- --------------------------------------------------------------------------------
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 (No fee required, effective October 7, 1996)
For the fiscal year ended March 31, 1997 or
___ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required)
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)
(602) 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
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 27, 1997 was: $1,546,133,816.
Number of shares of Common Stock, $.001 par value, outstanding as of
April 27, 1997 was: 53,198,679.
Documents Incorporated by Reference
-----------------------------------
Document Part of Form 10-K
-------- -----------------
Proxy Statement for the 1997 Annual III
Meeting of Stockholders
- --------------------------------------------------------------------------------
PART I
Item 1. BUSINESS
Microchip Technology Incorporated, a Delaware corporation ("Microchip" or
the "Company") develops, manufactures and markets field programmable 8-bit
microcontrollers, application-specific standard products (ASSPs) and related
memory products for high-volume embedded control applications in the consumer,
automotive, office automation, communications and industrial markets. The
Company provides cost-effective field programmability for high-volume
applications and believes that its PIC(R) product family is a price/performance
leader in the worldwide 8-bit microcontroller market. Microchip's embedded
control products also offer the advantages of a small footprint and low voltage
operation along with ease of development, enabling timely and cost-effective
product integration by its customers. The Company's ASSP products include a
variety of specialized integrated circuits, including KEELOQ(R) security
products and QuickASIC(TM) gate array devices. The Company's memory products are
primarily comprised of Serial EEPROMs, which are used primarily to provide
additional memory in embedded control systems.
Except as noted below, references to the Company include the Company and
its subsidiaries. The Company's executive offices are located at 2355 West
Chandler Boulevard, Chandler, Arizona 85224-6199 and its telephone number is
(602) 786-7200.
The following discussion of the Company's business contains certain factors
that may affect future operating results. For further discussion on certain
factors that may affect the Company's future operating results, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," below.
Industry Background
Competitive pressures increasingly require manufacturers to expand product
functionality and provide differentiation while maintaining or reducing cost. To
address these requirements, manufacturers increasingly use integrated
circuit-based embedded control systems which 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 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.
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, RAM memory for data storage and various
input/output functions. 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.
The increasing demand for embedded control has made the market for
microcontrollers one of the largest segments of the semiconductor logic 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 provide 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
over $6.00 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.
Products
Microchip's strategic focus is on embedded control products, primarily
including microcontrollers, ASSPs, related memory products and application
development systems.
Microcontrollers
Microchip offers a broad family of proprietary 8-bit field programmable
microcontrollers under the PIC(R) name and has shipped more than 400 million
PIC(R) microcontrollers to customers worldwide since 1990. The Company's PIC(R)
products are designed for applications requiring high performance, fast
time-to-market and user programmability. They feature low cost, low voltage and
power, small footprint and ease of use. Microchip believes this product family
is currently a price/performance leader in the 8-bit microcontroller
marketplace. Microchip's performance results from an exclusive RISC-based
architecture that provides significant speed advantages over the prevailing
8-bit CISC architectures. In addition to providing up to 33 MHz performance,
this architecture offers up to a 2:1 software compaction advantage, thereby
significantly reducing software development time. RISC architectures also have
the advantage of being more easily scaled to higher internal clock speeds in
future products. Microchip's field programmable 8-bit microcontroller prices
range from approximately $.55 to $16.00 per unit.
Microchip's original market focus was in the lowest cost segment of the
8-bit microcontroller marketplace. With its baseline 8-bit products, the Company
built its current market position as a leading supplier of field programmable
microcontrollers. Over the past three years, Microchip has introduced more than
60 new 8-bit microcontrollers targeted at the mid-range and high-end segments of
the 8-bit microcontroller marketplace, as well as the lower end of the 16-bit
microcontroller market. In addition, with its 8-pin, 8-bit microcontroller,
introduced in the first quarter of fiscal 1997, the Company has also targeted a
portion of the large 4-bit microcontroller marketplace. The Company believes
that these additional segments represent a significant opportunity for future
sales growth.
Microchip has used its manufacturing experience and design and process
technology to bring additional enhancements and manufacturing efficiencies to
the development and production of its PIC(R) family of microcontroller products.
This extensive experience base has enabled the Company to develop its advanced,
low cost user programmability feature by incorporating non-volatile memory
(EPROM, EEPROM and Flash Memory) into the microcontroller in addition to masked
ROM.
Development Systems
The Company offers 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. Microchip's family of development tools
operates in the standard Windows environment on IBM-compatible 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 $3,700. 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 which support Microchip's standard microcontroller product
architecture. The Company believes that familiarity with and adoption of the
Company's, and third-party, development systems by an increasing number of
product designers will be an important factor in the future selection of
Microchip's embedded control products. These development tools allow design
engineers to develop thousands of application-specific products from Microchip's
standard field programmable microcontrollers. Currently, there are more than 100
third-party tool suppliers world wide whose products support the Company's
proprietary microcontroller architecture.
ASSPs (Application-Specific Standard Products)
Microchip's application-specific standard products are specialized products
designed to perform specific end-user applications as opposed to the Company's
other products which are more general purpose in nature. The Company's ASSP
2
device families currently include, among other specialized integrated circuit
devices, KEELOQ(R) security products and QuickASIC(TM) gate array 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. QuickASIC(TM) gate array products are targeted at the
growing FPGA conversion market opportunity.
Memory Products
Microchip's memory products consist primarily of Serial EEPROMs. The
Company sells these devices primarily into the embedded control market and is
the third largest supplier of such devices worldwide. EEPROM (electrically
erasable programmable read only memory) 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.
Within this market, Microchip has 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.
The Company addresses these 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.
Microchip currently offers a complete Serial EEPROM family, which meets
three principal industry bus interface standards and are available in most
standard density, configuration and packaging alternatives. The Company's 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.
The Company's future operating results will depend to a significant extent
on its ability to continue to develop and introduce new products on a timely
basis which compete effectively on the basis of price and performance and which
address customer requirements. If the Company were unable to design, develop and
introduce competitive products on a timely basis, its future operating results
would be adversely affected.
Manufacturing
Microchip's ownership of its manufacturing resources is an important
component of its business strategy, enabling it to maintain a high level of
manufacturing control and to be one of the lowest cost producers in the embedded
control industry. By owning its wafer fabrication and the majority of its test
operations, and by employing proprietary statistical process control techniques,
the Company has been able to achieve high production yields. Direct control over
wafer fabrication also allows Microchip to shorten the Company's design and
production cycles and to capture the manufacturing and a portion of the testing
profit margin. Wafer fabrication and wafer test facilities are located in
Chandler and Tempe, Arizona. The Company performs product test at its facilities
in Kaohsiung, Taiwan and Chachoengsao, Thailand, located near Bangkok.
Wafers are produced in Class 10 fabrication modules in Chandler ("Fab 1")
and Tempe ("Fab 2") sites. Fab 1 currently contains approximately 24,000 square
feet; construction is currently underway to add additional capacity of 3,000
square feet, which is presently anticipated to be completed in July, 1997. Fab 2
occupies approximately 25,000 square feet; construction is currently underway to
add additional capacity of 20,000 square feet, which is presently anticipated to
be completed in August, 1997. Fab 1 currently produces 5-inch and 6-inch wafers,
while Fab 2 currently produce 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. The two wafer fabrication sites are managed by the
same management team and utilize similar production techniques.
The Company is continuing the process of transitioning products to smaller
geometries and to larger wafer sizes. Eight-inch wafer production commenced at
Fab 2 in early fiscal 1998. In addition, the Company will continue the
transition of products to its 0.7 micron process and has commenced development
of its next generation technology. Other companies in the industry have
experienced difficulty in effecting transitions to smaller geometry processes
and to larger wafers and, consequently, have experienced reduced manufacturing
yields or delays in product deliveries. The Company believes that its transition
to smaller geometries and to larger wafers will be important for the Company to
remain competitive and operating results could be adversely affected if the
Company's transition is substantially delayed or inefficiently implemented.
3
Microchip currently employs proprietary design and manufacturing processes
in developing its microcontroller and memory products. The Company believes its
processes afford it both cost-effective designs in existing and derivative
products and greater functionality in new product designs. While many of the
Company's competitors develop and optimize separate processes for their logic
and memory product lines, Microchip uses a common process technology for both
microcontroller and non-volatile memory products. This allows Microchip to more
fully absorb its process research and development costs and to deliver new
products to market more rapidly. Microchip engineers utilize advanced CAD tools
and software to perform circuit design, simulation and layout. The Company's
in-house photomask and wafer fabrication facilities enable it to rapidly verify
design techniques by processing test wafers quickly and efficiently.
Over the last several years, Microchip shifted its assembly operations from
Company-owned facilities to third-party contractors in order to meet increased
product shipment requirements. At March 31, 1997, all assembly was conducted by
third-party contractors. During the third quarter of fiscal 1997, the Company
commenced final test operations at its wholly-owned Chachoengsao test facility.
Currently, the Chachoengsao test facility has the capacity to handle up to one
million units per day. If required, the Chachoengsao facility could be expanded
in the future to more than double its current capacity. The Company will
continue to use third-party contractors to provide a majority of its assembly
services. Reliance on third parties involves some reduction in the Company's
level of control over the assembly and test portion of its business. While the
Company reviews the quality, delivery and cost performance of these third-party
contractors, there can be no assurance that increased 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. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Gross Profit",
below.
The Company's Taiwan and Thailand subsidiaries test the majority of the
products produced in Fab 1 and Fab 2. The 88,700 square foot Kaohsiung facility
has a monthly capacity of 19 million plastic packages; the 150,000 square foot
Chachoengsao facility has a monthly capacity of 30 million units. Final test and
burn-in functions are handled by advanced automated equipment. The Company uses
third-party contractors in Bangkok, Thailand to assemble a significant portion
of its products. The balance of Microchip's assembly and test requirements are
fulfilled by several third-party assembly and test contractors in Thailand, the
Philippines, People's Republic of China, and several other countries in Asia and
the Pacific Rim.
The Company's reliance on facilities in Taiwan, Thailand, the Philippines
and other foreign countries, and maintenance of substantially all of its
finished goods inventory overseas, entails certain political and economic risks,
including political instability and expropriation, supply disruption, currency
controls and exchange fluctuations, as well as changes in tax laws, tariff and
freight rates. Microchip currently employs the Alphatec Electronics Public
Company Limited group of companies ("Alphatec") headquartered in Bangkok,
Thailand for a significant portion of its product assembly volume and a portion
of its product final test capacity. While Alphatec's assembly and test
operations have performed reliably for the Company for several years, Alphatec
has recently experienced difficulty in obtaining financing in connection with
some of its unrelated joint ventures involving semiconductor fabrication
facilities in Thailand. Such financing difficulties have not impacted Alphatec's
assembly and test facilities nor its provision of services to the Company.
However, there can be no assurance that assembly and test operations will not be
affected in the future. Microchip currently has second sources for product
assembly and test for most of its package types and can shift its wafer output
to other factories, if necessary, however, there can be no assurance that such
action would not result in short-term disruption including possible temporary
product shortages. The Company has not experienced any significant interruptions
in its foreign business operations to date. Nonetheless, the Company's business
and operating results could be adversely affected if foreign operations or
international air transportation were disrupted.
Due to the high fixed cost inherent in semiconductor manufacturing,
increased manufacturing yields can have significant positive effects on gross
profits and overall operating results. During fiscal 1997, the Company continued
to focus on manufacturing productivity, and maintained average wafer fab line
yields in excess of 90%. The yields are primarily driven by a comprehensive
implementation of statistical process control, extensive employee training and
selective upgrading of the Company's manufacturing facilities and equipment.
Maintenance of manufacturing productivity and yields are important factors in
the achievement of the Company's operating results. As is typical in the
semiconductor industry, the Company has from time to time experienced lower than
anticipated manufacturing yields. The Company's operating results would be
adversely affected if it were unable to maintain yields at approximately the
current levels.
The raw materials and equipment used in the production of the Company's
integrated circuits currently are available from a number of suppliers, and the
Company is not materially dependent on any single source of supply. Although the
Company has not experienced any material difficulty to date in obtaining raw
materials or equipment, the interruption of certain components or ingredients of
certain raw materials could reduce the availability or increase the cost of raw
materials used by the Company. The manufacture and assembly of integrated
circuits, particularly non-volatile, erasable CMOS
4
memory and logic devices such as those produced by the Company, is a highly
complex process and 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 the fabrication equipment.
Research and Development
The Company's current research and development activities focus on the
design of new microcontroller and memory products, ASSPs, new development
systems, and software and application-specific software libraries. The Company
is also developing new design and process technology to achieve further cost
reductions and performance improvements in existing products. As of April 27,
1997, 243 employees were engaged in research and development. In fiscal 1997,
1996 and 1995, the Company's research and development expenses were $32.1
million, $27.5 million and $20.7 million, respectively. The Company expects that
it will continue to spend substantial funds on research and development
activities.
Sales and Distribution
The Company markets its products worldwide through a direct sales
organization and through distributors. In fiscal 1997, the Company derived
approximately 40% of its net sales from direct sales to OEM customers and 60%
from sales through distributors.
The Company's direct sales force, currently consisting of 159 people,
focuses on four geographical markets: the Americas, Europe, Asia/Pacific and
Japan. In the Americas, the Company currently has Technical Support Centers in
San Jose, Los Angeles, Dallas, Dayton, Chicago, Atlanta, Boston, New York and
Toronto. Microchip also maintains Technical Support Centers in Tokyo, London,
Munich, Paris, Milan, Taipei, Seoul, Singapore, Hong Kong, Shanghai, and
Bangalore, India. Microchip's direct sales force is augmented by a worldwide
network of national distributors and regional distributors in North and South
America. Microchip's distribution effort also includes a network of
manufacturer's representatives in North America and Europe.
Microchip believes that a strong technical service presence is essential to
the continued development of the embedded control market. The majority of
Microchip's field sales engineers (FSEs), field application engineers (FAEs) and
sales management have technical degrees and have been previously employed in an
engineering environment. The Company believes the technical knowledge of its
sales force is a key competitive advantage in the sale of field programmable
products. Currently, Microchip has at least one dedicated application engineer
in every Technical Support Center. The primary mission of the FAE team is to
provide technical assistance to OEM customers, conduct periodic training
sessions for FSEs, manufacturer's representatives and distributor sales teams.
The FAEs also conduct frequent technical seminars in major cities around the
world. FAEs also work closely with the Company's 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, the Company grants price
protection to distributors. Under this 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 the
Company subsequently charges distributors. From time to time, distributors also
receive credit on an individual basis for Company-approved price reductions on
specific transactions. The Company also grants some distributors limited rights
to return products. The Company defers recognition of 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.
Foreign sales, primarily in Asia/Pacific, Japan and Europe, represented
approximately 66%, 65% and 65% of consolidated net sales in the years ended
March 31, 1997, 1996 and 1995, respectively. International sales are
predominately billed in U.S. Dollars. Although foreign sales are subject to
certain government export restrictions, the Company has not experienced any
material difficulties as a result of export restrictions to date.
The Company's policy is to hedge its net foreign currency positions in the
normal course of business to reduce its exposure to fluctuations in foreign
exchange rates. Foreign exchange gains and losses have not been material during
fiscal years 1995 through 1997.
Backlog
As of April 27, 1997, the Company's backlog was approximately $93.7 million
as compared to $116.6 million as of April 26, 1996. The Company includes in its
backlog all purchase orders scheduled for delivery within the subsequent 12
months.
5
Microchip produces standard products that can be shipped from inventory
within a short time after receipt of an order. The Company's business and, to a
large extent, that of the entire semiconductor industry is characterized by
short-term orders and shipment schedules. Orders constituting the Company's
current backlog are subject to changes in delivery schedules or to cancellation
at the option of the purchaser without significant penalty. Accordingly,
although useful for scheduling production, backlog as of any particular date may
not be a reliable measure of sales for any future period. Turns orders (orders
received in a quarter for shipment in that quarter) have become an increasingly
important component of the Company's quarterly operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations - Net Sales," below.
Competition
The semiconductor industry is intensely competitive and has been
characterized by price erosion, rapid technological change and foreign
competition with respect to many products. The Company competes with major
domestic and international semiconductor companies, many of which have greater
market recognition and substantially greater financial, technical, marketing,
distribution and other resources than the Company with which to pursue
engineering, manufacturing, marketing and distribution of their products.
Emerging companies are also increasing their participation in the market for
embedded control applications. The Company's overall average selling prices for
its microcontroller products have remained relatively constant while average
selling prices of its non-volatile products have declined gradually over time.
During fiscal 1997, the Company experienced increased pricing pressure on its
non-volatile memory products due primarily to a worldwide industry inventory
correction and the less proprietary nature of these products. There can be no
assurance that average selling prices for the Company's microcontroller or other
products will not experience increased pricing pressure in the future. An
increase in pricing pressure could adversely affect the Company's operating
results. In addition, the Company's ability to compete successfully depends on a
number of factors both within and outside its control, including the quality,
performance, reliability, features, ease of use, pricing and diversity of its
products; the quality of its customer service and its ability to address the
needs of its customers; its 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;
protection of the Company's products and processes by effective utilization of
intellectual property laws; the rate at which customers incorporate the
Company's products into their own products; product introductions by the
Company's competitors; the number, nature and success of its competitors in a
given market; and general market and economic conditions. Furthermore, capacity
in the semiconductor industry is increasing over time and such increased
capacity or improved product availability could adversely affect the Company's
competitive position.
The Company currently competes principally on the basis of the technical
innovation and performance of its embedded control products, including their
speed, functionality, density, power consumption, reliability and packaging
alternatives, as well as on price and product availability. The Company believes
that other important competitive factors in the embedded control market include
ease of use, functionality of application development systems and technical
service and support. The Company believes that it competes favorably with other
companies on all of these factors, although there is no assurance that the
Company will continue to be able to compete successfully in the future.
Patents, Licenses and Trademarks
The Company's success depends in part on its ability to obtain patents,
licenses and other intellectual property rights covering its products and
manufacturing processes, and to protect its proprietary information. As of March
31, 1997, the Company owned 46 U.S. patents and eight foreign patents, expiring
on various dates between 1997 and 2015, and had an additional 49 U.S. patent
applications and 44 foreign patent applications pending. The Company intends to
continue to seek patents on its inventions used in its products and
manufacturing processes. However, the Company believes that its continued
success depends primarily on such factors as the technological skills and
innovative abilities of its personnel rather than on its patents. There can be
no assurance the Company's existing patents or any new patents that are issued
will be of sufficient scope or strength to provide meaningful protection or
other commercial advantage to the Company.
The Company acquired a nonexclusive, royalty-free license under certain
semiconductor patents owned by General Instrument in connection with the
acquisition and formation of the Company in 1989. The license extends for the
life of the licensed patents and is subject to early termination upon assignment
without General Instrument's consent, to any entity with annual revenues of more
than $100 million that acquires control of the Company. The Company also
acquired certain cross licenses between General Instrument and other
semiconductor patent owners.
6
In October, 1991, the Company acquired a nonexclusive, nontransferable
license for certain EPROM and EEPROM patents owned by Intel Corporation. This
license extends for the life of the licensed patents. The license may require
the payment of royalties under certain circumstances.
As is typical in the semiconductor industry, the Company has from time to
time received, and may in the future receive, communications alleging possible
infringement of patents or other intellectual property rights of others. The
Company investigates all such notices and responds as it believes is
appropriate. The Company is currently in discussions with several other
companies regarding intellectual property licenses of such other companies'
semiconductor patents and technology. Based on industry practice, the Company
believes that in most cases it could obtain any necessary licenses or other
rights on commercially reasonable terms. However, no assurance can be given 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 the Company and diversion of management effort,
may be necessary to enforce patents or other intellectual property rights of the
Company or to defend the Company 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 have a material adverse effect on the
Company's business and results of operations.
The Company is currently in discussions with Lucent Technologies Inc.
("Lucent") regarding alleged infringement of certain of Lucent's semiconductor
patents. The Company has investigated Lucent's claims and believes it does not
infringe any of the asserted patents. Notwithstanding the Company's position,
the Company and Lucent have exchanged various proposals for a patent license,
but, to date, have been unable to reach an agreement. Although the outcome of
the discussions with Lucent is not presently determinable, the Company believes
that, should a license be necessary, the Company will be able to obtain a
license from Lucent on commercially reasonable terms. However, no assurances can
be given that a mutually satisfactory conclusion will be achieved. In such
event, the Company may be subject to litigation, which could result in
substantial cost to the Company and diversion of management effort. If
unsuccessful, the Company could be forced to pay royalties on past and future
sales. Any such litigation and/or royalty payments could have a material adverse
impact on the Company's business and operating results.
Environmental Regulation
The Company is subject to a variety of federal, state and local
governmental regulations related to the use, storage, discharge and disposal of
toxic, volatile or otherwise hazardous chemicals used in its manufacturing
processes, including the Resource Conservation 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. The Company believes it has obtained all necessary
environmental permits to conduct its business. Although the Company believes
that its activities conform to presently applicable environmental regulations,
the failure to comply with present or future regulations could result in fines
being imposed on the Company, suspension of production or a cessation of
operations. While the Company has not experienced any materially adverse effects
on its operations from governmental regulations, there can be no assurance that
changes in such regulations will not require the Company to acquire costly
equipment or to incur other significant expenses to comply with environmental
regulations. Any failure by the Company to control the use of or adequately
restrict the discharge of hazardous substances could subject it to future
liabilities. There can be no assurance that environmental problems will not
occur in the future which could subject the Company to future costs or
liabilities.
Employees
As of April 27, 1997, the Company had 1,879 employees, including 1,330 in
manufacturing, 243 in research and development, 190 in sales and marketing and
116 in finance and administration. Approximately 42% of the Company's employees
work at the final test facilities located in Kaohsiung, Taiwan and Chachoengsao,
Thailand. No employees in the U.S. or Thailand are represented by a labor
organization. All employees in the Kaohsiung facility, except for certain
management employees, are represented by a labor organization. The Company has
never had a work stoppage and believes that its employee relations are good.
Executive Officers
The following sets forth certain information regarding the Company's
executive officers as of April 27, 1997:
7
Name Age Position
---- --- --------
Steve Sanghi 41 Chairman of the Board, President and Chief Executive Officer
Timothy B. Billington 54 Vice President, Manufacturing Operations
C. Philip Chapman 43 Vice President, Chief Financial Officer and Secretary
Robert A. Lanford 55 Vice President, Worldwide Sales
George P. Rigg 57 Vice President, Advanced Microcontroller and Technology Division
Mitchell R. Little 44 Vice President, Standard Microcontroller and ASSP Division
Mr. Sanghi is currently, and has been since August, 1990, President of the
Company, since October, 1991, Chief Executive Officer and since October, 1993,
Chairman of the Board of Directors. He has served as a director of the Company
since August, 1990. He served as the Company's Chief Operating Officer from
August, 1990 through October, 1991 and as Senior Vice President of Operations
from February, 1990 through 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.
Sanghi is also a director of ADFlex Solutions, Inc., a U.S. supplier of flexible
circuit-based interconnect solutions.
Mr. Billington has served as Vice President, Manufacturing Operations since
October, 1994 and was Vice President, Process Development and Manufacturing
Operations from April, 1991 until October, 1994. Prior to his appointment as
Vice President, Mr. Billington served as Director of Wafer Fabrication from
November, 1990 to April, 1991 and Wafer Fabrication Manager from June, 1989 to
November, 1990. Mr. Billington holds a B.S. degree in marketing from Abilene
Christian University.
Mr. Chapman has served as the Company's Vice President and Chief Financial
Officer since joining the Company in September, 1992 and as Secretary of the
Company since December, 1992. Prior to joining the Company, Mr. Chapman was
employed by Syntellect Inc., a telecommunication systems company, where he
served as Executive Vice President, Finance and Operations, and Chief Financial
Officer from 1988 to 1992. Mr. Chapman holds an M.B.A. from the Harvard Graduate
School of Business Administration and B.A. degrees in Accounting and Managerial
Finance from the University of California.
Mr. Lanford has served as Vice President, Worldwide Sales for the Company
since April, 1991. From May, 1990 to April, 1991, Mr. Lanford was Vice
President, Marketing for Specialty Development Corporation, a distributor of
semiconductor devices and other computer peripherals. From 1987 to 1990, Mr.
Lanford served as Vice President of Sales and Marketing and a director for AIM
Technology, a computer software company. Mr. Lanford holds a B.S. degree in
Electrical Engineering from Arizona State University.
Mr. Rigg has served as Vice President, Advanced Microcontroller and
Technology Division since November, 1995. From June, 1989 to November, 1995, he
served as Vice President, Logic Products Division. From 1981 to 1989, Mr. Rigg
held a number of senior management positions with Advanced Micro Devices, Inc.,
a semiconductor company, including Vice President, Embedded Processor Division,
Managing Director of Programmable Microprocessors and Product Line Manager for
Interface and LAN. Mr. Rigg holds a B.S. degree in Physics from Manchester
University, England.
Mr. Little has served as Vice President, Standard Microcontroller and ASSP
Division since November, 1995. From September, 1993 to November, 1995, he served
as Vice President, Memory Products and ASSP Division. Prior to his appointment
as Vice President, Mr. Little served as Division Director for the Company's
Memory Products Division from July, 1991 to September, 1993, and as Director of
Memory Marketing from November, 1989 to July, 1991. Immediately prior to joining
the Company, Mr. Little was employed by SGS-Thomson Microelectronics from 1982
to 1989 where he held various positions of increasing management responsibility
for the marketing of microprocessors, microcontrollers and memory products. Mr.
Little holds a BSET from United Electronics Institute.
Item 2. PROPERTIES
The Company's current headquarters, research and development center and one
of its wafer fabrication facilities are located in three buildings totaling
approximately 242,000 square feet situated on a 77-acre parcel of land in
Chandler, Arizona. A second wafer fabrication facility of approximately 170,000
square feet is located in Tempe, Arizona. The Chandler and Tempe facilities are
owned by the Company. Company-owned final test facilities are located in Taiwan
and Thailand. The Taiwan operations are housed in a three-story, 88,700 square
foot building located in the Kaohsiung Export Processing Zone in Kaohsiung,
Taiwan, Republic of China. The Taiwan building is owned by the Company's Taiwan
subsidiary and is located on land that is leased to the Company pursuant to
leases from the Taiwan government expiring in 1998 and 2002. The Company's
Thailand final test operations are housed in a 150,000 square foot facility
located in the
8
Alphatechnopolis Industrial Park in Chachoengsao, Thailand, near Bangkok. The
Thailand facility, owned by the Company's Thailand subsidiary, is situated on
land to which the Company expects to acquire title by the end of fiscal 1998, in
accordance with an agreement between the Company and the land owner. The Company
leases space for 20 Technical Support Centers in San Jose and Los Angeles,
California; Dallas, Texas; Dayton, Ohio; Chicago, Illinois; Atlanta, Georgia;
Boston, Massachusetts; New York, New York; as well as in Toronto, Tokyo, London,
Munich, Paris, Milan, Taipei, Seoul, Singapore, Hong Kong, Shanghai and
Bangalore, India. The Company's aggregate monthly rental payments for its
facilities are approximately $81,000.
The Company is in the process of making capital improvements to Fab 1 and
Fab 2 to add additional capacity. See, "Business - Manufacturing," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources." The Company currently believes that
its existing facilities, together with the additional capacity presently under
construction, will be adequate to meet its requirements for the next 12 months.
In fiscal 1996, the Company initiated planning and design of an additional
wafer fabrication facility in Chandler, Arizona ("Fab 3"). The Company has
determined that additional capital investment in Fab 1 and Fab 2 will yield
sufficient manufacturing capacity for several additional years and, thus, has
deferred the construction of Fab 3 for the present time.
Item 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is involved in a
limited number of legal actions, both as plaintiff and defendant, and could
incur an uninsured liability in any one or more of them. Although the outcome of
these actions is not presently determinable, the Company believes that the
ultimate resolution of these matters will not have a material adverse effect on
the Company's results of operations or financial condition. The Company could
also be subject to future litigation if it is unable to resolve pending
intellectual property and technology licensing discussions. See "Business -
Patents, Licenses and Trademarks," above. Litigation relating to the
semiconductor industry is not uncommon, and the Company is, and from time to
time, has been, subject to such litigation. No assurances can be given with
respect to the extent or outcome of any such litigation in the future.
The Securities and Exchange Commission is presently conducting an
investigation into matters relating to the Company's disclosure on February 26,
1996 that revenues and earnings for the quarter ended March 31, 1996 would be
lower than previously estimated. While the outcome of the investigation, and its
effect on the Company, if any, cannot be predicted at the present time, the
Company does not believe that the investigation will result in a material
adverse effect on the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of fiscal 1997.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "MCHP." The Company's 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 November, 1995, and a 3-for-2 stock split effected in
January, 1997:
Fiscal 1996 High Low Fiscal 1997 High Low
----------- ---- --- ----------- ---- ---
First Quarter $25.50 $17.08 First Quarter $19.50 $14.67
Second Quarter 27.50 23.167 Second Quarter 25.67 14.00
Third Quarter 29.25 22.00 Third Quarter 34.84 23.34
Fourth Quarter 25.67 16.00 Fourth Quarter 39.50 25.00
On May 22, 1997, the closing sale price for the Company's Common Stock was
$33.875 per share. As of such date, there were approximately 547 holders of
record of the Company's Common Stock. This figure does not reflect beneficial
ownership of shares held in nominee names.
9
The Company has not paid cash dividends on its capital stock. The Company
currently anticipates that it will retain all available funds for use in the
operations of its business and therefore does not anticipate paying any cash
dividends in the foreseeable future.
The trading price of the Company's Common Stock has been, and in the future
could be, subject to wide fluctuations in response to quarterly variations in
operating results of the Company and other semiconductor companies, actual or
anticipated announcements of technical innovations or new products by the
Company or its competitors, changes in analysts' estimates of the Company's
financial performance, general conditions in the semiconductor industry,
worldwide economic and financial conditions and other events or factors. In
addition, the stock market has experienced significant price and volume
fluctuations which have particularly affected the market prices for many high
technology companies and which often have been unrelated to the operating
performance of such companies. These broad market fluctuations and other factors
may adversely affect the market price of the Company's Common Stock.
Item 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the five-year period
ended March 31, 1997 should be read in conjunction with the Company's
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 report. The Company's consolidated statement of income data for each
of the years in the three year period ended March 31, 1997, and the balance
sheet data as of March 31, 1997 and 1996 are derived from and are qualified by
reference to the audited consolidated financial statements of the Company,
included in Item 8 of this report.
Year Ended March 31,
1997 1996 1995 1994 1993
--------------------------------------------------------------------------
(in thousands, except per share data)
Income Statement Data:
Net sales............................$ 334,252 $ 285,888 $ 207,961 $ 138,742 $ 88,652
Cost of sales........................ 167,330 137,708 101,039 73,765 56,552
Research and development............. 32,073 27,517 20,746 13,840 9,114
Selling, general and administrative.. 56,248 48,903 36,975 26,933 17,420
Restructuring cost................... 5,969 --- --- --- ---
Write-off of in-process technology... 1,575 11,448 --- --- ---
Operating income .................... 71,057 60,312 49,201 24,204 5,566
Interest expense, net................ (1,852) (947) (881) (593) (1,825)
Other income, net.................... 288 569 808 522 814
Income before income taxes........... 69,493 59,934 49,128 24,133 4,555
Provision for income taxes........... 18,361 16,182 12,829 4,974 337
Net income ..........................$ 51,132 $ 43,752 $ 36,299 $ 19,159 $ 4,218
Net income per share.................$ 0.94 $ 0.80 $ 0.70 $ 0.42 $ 0.13
Shares used in per share calculations 54,683 54,533 51,641 46,155 33,420
As of March 31,
1997 1996 1995 1994 1993
--------------------------------------------------------------------------
Balance Sheet Data:
Working capital......................$ 91,176 $ 55,855 $ 71,307 $ 53,584 $ 32,445
Total assets......................... 428,092 358,187 249,480 151,425 76,919
Long-term obligations, less current
portion.............................. 5,999 33,250 15,340 14,424 3,749
Stockholders' equity................. 316,584 219,632 161,825 87,864 43,834
10
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,
1997 1996 1995
----------------------------------
Net sales............................. 100.0% 100.0% 100.0%
Cost of sales......................... 50.1 48.2 48.6
--------- ---------- --------
Gross profit.......................... 49.9 51.8 51.4
Research and development.............. 9.6 9.6 10.0
Selling, general and administrative... 16.8 17.1 17.8
Restructuring cost.................... 1.8 --- ---
Write-off of in-process technology.... 0.4 4.0 ---
Amortization of negative goodwill..... --- --- (0.1)
--------- ---------- --------
Operating income...................... 21.3% 21.1% 23.7%
========= ========== ========
Net Sales
Microchip's net sales of $334.3 million in fiscal 1997 increased by $48.4
million, or 16.9%, over fiscal 1996 and net sales of $285.9 million in fiscal
1996 increased by $77.9 million, or 37.5%, over fiscal 1995. The Company
experienced growth in sales of 8-bit microcontrollers and EEPROM memories over
these periods and a moderate decline in sales of its commodity memory and other
product categories.
The Company's family of 8-bit microcontrollers represents the largest
component of Microchip's total net sales. Microcontrollers and associated
application development systems accounted for 64%, 59% and 58% of total net
sales in fiscal 1997, 1996 and 1995, respectively. A related component of the
Company's product sales consist of serial and parallel EEPROM memories and
high-speed and low-voltage EPROMs. These products accounted for 31%, 34% and 34%
of net sales in fiscal 1997, 1996 and 1995, respectively. The remaining
component of total net sales was the Company's lower margin memory and other
miscellaneous products which accounted for 5%, 7% and 8% of net sales in fiscal
1997, 1996 and 1995, respectively. During the three year period ended March 31,
1997 the Company increased the percentage of net sales attributable to 8-bit
microcontrollers as a result of the Company's focus in this area. It is
anticipated that this trend will continue for the foreseeable future.
The Company's net sales in any given quarter are dependent upon a
combination of orders received in that quarter for shipment in that quarter
("turns orders") and shipments from backlog. The Company has emphasized its
ability to respond quickly to customer orders as part of its competitive
strategy. This strategy, combined with current industry conditions, is resulting
in customers placing orders with relatively short delivery schedules. This has
had the effect of increasing turns orders as a portion of the Company's business
in fiscal 1997 as compared to fiscal 1996, and has reduced the Company's
visibility in projecting net sales levels. Because turns orders are more
difficult to predict, there can be no assurance that the combination of turns
orders and backlog in any quarter will be sufficient to achieve growth in net
sales. If the Company does not achieve a sufficient level of turns orders in a
particular quarter, the Company's revenues and operating results would be
materially adversely affected.
In the quarter ended March 31, 1997, the Company was unable to ship
approximately $4 million of product for which it had firm scheduled orders. This
shipment delinquency was a result of inventory mix issues which were exacerbated
by the rapid growth in the Company's product offerings and the low long-term
order visibility. It is anticipated that low long-term order visibility will
continue for the foreseeable future and, as a result, the Company expects it may
have shipment delinquencies at the end of each quarter which could adversely
affect quarterly operating results.
The Company's overall average selling prices for its microcontroller
products have remained relatively constant while average selling prices of its
non-volatile memory products have declined gradually over time. During fiscal
1997, the Company experienced increased pricing pressure on its non-volatile
memory products due primarily to a worldwide industry inventory correction and
the less proprietary nature of these products. There can be no assurance that
average selling prices
11
for the Company's microcontroller or other products will not experience
increased pricing pressure in the future. An increase in pricing pressure could
adversely affect the Company's operating results.
The foregoing statements regarding product mix, turns orders, shipment
delinquencies and pricing pressures are forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are subject to the
safe harbors created thereby. 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.
Foreign sales represented 66%, 65% and 65% of net sales in fiscal 1997,
1996 and 1995, respectively. The Company's foreign sales have been predominantly
in Asia, Europe and Japan which the Company attributes to the manufacturing
strength in those areas for consumer, automotive, office automation,
communications and industrial products. The majority of foreign sales are U.S.
Dollar denominated. The Company has entered into and, from time to time, will
enter into hedging transactions in order to minimize exposure to currency rate
fluctuations. Although none of the countries in which the Company conducts
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 the Company conducts operations will
not adversely affect the Company's operating results in the future.
Additional Factors Affecting Operating Results
The Company believes that future growth in net sales of its 8-bit family of
microcontroller products and related memory products will depend largely upon
the Company's success in having its current and new products designed into
high-volume customer applications. Design wins typically precede the Company's
volume shipment of products for such applications by 15 months or more. The
Company also believes that shipment levels of its proprietary application
development systems are an indicator of potential future design wins and
microcontroller sales. The Company continued to achieve a high volume of design
wins and shipped increased numbers of application development systems in fiscal
1997 compared to previous fiscal years. There can be no assurance that any
particular development system shipment will result in a product design win or
that any particular design win will result in future product sales.
The Company's operating results are affected by a wide variety of other
factors that could adversely impact its net sales and profitability, many of
which are beyond the Company's control. These factors include the Company's
ability to design and introduce new products on a timely basis, market
acceptance of products of both the Company and its customers, customer order
patterns and seasonality, changes in product mix, whether the Company's
customers buy from a distributor or directly from the Company, product
performance and reliability, product obsolescence, the amount of any product
returns, availability and utilization of manufacturing capacity, fluctuations in
manufacturing yield, the availability and cost of raw materials, equipment and
other supplies, the cyclical nature of both the semiconductor industry and the
markets addressed by the Company's products, technological changes, competition
and competitive pressures on prices, and economic, political or other conditions
in the United States, and other worldwide markets served by the Company. The
Company believes its ability to continue to increase its manufacturing capacity
to meet customer demand and maintain satisfactory delivery schedules will be an
important competitive factor. As a result of the increase in fixed costs and
operating expenses related to expanding its manufacturing capacity, the
Company's operating results may be adversely affected if net sales do not
increase sufficiently to offset the increased costs. The Company's products are
incorporated into a wide variety of consumer, automotive, office automation,
communications and industrial products. A slowdown in demand for products which
utilize the Company's products as a result of economic or other conditions in
the worldwide markets served by the Company could adversely affect the Company's
operating results.
Gross Profit
The Company's gross profit was $166.9 million, $148.2 million and $106.9
million in fiscal 1997, 1996 and 1995, respectively. Gross profit as a percent
of sales was 50%, 52% and 51% in fiscal 1997, 1996 and 1995, respectively. The
Company anticipates that its cost of sales will fluctuate over time, driven
primarily by the product mix of 8-bit microcontroller products and related
memory products, manufacturing yields, wafer fab loading levels and competitive
and economic conditions. Gross profit percentage was down from the prior years'
levels, primarily as a result of reduced 5-inch wafer production at one of the
Company's wafer fabrication facilities and increased pricing pressure on its
non-volatile memory products. The Company anticipates that its gross profit
percentage will fluctuate over time, driven primarily by
12
product mix, manufacturing costs and yields, and competitive and economic
conditions. The Company is continuing the process of transitioning products to
smaller geometries and to larger wafer sizes to reduce future manufacturing
costs. Eight-inch wafer production commenced at the Tempe wafer fabrication
facility in early fiscal 1998. The Company will continue the transition of
products to its 0.7 micron process. The foregoing statements relating to
anticipated gross margins, cost of sales, and the transition to higher yielding
manufacturing processes are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are subject to the safe harbors
created thereby. Actual results could differ materially because of the following
factors, among others: fluctuations in production yields, production efficiencie
and overall capacity utilization; cost and availability of raw materials;
absorption of fixed costs, labor and other direct manufacturing costs; the
timing and success of manufacturing process transition; changes in product mix;
competitive pressures on prices; and other economic conditions in the United
States and other worldwide markets.
The Company has consistently presented its results of operations for all
periods on the last-in first-out (LIFO) method and has assessed the net
realizable value of inventory based on LIFO costs. LIFO has the effect of
matching current costs of production with sales generated during the same
period. Production costs have decreased over time due to improvements in
manufacturing productivity and yields, resulting in lower cost of sales for the
year ended March 31, 1995. Due to changes in sales and product mix which
affected production costs, cost of sales increased during the years ended March
31, 1997 and 1996. The difference in cost of sales between the LIFO and FIFO
inventory valuation methods for the reporting periods was immaterial.
All of Microchip's assembly operations and a portion of its product final
test requirements are performed by third-party contractors in order to meet
product shipment requirements. Reliance on third parties involves some reduction
in the Company's level of control over these portions of its business. While the
Company reviews 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.
The Company owns product final test facilities in Kaohsiung, Taiwan,
Republic of China and Chachoengsao, Thailand. The Company also uses various
third-party contractors in Thailand, Taiwan, the Philippines and other locations
in Asia for product assembly and test. The Company's reliance on facilities in
these countries, and maintenance of substantially all of its finished goods
inventory overseas, entails certain political and economic risks, including
political instability and expropriation, labor disruption, supply disruption,
currency controls and exchange fluctuations, as well as changes in tax laws,
tariff and freight rates. Microchip currently employs the Alphatec Electronics
Public Company Limited group of companies ("Alphatec") headquartered in Bangkok,
Thailand for a significant portion of its product assembly volume and a portion
of its product final test capacity. While Alphatec's assembly and test
operations have performed reliably for the Company for several years, Alphatec
has recently experienced difficulty in obtaining financing in connection with
some of its unrelated joint ventures involving semiconductor fabrication
facilities in Thailand. Such financing difficulties have not impacted Alphatec's
assembly and test facilities nor its provision of services to the Company.
However, there can be no assurance that assembly and test operations will not be
affected in the future. Microchip currently has second sources for product
assembly and test for most of its package types and can shift its wafer output
to other factories, if necessary, however, that can be no assurance that such
action would not result in short-term disruption including possible temporary
product shortages. The Company has not experienced any significant interruptions
in its foreign business operations to date. Nonetheless, the Company's business
and operating results could be adversely affected if foreign operations or
international air transportation were disrupted.
During the fourth quarter of fiscal 1997, the Company commenced
construction of an additional 20,000 square foot wafer fabrication module at
Tempe, Arizona. It is anticipated that the construction will be completed during
the second quarter of fiscal 1998 and that the new wafer fabrication module will
begin 8-inch wafer production in the fourth quarter of fiscal 1998. In addition,
the Company is also expanding capacity at its Chandler wafer fabrication
facility and expects to have an additional 3,000 square feet of capacity
available in Chandler during the second quarter of fiscal 1998. The foregoing
statements regarding completion of construction and additional available
capacity are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and are subject to the safe harbors created thereby.
Actual results could differ materially because of the following factors, among
others: delays in facilitation of the expanded Tempe and Chandler wafer
fabrication facilities; production yields and efficiencies; factory absorption
rates; capacity loading; supply disruption; operating cost levels; and the rate
of revenue growth.
13
Research and Development
The Company is committed to continued investment in new and enhanced
products, including its development systems software and in its design and
manufacturing process technology, which are significant factors in maintaining
the Company's competitive position. The dollar investment in research and
development increased 17% in fiscal 1997 over fiscal 1996, and 33% in fiscal
1996 over fiscal 1995. The Company will continue to invest in research and
development in the future, including an investment in process and product
development associated with the capacity expansion of the Company's fabrication
facilities.
The Company's future operating results will depend to a significant extent
on its ability to continue 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 customers' end products. Because of
the complexity of its products, the Company has experienced delays from time to
time in completing development of new products. In addition, there can be no
assurance that any new products will receive or maintain substantial market
acceptance. If the Company were unable to design, develop and introduce
competitive products on a timely basis, its future operating results would be
adversely affected.
The Company's future success will also depend upon its ability to develop
and implement new design and process technologies. Semiconductor design and
process technologies are subject to rapid technological change, requiring large
expenditures for research and development. 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. The Company believes that its transition
to smaller geometries and to larger wafers will be important for the Company to
remain competitive, and operating results could be adversely affected if the
transition is substantially delayed or inefficiently implemented.
Selling, General and Administrative
Through expense controls and operating efficiencies, the Company has
reduced selling, general and administrative expenses in fiscal 1997 to 16.8% of
sales, as compared to 17.1% and 17.8% of sales in fiscal 1996 and 1995,
respectively. This has been achieved while the Company has continued to invest
significantly in incremental worldwide sales and technical support resources to
promote the Company's embedded control products. However, there can be no
assurance that revenue growth in the future will be sufficient to continue to
reduce the current level of selling, general and administrative expenses as a
percentage of sales.
Other Income (Expense)
Interest expense in fiscal 1997 increased over fiscal 1996 and fiscal 1995
due to increased borrowings associated with the Company's capital equipment
additions and stock repurchase program. Interest income in fiscal 1997 decreased
from fiscal 1996 but increased from fiscal 1995, primarily as a result of
changes in invested cash balances. Other income represents numerous immaterial
non-operating items. The Company's interest expense could increase in fiscal
1998 if the Company increases its borrowings and interest expense would be
adversely impacted by increased interest rates.
Provision for Income Taxes
Provisions for income taxes reflect tax on foreign earnings and federal and
state tax on U.S. earnings. The Company had an effective tax rate of 26.4%,
27.0% and 26.1% for the years ended March 31, 1997, 1996 and 1995, respectively,
due primarily to lower tax rates at its foreign locations. The Company believes
that its tax rate for the foreseeable future will be approximately 27%. During
fiscal 1995, the Internal Revenue Service ("IRS") completed an examination of
the Company's federal income tax returns for fiscal 1993, 1992, 1991 and 1990.
As a result of the completion of this examination by the IRS and completion of
examinations by certain foreign tax authorities, the Company recognized a
benefit to its effective tax rate in fiscal 1995. The foregoing statement
regarding the Company's anticipated future tax rate is a forward-looking
statement within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
is subject to the safe harbors created thereby. Actual results could differ
materially because of the following factors, among others: taxation rates in
geographic regions where the Company has significant operations; and current tax
holidays available in foreign locations.
14
Liquidity and Capital Resources
The Company had $43.0 million in cash and cash equivalents at March 31,
1997, an increase of $11.9 million from the March 31, 1996 balance. The Company
has an unsecured line of credit with a syndicate of domestic banks totaling
$90.0 million. There were no borrowings under the domestic line of credit as of
March 31, 1997. The domestic line of credit requires the Company to achieve
certain financial ratios and operating results. The Company was in compliance
with these covenants at March 31, 1997. The Company also has an unsecured short
term line of credit totaling $14.9 million with certain foreign banks. There
were no borrowings under the foreign line of credit as of March 31, 1997. There
are no covenants related to the foreign line of credit.
At March 31, 1997, an aggregate of $104.9 million of these facilities was
available, subject to financial covenants and ratios with which the Company was
in compliance. The Company's ability to fully utilize these facilities is
dependent on the Company remaining in compliance with such covenants and ratios.
During the year ended March 31, 1997, the Company generated $77.6 million
of cash from operating activities, an improvement of $4.2 million from the year
ended March 31, 1996 and an improvement of $34.5 million from the year ended
March 31, 1995. The improvement in cash flow from operations was primarily due
to increased profitability, the impact of changes in accounts payable and
accrued expenses and an increase in depreciation expense.
The Company's level of capital expenditures varies from time to time as a
result of actual and anticipated business conditions. Capital expenditures in
the years ended March 31, 1997, 1996 and 1995 were $79.0 million, $115.8 million
and $70.8 million, respectively. Capital expenditures were primarily for the
expansion of production capacity and the addition of research and development
equipment in each of these periods. The Company also acquired equipment under
capital leases of $3.7 million in the year ended March 31, 1995. The Company
currently intends to spend approximately $135.0 million during the next 12
months for additional capital equipment to increase capacity at its existing
wafer fabrication facilities, to construct additional facilities and to expand
product test operations. The Company expects capital expenditures will be
financed by cash flow from operations, available debt arrangements and other
sources of financing. The Company believes that the capital expenditures
anticipated to be incurred over the next 12 months will provide sufficient
additional manufacturing capacity to meet its currently anticipated needs.
Net cash provided by financing activities was $13.4 million, $27.1 million
and $31.5 million for the years ended March 31, 1997, 1996 and 1995
respectively. Proceeds from sale of stock and put options were $59.5 million,
$9.6 million and $33.7 million for the years ended March 31, 1997, 1996 and
1995, respectively. Proceeds from issuance of long term debt were $2.9 million
and $3.8 million for the years ended March 31, 1996 and 1995, respectively.
Payments on long term debt and capital lease obligations were $5.7 million, $5.9
million and $5.9 million for the years ended March 31, 1997, 1996 and 1995,
respectively. Proceeds from lines of credit were $20.5 million for the year
ended March 31, 1996. Repayments on lines of credit were $21.0 million for the
year ended March 31, 1997. Cash expended for the purchase of the Company's
Common Stock was $19.5 million for the year ended March 31, 1997.
On July 26, 1996, the Company's Board of Directors authorized a share
repurchase plan which permits the Company to purchase up to 1,500,000 shares of
its Common Stock and to sell up to 750,000 put options. Based on the price of
Microchip's stock and other pertinent factors, the Company may from time to time
purchase shares on the open market or sell put options. See Footnote 14 to the
Company's Consolidated Financial Statements, below.
The Company believes that its existing sources of liquidity combined with
cash generated from operations will be sufficient to meet the Company's
currently anticipated cash requirements for at least the next 12 months.
However, the semiconductor industry is capital intensive. In order to remain
competitive, the Company must continue to make significant investments in
capital equipment, for both production and research and development. The Company
may seek additional equity or debt financing during the next 12 months for the
capital expenditures required to maintain or expand the Company's wafer
fabrication and product test facilities. The timing and amount of any such
capital requirements will depend on a number of factors, including demand for
the Company's 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.
Recent Accounting Pronouncements
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128 , "Earnings per Share"
("Statement 128"). Statement 128 establishes standards for computing and
presenting earnings per share ("EPS"), and supersedes APB Opinion No.15.
Statement 128 replaces primary EPS with basic EPS and requires
15
dual presentation of basic and diluted EPS. Statement 128 is effective for
annual and interim periods ending after December 15, 1997. Earlier adoption is
not permitted. After adoption all prior period EPS data shall be restated to
conform to Statement 128. Basic and diluted EPS, as calculated under Statement
128 would have been $.99 and $.94 for the fiscal year ended March 31, 1997.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company listed in the index
appearing under Item 14(a)(1) hereof are filed as part of this Annual Report on
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 with respect to the Company's directors is incorporated herein
by reference to the Company's proxy statement for the 1997 annual meeting of
stockholders under the caption "Election of Directors."
See Item I, Part I hereof under the caption "Executive Officers" for
information with respect to the Company's executive officers. Information with
respect to compliance with Section 16(a) of the Securities Exchange Act of 1934,
as amended, is incorporated herein by reference to the Company's proxy statement
for the 1997 annual meeting of stockholders under the caption "Section 16(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
the Company's proxy statement for the 1997 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 of the Company is incorporated herein by reference to the
information under the caption "Security Ownership of Principal Stockholders,
Directors and Executive Officers" in the Company's proxy statement for the 1997
annual meeting of stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
16
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
Page No.
(1) Financial Statements:
Independent Auditors' Report F-1
Consolidated Balance Sheets as of
March 31, 1997 and 1996 F-2
Consolidated Statements of Income for each
of the years in the three-year period ended
March 31, 1997 F-3
Consolidated Statements of Cash Flows for
each of the years in the three-year period
ended March 31, 1997 F-4
Consolidated Statements of Stockholders'
Equity for each of the years in the
three-year period ended March 31, 1997 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 report 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.
(b) No current reports on Form 8-K were filed during the quarter
ended March 31, 1997.
(c) See Item 14(a)(3) above.
(d) See "Index to Financial Statements" included under Item 8 to
this report.
17
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: May 23, 1997
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 May 23, 1997
- -------------------------------------------- Chief Executive Officer
Steve Sanghi
Albert J. Hugo-Martinez* Director May 23, 1997
Jon H. Beedle* Director May 23, 1997
L.B. Day* Director May 23, 1997
/s/ C. Philip Chapman Vice President, Chief Financial May 23, 1997
- -------------------------------------------- Officer and Secretary (Principal
C. Philip Chapman Financial and Accounting Officer)
*By: /s/ Steve Sanghi Individually and as Attorney-in-fact May 23, 1997
---------------------------------------
Steve Sanghi
18
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, 1997
MICROCHIP TECHNOLOGY INCORPORATED
AND SUBSIDIARIES
CHANDLER, ARIZONA
19
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, 1997 and 1996
Consolidated Statements of Income F-3
for each of the years in the three-year
period ended March 31, 1997
Consolidated Statements of Cash Flows F-4
for each of the years in the three-year
period ended March 31, 1997
Consolidated Statements of Stockholders' Equity F-5
for each of the years in the three-year
period ended March 31, 1997
Notes to Consolidated Financial Statements F-6
i
KPMG Peat Marwick LLP
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Phoenix, Arizona
April 18, 1997
F-1
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
ASSETS
March 31,
-----------------------------------------
1997 1996
----------------- ------------------
Cash and cash equivalents $ 42,999 $ 31,059
Accounts receivable, net 61,102 47,208
Inventories 56,813 56,127
Prepaid expenses 1,715 1,808
Deferred tax asset 24,251 19,121
Other current assets 2,656 1,108
----------------- ------------------
Total current assets 189,536 156,431
Property, plant and equipment, net 234,058 197,383
Other assets 4,498 4,373
----------------- ------------------
Total assets $ 428,092 $ 358,187
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 35,281 $ 47,165
Current maturities of of long-term debt 2,470 2,734
Current maturities of capital lease obligations 3,776 2,943
Accrued liabilities 36,392 28,207
Deferred income on shipments to distributors 20,441 19,527
----------------- ------------------
Total current liabilities 98,360 100,576
Long-term line of credit --- 21,000
Long-term debt, less current maturities 3,616 6,086
Capital lease obligations, less current maturities 2,383 6,164
Long-term pension accrual 980 690
Deferred tax liability 6,169 4,039
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; authorized 5,000,000 shares;
no shares issued or outstanding --- ---
Common stock, $.001 par value; authorized 65,000,000 shares;
issued 53,300,619 and outstanding 53,196,037 shares at March 31, 1997;
issued and outstanding 51,581,172 shares at March 31, 1996. 53 52
Additional paid-in capital 168,185 120,887
Retained earnings 149,825 98,693
Less shares of common stock held in treasury; 104,582 shares at cost (1,479) ---
----------------- ------------------
Net stockholders' equity 316,584 219,632
Total liabilities and stockholders' equity $ 428,092 $ 358,187
================= ==================
F-2
See accompanying notes to consolidated financial statements
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share amounts)
Year Ended March 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
Net sales $ 334,252 $ 285,888 $ 207,961
Cost of sales 167,330 137,708 101,039
--------- --------- ---------
Gross profit 166,922 148,180 106,922
Operating expenses:
Research and development 32,073 27,517 20,746
Selling, general and administrative 56,248 48,903 36,975
Restructuring cost 5,969 -- --
Write-off of in-process technology 1,575 11,448 --
--------- --------- ---------
95,865 87,868 57,721
Operating income 71,057 60,312 49,201
Other income (expense):
Interest income 1,419 2,034 1,108
Interest expense (3,271) (2,981) (1,989)
Other, net 288 569 808
--------- --------- ---------
Income before income taxes 69,493 59,934 49,128
Income taxes 18,361 16,182 12,829
--------- --------- ---------
Net income $ 51,132 $ 43,752 $ 36,299
========= ========= =========
Net income per common and
common equivalent share $ 0.94 $ 0.80 $ 0.70
========= ========= =========
Shares used in per share calculation 54,683 54,533 51,641
========= ========= =========
F-3
See accompanying notes to consolidated financial statements
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share amounts)
Years Ended March 31,
---------------------------------------------------
1997 1996 1995
---------- ----------- ----------
Cash flows from operating activities:
Net income $ 51,132 $ 43,752 $ 36,299
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for doubtful accounts 452 634 649
Provision for inventory valuation 1,886 7,639 1,883
Provision for pension accrual 1,316 1,197 1,177
Provision for restructuring cost 2,483 --- ---
Depreciation 39,853 29,975 17,196
Amortization of purchased technology 300 --- ---
Deferred income taxes (3,000) (7,402) (9,055)
Tax benefit from exercise of stock options 5,742 4,130 4,120
Increase in accounts receivable (14,346) (9,974) (12,101)
Increase in inventories (2,572) (23,565) (17,354)
Increase (decrease) in accounts payable
and accrued liabilities (3,699) 28,788 15,550
Change in other assets and liabilities (1,961) (1,815) 4,751
------------- -------------- --------------
Net cash provided by operating activities 77,586 73,359 43,115
------------- -------------- --------------
Cash flows from investing activities:
Capital expenditures (79,012) (115,845) (70,848)
Sales of marketable securities --- 13,796 4,420
------------- -------------- --------------
Net cash used in investing activities (79,012) (102,049) (66,428)
------------- -------------- --------------
Cash flows from financing activities:
Net proceeds from (repayments on) lines
of credit (21,000) 20,499 1
Proceeds from issuance of long-term debt --- 2,926 3,769
Payments on long-term debt (2,734) (2,688) (2,352)
Payments on capital lease obligations (2,948) (3,251) (3,591)
Purchase of treasury stock (19,463) --- ---
Proceeds from sale of stock and put options 59,511 9,625 33,722
------------- -------------- --------------
Net cash provided by financing activities 13,366 27,111 31,549
------------- -------------- --------------
Net increase (decrease) in cash and cash
equivalents 11,940 (1,579) 8,236
Cash and cash equivalents at beginning of year 31,059 32,638 24,402
------------- -------------- --------------
Cash and cash equivalents at end of year $ 42,999 $ 31,059 $ 32,638
============= ============== ==============
F-4
See accompanying notes to consolidated financial statements
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Common Net
Stock and Additional Stock held in Retained Stockholders'
Paid-in Capital Treasury Earnings Equity
(in thousands) Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------------------------
Balance March 31, 1994 46,181 $ 69,222 - - $ 18,642 $ 87,864
Sale of Stock
Public offering 1,500 28,384 - - - 28,384
Exercise of stock options 902 1,964 - - - 1,964
Employee stock purchase plan 1,372 2,746 - - - 2,746
Sale of put options - 628 - - - 628
Tax benefit from exercise of options - 4,120 - - - 4,120
Compensation expense - 60 - - - 60
Unrealized holding loss - (240) - - - (240)
Net income - - - - 36,299 36,299
- --------------------------------------------------------------------------------------------------------------------------
Balance March 31, 1995 49,955 $ 106,884 - - $ 54,941 $ 161,825
Sale of Stock
Exercise of stock options 1,368 5,686 - - - 5,686
Employee stock purchase plan 258 3,292 - - - 3,292
Sale of put options - 647 - - - 647
Tax benefit from exercise of options - 4,130 - - - 4,130
Unrealized holding loss - 240 - - - 240
Compensation expense - 60 - - - 60
Net income - - - - 43,752 43,752
- --------------------------------------------------------------------------------------------------------------------------
Balance March 31, 1996 51,581 $ 120,939 - - $ 98,693 $ 219,632
Sale of Stock
Public offering (net of
offering costs of $2,905) 1,380 47,120 - - - 47,120
Exercise of stock options 1,315 8,388 - - - 8,388
Employee stock purchase plan 246 3,576 - - - 3,576
Purchase of treasury stock - - 1,326 (19,463) - (19,463)
Issuance of treasury stock for the
exercise of options and purchases in
the employee stock purchase plan (1,221) (17,984) (1,221) 17,984 - -
Sale of put options, net - 427 - - - 427
Tax benefit from exercise of options - 5,742 - - - 5,742
Compensation expense - 30 - - - 30
Net income - - - - 51,132 51,132
- --------------------------------------------------------------------------------------------------------------------------
Balance March 31, 1997 53,301 $ 168,238 105 $ (1,479) $ 149,825 $ 316,584
==========================================================================================================================
See accompanying notes to consolidated financial statements
F-5
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
Principles of Consolidation
The consolidated financial statements include the accounts of Microchip
Technology Incorporated and its wholly owned subsidiaries (the
"Company"). All significant intercompany accounts and transactions have
been eliminated in consolidation.
Stock Split
On December 6, 1996, the Company's Board of Directors approved a
three-for-two split of its Common Stock which became effective January
6, 1997. Accordingly, all references in the financial statements to
number of shares of Common Stock, weighted average number of shares of
Common Stock and stock option information have been restated to reflect
this stock split.
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. As of March 31, 1997, the Company has classified
marketable securities of $25,964,000, with a maturity of less than
three months as cash and cash equivalents. The Company intends to hold
these securities to maturity. There were no marketable securities at
March 31, 1996.
Inventories
Inventories are valued at the lower of cost or market using the
last-in, first-out (LIFO) 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. The Company defers recognition of net sales and 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
Net income per share is based upon the weighted average number of
shares of Common Stock and common equivalent shares consisting of stock
options (using the treasury stock method) outstanding for each of the
periods presented. Common equivalent shares are not considered if the
result would be anti-dilutive.
F-6
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, on April 1, 1996.
This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell. Adoption
of this Statement did not have a material impact on the Company's
financial position or results of operations.
Stock Option Plan
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,
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 of assets and liabilities 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 1996 and 1995 fiscal year balances have been reclassified to
conform to the fiscal year 1997 presentation.
2. 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 on-going treatment of research and development costs, as well
as all Keeloq Acquisition-related costs. The one-time write-off
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 has agreed to a secondary payment which will be determined
by a formula based on the net sales and gross margin results of the
division for the six month period ended December 31, 1998. Any such
secondary payment is based on future performance and it is currently
not possible to determine the amount of such payment. It is currently
anticipated that any such payment would be expensed in the quarter the
amount is determined. The impact of the Keeloq Acquisition to the
Company's reported financial position and results of operations is
immaterial, therefore, pro-forma information illustrating the combined
results after the Keeloq Acquisition has not been provided.
ASIC Technical Solutions
On June 25, 1996 the Company acquired ASIC Technical Solutions, Inc., a
fabless provider of quick turn gate array devices (the "ASIC
Acquisition"). The ASIC Acquisition was treated as a purchase for
accounting purposes. The amount paid for the ASIC Acquisition and
related costs was $1,750,000. As part of the ASIC Acquisition, the
Company allocated a substantial portion of the purchase price to
in-process research and development costs, which is consistent with the
Company's on-going treatment of research and development costs. The
total one-time write-off associated with the ASIC Acquisition was
$1,575,000, with the balance treated as purchased technology related to
current products and amortized over five years. Under the terms of the
ASIC Acquisition, the Company has agreed to a secondary payment which
will be determined by a formula based on the net sales and gross margin
F-7
results of the division for the two year period ending December 31,
1999. Any such secondary payment is based on future performance and it
is currently not possible to determine the amount of such payment. It
is currently anticipated that any such payment would be expensed in the
quarter the amount is determined. The impact of the ASIC Acquisition to
the Company's reported financial position and results of operations is
immaterial, therefore, pro-forma information illustrating the combined
results after the ASIC Acquisition has not been provided.
3. RESTRUCTURING CHARGES
---------------------
During the quarter ended June 30, 1996, primarily in response to
inventory correction activities at the Company's customers, the Company
implemented a series of actions to reduce production capacity, curtail
the growth of inventories and reduce operating expenses. These actions
included delaying capital expansion plans and deferring capital
spending, a 15% production cutback in wafer fabrication, a headcount
reduction in early April, 1996 representing approximately 3% of the
Company`s worldwide employees, and a two-week wafer fab shut down in
early July, 1996. As a result of these actions, the Company recorded a
pre-tax restructuring charge of $5,969,000 in the quarter ended June
30, 1996 to cover costs primarily related to idling part of the
Company's 5-inch wafer fab capacity, paying continuing expenses during
the wafer fabrication facility shutdown and paying severance costs
associated with the April, 1996 headcount reduction.
4. 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, 1997, the effect of
such matters will not have a material adverse effect on the Company's
financial position.
5. ACCOUNTS RECEIVABLE
-------------------
Accounts receivable consists of the following (amounts in thousands):
March 31,
1997 1996
---------------------------------
Trade accounts receivable $ 62,165 $ 47,799
Other 1,031 1,243
---------------------------------
63,196 49,042
Less allowance for doubtful accounts 2,094 1,834
----------------------------------
$ 61,102 $ 47,208
==================================
6. INVENTORIES
The components of inventories are as follows (amounts in thousands):
March 31,
1997 1996
---------------------------------
Raw materials $ 2,310 $ 2,033
Work in process 44,813 43,036
Finished goods 18,021 21,430
---------------------------------
65,144 66,499
Less allowance for inventory valuation 8,331 10,372
---------------------------------
$ 56,813 $ 56,127
=================================
The Company has consistently presented its results of operations for
all periods on the last-in first-out (LIFO) method and has assessed the
net realizable value of inventory based on LIFO costs. LIFO has the
effect of matching current costs of production with sales generated
during the same period. Production costs have decreased over time due
to improvements in manufacturing productivity and yields, resulting in
lower cost of sales for the year ended
F-8
March 31, 1995. Due to changes in sales and product mix which affected
production costs, cost of sales increased during the years ended March
31, 1997 and 1996. The difference in cost of sales between the LIFO and
FIFO inventory valuation methods for the reporting periods was
immaterial. The inventory has been valued at net realizable value after
considering costs of disposition and the LIFO basis of the inventory.
7. PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Property, plant and equipment consists of the following (amounts in
thousands):
March 31,
1997 1996
----------- -----------
Land $ 10,837 $ 10,518
Building and building improvements 51,796 36,939
Machinery and equipment 218,284 185,580
Projects in process 52,608 26,389
----------- -----------
333,525 259,426
Less accumulated depreciation
and amortization 99,467 62,043
----------- -----------
$ 234,058 $ 197,383
=========== ===========
8. LONG-TERM DEBT
--------------
Long-term debt consists of borrowings (denominated in U.S. Dollars)
from three Taiwan financial institutions, secured by equipment financed
thereby. Interest rates are at the London Interbank Offering Rate
(LIBOR) (6.0% at March 31, 1997) plus 0.75%, and Singapore Interbank
Offering Rate (SIBOR) (6.125% at March 31, 1997) plus 0.75%. The
weighted average interest rate on these borrowings was 6.824% at March
31, 1997. Payments, including interest, are due semi-annually through
September 15, 2000. The aggregate annual maturities of long term debt
as of March 31, 1997 are $2,470,000, $2,196,000, $1,147,000 and
$273,000 for the years ending March 31, 1998, 1999, 2000 and 2001,
respectively.
The Company has an unsecured line of credit with a syndicate of U.S.
banks for up to $90,000,000, bearing interest at the Prime Rate (8.50%
at March 31, 1997) and expiring in October, 1998. At March 31, 1996 the
Company had utilized $21,000,000 of this line of credit. At March 31,
1997 there were no borrowings against the line of credit. The agreement
between the Company and the syndicate of banks requires the Company to
achieve certain financial ratios and operating results. The Company was
in compliance with these covenants as of March 31, 1997.
The Company has an additional unsecured line of credit with various
Taiwan financial institutions for up to $14,890,000 (U.S. Dollar
equivalent). These borrowings are predominantly denominated in New
Taiwan Dollars, bearing interest at the Taiwan money market rate (6.10%
at March 31, 1997) and expiring on various dates through September,
1998. No borrowings were outstanding on this line of credit as of March
31, 1997 and 1996.
9. 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, and
allows employees to contribute up to 15% of their compensation, subject
to maximum annual limitations prescribed by the Internal Revenue
Service. Company contributions to the plan were at the discretion of
the Board of Directors until January 1, 1997, when the employer match
was revised to provide for a fixed and discretionary component. 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 years ended March 31,
1997, 1996 and 1995, the Company contributions to the plan totaled
$452,000, $407,000, and $273,000, respectively.
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.
F-9
Substantially all employees in 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 $1,316,000, $1,197,000, and $1,177,000 for the years ended
March 31, 1997, 1996 and 1995, respectively.
The Company has an incentive compensation plan which provides for
awards, 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, 1997, 1996 and
1995, $2,064,000, $1,357,000 and $2,105,000, respectively, was charged
against operations for this plan.
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, 1997, 1996
and 1995, $1,373,000, $1,025,000, and $1,025,000, respectively, was
charged against operations for this plan.
10. STOCK OPTION PLANS
------------------
Under the Company's 1993 Stock Option Plan (the "Plan") 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 market value of the
option shares on the grant date. Options granted under the Plan 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, 1997, there were 1,508,370 shares available for grant
under the Plan. The per share weighted-average fair value of stock
options granted under the Plan for the years ended March 31, 1997 and
1996 was $9.66 and $13.22, respectively, based on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions for both years: expected dividend yield of
0%, expected volatility of 60%, risk-free interest rate of 6.25%, and
an expected life of 3.50 years.
Under the Company's 1993 Stock Option Plan, 14,897,477 shares of Common
Stock had been reserved for issuance since the inception of the Plan.
In April, 1997, subject to stockholder approval, the Board of Directors
reserved an additional 2,000,000 shares of Common Stock for issuance
under the Plan.
The stock option activity is as follows:
Options Outstanding
Weighted Average
Shares Exercise Price
-----------------------------------------
Outstanding at March 31, 1994 5,963,625 $ 4.69
Granted 2,186,945 13.76
Exercised (901,656) 2.20
Canceled (138,242) 6.50
-----------------
Outstanding at March 31, 1995 7,110,672 7.76
Granted 981,833 23.77
Exercised (1,367,832) 4.01
Canceled (177,366) 10.86
-----------------
Outstanding at March 31, 1996 6,547,307 10.88
Granted 2,092,952 17.74
Exercised (1,314,977) 6.16
Canceled (967,610) 21.28
-----------------
Outstanding at March 31, 1997 6,357,672 $ 12.50
=================
F-10
The following table summarizes information about the stock options
outstanding at March 31, 1997:
Weighted
Average Weighted Weighted
Range of Options Remaining Average Options Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$ 0.0300 - $ 2.4070 571,588 5.72 $ 1.87 571,588 $ 1.87
$ 3.6300 - $ 7.1110 1,714,505 6.47 7.07 1,369,106 7.06
$ 7.5930 - $13.0000 175,997 6.95 11.06 91,951 10.93
$ 13.7220 - 1,525,500 7.31 13.72 77,940 13.72
$ 14.5550 - $16.7500 116,975 8.21 15.25 28,473 15.37
$ 16.8330 - 1,001,250 9.25 16.83 -- --
$ 17.0000 - $38.2500 1,251,857 8.91 19.70 69,750 20.31
--------- ---- ------ --------- -------
$0.0300 - $38.2500 6,357,672 7.56 $12.50 2,208,808 $ 6.60
========= ==== ====== ========= ======
At March 31, 1997 and 1996, the number of options exercisable was
2,208,808 and 2,115,404, respectively, and the weighted-average
exercise price of those options was $6.60 and $6.21, respectively.
On April 23, 1996, the Board of Directors of the Company approved an
option exchange program for options priced in excess of $20.00.
Employees, excluding executive officers, certain corporate officers,
and directors, who were issued stock options in this category, and who
were active employees on April 30, 1996, could elect to keep their
options to buy Common Stock at the original grant price or exchange
their options for options priced at $17.00 per share, the fair market
value of the Company's Common Stock on April 30, 1996. If the employee
elected to exchange their options for options priced at $17.00 per
share, the vesting commencement date was extended by 90 days from the
original vesting date. There were 654,395 shares exchanged under the
option exchange program.
For certain options granted, the Company recognizes as compensation
expense the excess of the deemed value for accounting purposes of the
Common Stock issuable upon exercise of such options over the exercise
price of such options. This deferred compensation expense is amortized
ratably over the vesting period of each option. During the years ended
March 31, 1997, 1996 and 1995, the Company recorded compensation
expense of $30,000, $60,000 and $60,000, respectively.
Common stock received through the exercise of incentive stock options
which are sold by the optionee within two years of grant or one year of
exercise result in a tax deduction for the Company equivalent to the
taxable gain recognized by the optionee. 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. Such optionee sales resulted in a tax benefit to the Company
of $5,742,000, $4,130,000 and $4,120,000 for the years ended March 31,
1997, 1996 and 1995, 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, 1997, 179,086 shares were available for
issuance under the Purchase Plan. Since the inception of the Purchase
Plan, 3,006,000 shares of Common Stock have been reserved for issuance
under the Purchase Plan. In April, 1997, subject to stockholder
approval, the Board of Directors reserved an additional 300,000 shares
of Common Stock for issuance under the Purchase Plan. During fiscal
1995, a purchase plan was adopted for employees in non-U.S. locations.
The plan will allow 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. In April, 1997, the Board
of Directors reserved an additional 10,000 shares of Common Stock for
issuance under this plan.
The Company applies APB Opinion No. 25 in accounting for its various
stock plans and, accordingly, no compensation cost has been recognized
for the Plan 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 and net income per share would have been
reduced to the pro forma amounts indicated below:
F-11
Year Ended March 31,
1997 1996
-------------------------
Net income As reported $ 51,132 $ 43,752
Pro forma 48,202 40,691
Net income per common and As reported $ 0.94 $ 0.80
common equivalent share Pro-forma 0.88 0.75
Pro forma net income reflects only options granted during the fiscal
years ended March 31, 1997 and 1996. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is
not reflected in the 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.
11. LEASE COMMITMENTS
-----------------
The Company leases office space, transportation and other equipment
under capital and operating leases which expire at various dates
through March, 2003. The future minimum lease commitments under these
leases are payable as follows (amounts in thousands):
Year ended Capital Operating
March 31, Leases Leases
--------- ------ ------
1998 $ 4,116 $ 1,410
1999 2,139 1,220
2000 360 712
2001 2 237
2002 --- 136
Thereafter --- 52
-------------- ------------
Total minimum lease payments $ 6,617 $ 3,767
============
Less amount representing interest
(at rates ranging from 6.7% to 10.43%) (458)
--------------
Present value of net minimum lease payments 6,159
Less current maturities 3,776
--------------
Capital lease obligations $ 2,383
==============
Rental expense under operating leases totaled $2,644,000, $1,675,000
and $1,646,000 for the years ended March 31, 1997, 1996 and 1995,
respectively.
F-12
12. INCOME TAXES
The provision for income taxes is as follows (amounts in
thousands):
Year Ended March 31,
1997 1996 1995
---------------------------------------------------------------
Current expense:
Federal $ 13,814 $ 15,923 $ 15,833
State 3,454 4,122 3,835
Foreign 4,093 3,539 2,216
------------- ------------- -----------
21,361 23,584 21,884
------------- ------------- -----------
Deferred expense (benefit):
Federal (1,322) (5,922) (7,017)
State (331) (1,480) (2,038)
Foreign (1,347) --- ---
-------------- ------------- -----------
(3,000) (7,402) (9,055)
-------------- -------------- ------------
$ 18,361 $ 16,182 $ 12,829
============= ============= ===========
The tax benefit associated with the exercise of employee stock options
reduced taxes currently payable by $5,742,000, $4,130,000 and
$4,120,000 for the years ended March 31, 1997, 1996 and 1995,
respectively.
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):
Year Ended March 31,
1997 1996 1995
-----------------------------------------------------------
Computed expected provision $ 24,323 $ 20,977 $ 17,195
State income taxes, net
of federal benefit 2,245 1,669 1,168
Foreign sales corporation benefit (2,552) (2,123) (154)
Foreign income taxed at
lower than the federal rate (5,655) (4,341) (5,380)
-------------- -------------- ------------
$ 18,361 $ 16,182 $ 12,829
============= ============= ===========
Pretax income from foreign operations was $32,172,000, $29,434,000 and
$21,064,000 for the years ended March 31, 1997, 1996 and 1995,
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 $108,320,000 at
March 31, 1997.
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):
F-13
March 31,
1997 1996
--------------------------------
Deferred tax assets:
Intercompany profit in inventory $ 10,408 $ 10,055
Deferred income on shipments
to distributors 6,475 4,938
Inventory reserves 2,392 2,196
Technology assets 2,934 3,536
Accrued expenses and other 4,976 1,932
----------- -----------
Gross deferred tax assets 27,185 22,657
=========== ===========
Deferred tax liabilities:
Property, plant and equipment,
principally due to differences in
depreciation (8,479) (6,950)
Other deferred liabilities (624) (625)
------------ ------------
Gross deferred tax liability (9,103) (7,575)
------------ ------------
Net deferred tax asset $ 18,082 $ 15,082
============= ============
Management believes that it is more likely than not that the results of
future operations will generate sufficient
taxable income to realize the deferred tax assets.
The Company has enjoyed the benefits of a partial tax holiday for its
Taiwan manufacturing operations over the past several years. The
aggregate dollar benefits derived from this tax holiday status
approximated $5,415,000, $5,003,000, and $3,707,000 for the years ended
March 31, 1997, 1996 and 1995, respectively. The benefit the tax
holiday status had on net income per share approximated $0.10, $0.09
and $0.07 for the years ended March 31, 1997, 1996 and 1995,
respectively. The Company's tax holiday status in Taiwan expired in
March, 1997.
13. ACCRUED LIABILITIES
-------------------
Accrued liabilities consists of the following (amounts in thousands):
March 31,
1997 1996
---------------------------
Accrued salaries and wages $ 6,344 $ 4,728
Income taxes 14,957 7,422
Other accrued expenses 15,091 16,057
----------- -----------
$ 36,392 $ 28,207
=========== ===========
14. STOCKHOLDERS' EQUITY
--------------------
Stockholder Rights Plan. On February 13, 1995, the Company's Board of
Directors adopted a Stockholder Rights Plan (the "Plan"). Under the
Plan, each share of the Company's Common Stock has one right which
entitles the stockholder to buy 1/100th of a share of the Company's
Series A Participating Preferred Stock. The rights have an exercise
price of $66.67 and expire in February, 2005. 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, 1997, the Company purchased a
total of 1,326,477 shares of the Company's Common Stock in open market
activities at a total cost of $19,463,000. Through December 31, 1996,
the Company had reissued through stock option exercises and the
Company's employee stock purchase plan a total of 1,221,895 shares of
the Company's Common Stock held in treasury. Also, in connection with a
stock repurchase program, during fiscal 1997 and fiscal 1996 the
Company sold put options for 500,000 shares and 517,500 shares of
Common Stock, respectively. Pricing per share ranged from $15.00 to
$24.88 in fiscal 1997 and from $18.25 to $25.08 in fiscal 1996. During
fiscal 1997, the Company
F-14
repurchased put options for 142,500 shares. As of March 31, 1997 the
Company held put options for 300,000 shares which have expiration dates
ranging from April 1, 1997 to December 26, 1997 at prices ranging from
$15.00 to $24.88 per share. The net proceeds from the sale and
repurchase of these options, in the amount of $427,750 and $647,000 for
fiscal years 1997 and 1996 respectively, has been credited to
additional paid-in capital.
Proposed Increase to the Number of Authorized Shares. In April, 1997,
subject to stockholder approval, the Board of Directors approved an
amendment to the Company's Restated Certificate of Incorporation, as
amended, to increase the number of authorized shares of Common Stock
from 65,000,000 to 100,000,000. This matter will be voted upon by the
stockholders at the 1997 annual stockholders' meeting.
15. 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 comprehensive
product final test facilities in Taiwan and 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 Taiwan test facility is reimbursed
in relation to value added with respect to test operations and other
functions performed, and certain foreign sales offices receive a
commission on export sales within their territory. The Thailand test
facility was brought on line during the fiscal year ended March 31,
1997 and has also been reimbursed in relation to value added during
test operations. 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 (in thousands):
March 31,
1997 1996
-------------------------------
United States $ 254,477 $ 192,726
Taiwan 101,036 119,269
Thailand 44,126 23,767
Other 28,453 22,425
------------- -------------
Total Assets $ 428,092 $ 358,187
============= =============
Sales to unaffiliated customers located outside the United States,
primarily in Asia, Europe and Japan, aggregated approximately 66%, 65%,
and 65% of consolidated net sales for the years ended March 31, 1997,
1996 and 1995, respectively.
16. 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 and long-term debt
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, 1997 and 1996, the Company held
contracts totaling $5,421,000 and $10,243,000, respectively, which were
entered into and hedged the Company's foreign currency risk. The
contracts matured in April and May 1997 and 1996 respectively.
Unrealized gains and losses as of the balance sheet dates and realized
gains and losses for the years ending March 31, 1997, 1996 and 1995
were not material.
F-15
17. QUARTERLY RESULTS (UNAUDITED)
-----------------------------
The following table presents selected unaudited quarterly operating
results for the Company's eight quarters ended March 31, 1997. The
Company believes that all necessary adjustments have been made to
present fairly the related quarterly results.
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-----------------------------------------------------
Fiscal 1997
-----------
Net sales $ 74,161 $ 79,510 87,076 $ 93,505 $334,252
Gross profit 36,636 39,788 43,514 46,984 166,922
Operating income 9,545 18,517 20,791 22,204 71,057
Net income 6,686 13,126 14,755 16,565 51,132
Net income per common
and common equivalent
share 0.12 0.24 0.27 0.30 0.94
Fiscal 1996
-----------
Net sales $ 64,499 $ 71,265 $ 78,069 $ 72,055 $285,888
Gross profit 33,495 36,958 40,383 37,344 148,180
Operating income 16,161 17,994 8,064 18,093 60,312
Net income 11,503 12,765 5,765 13,719 43,752
Net income per common
and common equivalent
share 0.21 0.23 0.10 0.25 0.80
18. SUPPLEMENTAL FINANCIAL INFORMATION
----------------------------------
The Company acquired equipment and incurred capital lease obligations
of $3,656,000 during the year ended March 31, 1995.
Cash paid for income taxes amounted to $8,108,000, $17,557,000 and
$10,905,000 during the years ended March 31, 1997, 1996 and 1995,
respectively. Cash paid for interest amounted to $3,183,000, $2,643,000
and $2,081,000 during the years ended March 31, 1997, 1996 and 1995,
respectively.
A summary of additions and deductions related to the allowances for
accounts receivable and inventories for the years ended March 31, 1997,
1996 and 1995 follows:
Balance at Charged to
beginning costs and Balance at
of year expenses Deductions end of year
-------------------------------------------------
Allowance for doubtful accounts:
1997 $ 1,834 $ 452 $ (192) $ 2,094
1996 1,394 634 (194) 1,834
1995 885 649 (140) 1,394
Allowance for inventory valuation:
1997 $ 10,372 $ 1,886 $ (3,927) $ 8,331
1996 4,373 7,639 (1,640) 10,372
1995 5,049 1,883 (2,559) 4,373
F-16
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
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]
3.2 Amended and Restated By-Laws of Registrant, as amended through
May 19, 1997
4.1 Investors' Rights Agreement dated October 30, 1992
[Incorporated by reference to Exhibit No. 4.1 to Registration
Statement No. 33-57960]
4.2 Preferred Share Rights Agreement dated as of February 13, 1995
between Registrant and Bank One, Arizona, N.A., including 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 February 14,
1995]
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 Series B Preferred Stock Purchase Agreement dated as of March
14, 1991, as amended, between Registrant and the investors
specified therein [Incorporated by reference to Exhibit No.
10.2 to Registration Statement No. 33-57960]
10.3 Series C Preferred Stock Purchase Agreement dated as of
October 30, 1992 between Registrant and the investors
specified therein [Incorporated by reference to Exhibit No.
10.3 to Registration Statement No. 33-57960]
10.4 Warrant Purchase Agreement dated as of May 15, 1991 between
Registrant and Silicon Valley Bank [Incorporated by reference
to Exhibit No. 10.5 to Registration Statement No. 33-57960]
E-1
Exhibit No. Description Page No.
- ----------- ----------- --------
10.5 Warrant Purchase Agreement dated as of July 1, 1992 between
Registrant and Silicon Valley Bank [Incorporated by reference
to Exhibit No. 10.6 to Registration Statement No. 33-57960]
10.6 Form of Stock Purchase Warrant between Registrant and certain
investors [Incorporated by reference to Exhibit No. 10.8 to
Registration Statement No. 33-57960]
10.7 License Agreement dated as of April 1, 1988 between Registrant
and General Instrument Corporation, as amended by that certain
Amendment, Assignment and Assumption Agreement dated as of
April 12, 1989 [Incorporated by reference to Exhibit No. 10.9
to Registration Statement No. 33-57960]
10.8 Land Lease Contract dated January 1, 1989 between Registrant's
subsidiary and Kaohsiung Export Processing Zone Administration
Summary (English Summary) [Incorporated by reference to
Exhibit No. 10.10 to Registration Statement No. 33-57960]
10. 9 Land Lease Contract dated September 1, 1992 between
Registrant's subsidiary and Kaohsiung Export Processing Zone
Administration Summary (English Summary) [Incorporated by
reference to Exhibit No. 10.11 to Registration Statement No.
33-57960]
10.10 Amended and Restated 1989 Stock Option Plan [Incorporated by
reference to Exhibit No. 10.14 to Registration Statement No.
33-57960]
10.11 1993 Stock Option Plan, as amended through April 25, 1997
10.12 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 to Registration Statement No.
333-872]
10.13 Employee Stock Purchase Plan, as amended through April 25,
1997
10.14 Form of Stock Purchase Agreement for Employee Stock Purchase
Plan [Incorporated by reference to Exhibit No. 10.2 to
Registration Statement No. 333-872]
E-2
Exhibit No. Description Page No.
- ----------- ----------- --------
10.15 Form of Enrollment Form For Employee Stock Purchase Plan
[Incorporated by reference to Exhibit No. 10.3 to Registration
Statement No. 333-872]
10.16 Form of Change Form For Employee Stock Purchase Plan
[Incorporated by reference to Exhibit No. 10.4 to Registration
Statement No. 333-872]
10.17 Form of Executive Officer Severance Agreement [Incorporated by
reference to Exhibit No. 10.7 to Registration Statement No.
333-872]
10.18 Purchase and Sale Agreement dated October 7, 1993 Between
Registrant and Digital Equipment Corporation [Incorporated by
reference to Exhibit No. 10.22 to Registration Statement No.
33-70608]
10.19 Credit Agreement dated as of October 31, 1996 among
Registrant, the Banks named therein, Wells Fargo Bank, N.A. as
Administrative Agent and NBD Bank, as Co-Agent [Incorporated
by reference to Exhibit No. 10.1 to Registrant's Quarterly
Report on Form 10-Q for the Quarter Ended September 30, 1996]
10.20 Modification Agreement dated as of January 14, 1997 to the
Credit Agreement dated as of October 31, 1996 among
Registrant, the Banks named therein, Wells Fargo Bank, N.A.,
as Administra- tive Agent and NBD Bank, as Co-Agent
11.1 Computation of Net Income Per Share
21.1 Subsidiaries of Registrant [Incorporated by reference to
Exhibit No. 21.1 to Registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 1996]
23.1 Consent of KPMG Peat Marwick LLP
24.1 Power of Attorney Re: Microchip Technology Incorporated, the
Registrant [Incorporated by reference to Exhibit No. 24.1 to
Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1995]
28.1 Specimen Certificate of Registrant's Common Stock
[Incorporated by reference to Exhibit No. 28.1 to Registration
Statement No. 33-57960]
E-3