SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
---
Exchange Act of 1934
For the Quarterly Period Ended July 4, 1999
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or
___ Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _______
Commission File No. 0-8866
MICROSEMI CORPORATION
---------------------
(Exact name of registrant as specified in its charter)
Delaware 95-2110371
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2830 South Fairview Street, Santa Ana, California 92704
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(Address of principal executive offices) (Zip Code)
(714) 979-8220
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the issuer's Common Stock, $.20 par value,
on July 29, 1999 was 10,913,979.
1
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The unaudited consolidated financial information for the quarter and nine months
ended July 4, 1999 of Microsemi Corporation and Subsidiaries ("Microsemi" or the
"Company") and the comparative unaudited consolidated financial information for
the corresponding periods of the prior year, together with the balance sheet as
of September 27, 1998 are attached hereto and incorporated herein.
2
MICROSEMI CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Balance Sheets
(amounts in 000's)
July 4, 1999 September 27, 1998
------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,412 $ 9,610
Accounts receivable less allowance for doubtful accounts,
$3,737 at July 4, 1999 and $2,457 at September 27, 1998 30,655 23,094
Inventories 64,968 54,433
Deferred income taxes 6,049 6,049
Other current assets 2,532 1,319
------------ -----------
Total current assets 111,616 94,505
------------ -----------
Property and equipment, at cost 125,612 77,667
Less: Accumulated depreciation (74,853) (42,113)
------------ -----------
50,759 35,554
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Goodwill and other intangible assets 12,591 9,639
Other assets 7,469 5,390
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TOTAL ASSETS $ 182,435 $ 145,088
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks and other $ 19,540 $ 6,172
Current maturity of long-term debt 8,042 4,339
Accounts payable 11,427 6,656
Accrued liabilities 16,606 14,401
Income taxes payable 7,094 5,874
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Total current liabilities 62,709 37,442
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Long-term debt 33,223 18,667
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Other long-term liabilities 1,959 1,962
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Commitments and contingencies
Stockholders' equity:
Common stock, $.20 par value; authorized 20,000 shares;
issued 10,914 at July 4, 1999 and 11,666 at September 27, 1998 2,183 2,333
Capital in excess of par value of common stock 46,673 49,896
Retained earnings 36,665 35,734
Cumulative translation adjustment (977) (946)
-------------- -----------
Total stockholders' equity 84,544 87,017
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 182,435 $ 145,088
============== ===========
The accompanying notes are an integral part of these statements.
3
MICROSEMI CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Income Statements
(amounts in 000's, except earnings per share)
Quarter Ended Quarter Ended
July 4, 1999 June 28, 1998
------------------- ---------------
Net sales $ 48,758 $ 39,291
Cost of sales 38,164 28,417
---------------- ---------------
Gross profit 10,594 10,874
---------------- ---------------
Operating expenses:
Selling 4,165 3,275
General and administrative 4,494 3,348
Acquired in-process research and development 1,950 -
---------------- ---------------
Total operating expenses 10,609 6,623
---------------- ---------------
(Loss) income from operations (15) 4,251
---------------- ---------------
Other expense:
Interest (1,012) (394)
Other (36) (71)
---------------- ---------------
Total other expense (1,048) (465)
---------------- ---------------
(Loss) income before income taxes (1,063) 3,786
(Benefit) provision for income taxes (393) 1,439
---------------- ---------------
Net (loss) income $ (670) $ 2,347
================ ===============
Earnings per share:
-Basic $ (0.06) $ 0.20
================ ==============
-Diluted $ (0.06) $ 0.20
================ ==============
Weighted average common shares outstanding:
-Basic 10,915 11,777
-Diluted 10,915 11,964
The accompanying notes are an integral part of these statements.
4
MICROSEMI CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Income Statements
(amounts in 000's, except earnings per share)
Nine Months Ended Nine Months Ended
July 4, 1999 June 28, 1998
------------------- -----------------
Net sales $ 127,666 $ 124,537
Cost of sales 96,621 89,963
------------------- ----------------
Gross profit 31,045 34,574
------------------- ----------------
Operating expenses:
Selling 10,665 8,306
General and administrative 10,748 10,204
Acquired in-process research and development 1,950 -
------------------- ----------------
Total operating expenses 23,363 18,510
------------------- ----------------
Income from operations 7,682 16,064
------------------- ----------------
Other income (expense):
Interest expense (1,975) (1,736)
Other 14 (45)
------------------- ----------------
Total other expense (1,961) (1,781)
------------------- ----------------
Income before income taxes 5,721 14,283
Provision for income taxes 2,117 5,428
------------------- ----------------
Net income $ 3,604 $ 8,855
=================== ================
Earnings per share:
-Basic $ 0.32 $ 0.85
=================== ================
-Diluted $ 0.32 $ 0.79
=================== ================
Weighted average common shares outstanding:
-Basic 11,200 10,386
-Diluted 11,313 11,984
The accompanying notes are an integral part of these statements.
5
MICROSEMI CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(amounts in 000's)
Nine Months Ended Nine Months Ended
July 4, 1999 June 28, 1998
-------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,604 $ 8,855
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 5,898 3,538
Allowance for doubtful accounts (679) (1,121)
Acquired in-process research and development 1,950 -
Changes in assets and liabilities, net of acquisitions and
disposition:
Accounts receivable 1,367 856
Inventories (4,161) (3,041)
Other current assets (23) 2,397
Other assets - -
Accounts payable 357 (3,971)
Accrued liabilities (880) 1,286
Income taxes payable 1,220 (1,197)
Other - (38)
-------------------- --------------------
Net cash provided by operating activities 8,653 7,564
-------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisitions of businesses (29,488) (13,740)
Proceeds from disposition of business - 5,000
Investment in an unconsolidated affiliate - (1,000)
Purchases of property and equipment (4,635) (4,342)
Change in other assets (2,275) 366
-------------------- --------------------
Net cash used in investing activities (36,398) (13,716)
-------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable to banks and other 13,368 (1,261)
Proceeds from long-term debt 30,800 10,000
Payments on long-term debt (12,541) (1,988)
(Decrease) increase in other long-term liabilities (3) 18
Repurchases of common stock (6,073) -
Exercise of employee stock options 27 554
-------------------- --------------------
Net cash provided by financing activities 25,578 7,323
-------------------- --------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (31) (106)
-------------------- --------------------
Net (decrease) increase in cash and cash equivalents (2,198) 1,065
Cash and cash equivalents at beginning of period 9,610 6,145
-------------------- --------------------
Cash and cash equivalents at end of period $ 7,412 $ 7,210
==================== ====================
The accompanying notes are an integral part of these statements.
6
MICROSEMI CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
July 4, 1999
1. PRESENTATION OF FINANCIAL INFORMATION
The financial information furnished herein is unaudited, but, in the opinion of
the management of Microsemi Corporation, includes all adjustments (all of which
are normal, recurring adjustments) necessary for a fair presentation of the
results of operations for the periods indicated. The results of operations for
the quarter or first nine months of the current fiscal year are not necessarily
indicative of the results to be expected for the full year.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, therefore, do not include
all information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. The unaudited consolidated financial statements
and notes should be read in conjunction with the consolidated financial
statements and notes thereto in the Annual Report on Form 10-K for the fiscal
year ended September 27, 1998.
2. INVENTORIES
For interim reporting purposes, cost of goods sold and inventories are estimated
based upon the use of the gross profit method.
Inventories used in the computation of cost of goods sold were:
September 27,
July 4, 1999 1998
------------------ ------------------
(amounts in 000's)
Raw materials $ 16,065 $ 14,759
Work in process 22,674 18,282
Finished goods 26,229 21,392
------------------ ------------------
$ 64,968 $ 54,433
================== ==================
The accompanying notes are an integral part of these statements.
7
3. BORROWINGS
Long-term debt consisted of:
September 27,
July 4, 1999 1998
-------------- ---------------
(amounts in 000's)
Industrial Development Bond, bearing interest at 7.875%, due
May 2000; secured by first deed of trust $ 2,075 $ 2,305
Industrial Development Bond, bearing interest at 6.75%, due
February 2005; secured by first deed of trust 4,200 4,300
Note payable, bearing interest at 5.93%, payable monthly
through July 2002 1,665 2,070
Notes payable (PPC Acquisition), bearing interest at 7%,
payable monthly through September 2009 1,870 2,092
Notes payable to a bank, bearing interest at the bank's prime
rate, payable in monthly installments through March 2003 - 9,667
Note payable to banks, bearing interest at a variable rate
(7.0625% at July 4, 1999), payable in quarterly installments
through March 2003 29,000 -
Notes payable, bearing interest at ranges of 5% - 9.75%, due
between July 1999 and September 2014 2,455 2,572
--------- ----------
41,265 23,006
Less current portion (8,042) (4,339)
--------- ----------
33,223 18,667
========= ==========
A $4,150,000 Industrial Revenue Bond was issued in November 1975 through the
City of Broomfield, Colorado and carries an interest rate of 7.875% per annum.
The balance of $2,075,000 is due in May 2000.
A $6,500,000 Industrial Development Revenue Bond was originally issued in April
1985, through the City of Santa Ana, California for the construction of
improvements and new facilities at the Company's Santa Ana plant. $4,200,000 of
this loan remained outstanding at July 4, 1999. It was remarketed in 1995 and
carries an average interest rate of 6.75% per annum. The terms of the bond
require principal payments of $100,000 annually from 2000 to 2004 and $3,700,000
in 2005. A $4,466,000 letter of credit is carried by a bank to guarantee the
repayment of this bond. There are no compensating balance requirements. An
annual commitment fee of 2% is charged on this letter of credit. In addition,
the agreement contains covenants regarding net worth and working capital. The
Company was in compliance with the aforementioned covenants at July 4, 1999.
In June 1997, the Company entered into a $2,700,000 equipment loan agreement,
providing for monthly principal payments through July 2002 of $45,000 plus
interest at 5.93% per annum. $1,665,000 of this loan remained outstanding at
July 4, 1999.
In September 1997, the Company issued and assumed notes payable of $2,370,000
related to the PPC acquisition. These notes are payable to the former owners,
bear an interest rate of 7%, and are due in
8
monthly installments over various periods through September 2009. $1,870,000 of
these notes remained outstanding at July 4, 1999.
In June 1998, the Company finalized an amendment to its then-existing bank
credit facility, which added a $10,000,000 term loan, used by Microsemi to
finance a portion of the BKC acquisition. This term loan was paid in full when
the Company obtained new credit arrangements with its banks in April 1999.
In April 1999, the Company obtained a new credit agreement with its banks, which
included a term loan of $30,000,000 and a revolving line of credit of
$30,000,000 to finance the LinFinity acquisition and to pay off the existing
term loan and the revolving line of credit.
The new $30,000,000 term loan, ($29,000,000 of this loan remained outstanding at
July 4, 1999), is secured by substantially all of the assets of the Company. It
bears interest at the bank's prime rate plus .75% to 1.5% per annum or, at the
Company's option, at the Eurodollar rate plus 1.75% to 2.5% per annum. The
interest rate is determined by the ratio of total funded debt to Earnings before
Interest Expense (net of interest income), Income Taxes, Depreciation and
Amortization ("EBITDA"). It requires quarterly principal payments of $1,000,000
from June 1999 to March 2000, $1,500,000 from June 2000 to March 2001,
$2,000,000 from June 2001 to March 2002 and $3,000,000 from June 2002 to March
2003 and monthly interest payments. The terms of the term loan contain
covenants regarding net worth and working capital and restricting payment of
cash dividends or share repurchases.
Concurrently with the new term loan, the Company obtained a new $30,000,000
revolving line of credit, which expires in March 2003. This line of credit
replaced its then-existing $15,000,000 credit line. The new line of credit is
secured by substantially all of the assets of the Company. It bears interest at
the bank's prime rate plus .75% to 1.5% per annum or, at the Company's option,
at the Eurodollar rate plus 1.75% to 2.5% per annum. The interest rate is
determined by the ratio of total funded debt to EBITDA. The terms of the
revolving line of credit contain covenants regarding net worth and working
capital and restricting payment of cash dividends or share repurchases.
Other debts consist of various loans bearing interest at ranges from 5% to 9.75%
and require periodic principal payments through September 2014. At July 4,
1999, totals of $2,455,000 remained outstanding for these loans.
4. CONTINGENCY
In Broomfield, Colorado, the owner of a property located adjacent to a
manufacturing facility owned by a subsidiary of the Company had filed suit
against the subsidiary and other parties, claiming that contaminants migrated to
his property, thereby diminishing its value. In August 1995, the subsidiary,
together with former owners of the manufacturing facility, agreed to settle the
claim and to indemnify the owner of the adjacent property for remediation costs.
Although TCE and other contaminants previously used at the facility were present
in soil and groundwater on the subsidiary's property, the Company vigorously
contested any assertion that the subsidiary was the cause of the contamination.
In November 1998, the Company signed an agreement with three former owners of
this facility whereby the former owners will 1) reimburse the Company for
$530,000 of past costs related to the dispute, 2) assume responsibility for 90%
of all future clean-up costs, and 3) indemnify and protect the Company against
any and all third-party claims relating to the contamination of the facility.
The Company received a $530,000 cash reimbursement in the first quarter of
fiscal year 1999. State and local agencies in Colorado are reviewing current
data and considering study and cleanup options, and it is not yet possible to
predict the future costs for remediation. In the opinion of management, the
final outcome of the Broomfield, Colorado environmental matter will not have a
material adverse effect on the Company's financial position or results of
operations.
The Company is involved in various pending litigation arising out of the normal
conduct of its business, including those relating to commercial transactions,
contracts, and environmental matters. In the opinion
9
of management, the final outcome of these matters will not have a material
adverse effect on the Company's financial position or results of operations.
5. COMPREHENSIVE INCOME
Effective in the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for reporting and displaying of
comprehensive income and its components in the Company's consolidated financial
statements. Comprehensive income is defined in SFAS 130 as the change in equity
(net assets) of a business enterprise during the period from transactions and
other events and circumstances from non-owner sources. Total comprehensive loss
for the quarter ended July 4, 1999 was $670,000. Total comprehensive income for
the quarter ended June 28, 1998 was $2,300,000. Total comprehensive income was
$3,584,000 and $8,789,000 for the nine months ended July 4, 1999 and June 28,
1998, respectively. The difference from net income as reported is the tax
effected change in the cumulative translation adjustment.
6. EARNINGS PER SHARE
Basic earnings per share have been computed based upon the weighted average
number of common shares outstanding during the respective periods. Diluted
earnings per share have been computed, when the result is dilutive, using the
treasury stock method for stock options outstanding during the respective
periods and based upon the assumption that the convertible subordinated debt had
been converted into common stock as of the beginning of the respective periods,
with a corresponding increase in net income to reflect a reduction in related
interest expense, net of applicable taxes.
Earnings per share for the quarters and nine months ended July 4, 1999 and June
28, 1998 were calculated as follows:
Quarter Ended Nine Months Ended
------------------------------- -------------------------------
July 4, June 28, July 4, June 28,
1999 1998 1999 1998
-------------- ------------- -------------- --------------
(in 000's, except per share data)
BASIC
Net (loss) income $ (670) $ 2,347 $ 3,604 $ 8,855
============== ============= ============== ==============
Weighted-average common shares outstanding 10,915 11,777 11,200 10,386
============== ============= ============== ==============
Basic (loss) earnings per share $ (0.06) $ 0.20 $ 0.32 $ 0.85
============== ============= ============== ==============
DILUTED
Net (loss) income $ (670) $ 2,347 $ 3,604 $ 8,855
Interest savings from assumed conversions of
Convertible debt, net of income taxes - - - 618
-------------- ------------- -------------- --------------
Net (loss) income assuming conversions $ (670) $ 2,347 $ 3,604 $ 9,473
============== ============= ============== ==============
Weighted-average common shares outstanding
for basic 10,915 11,777 11,200 10,386
Dilutive effect of stock options - 187 113 284
Dilutive effect of convertible debt - - - 1,314
-------------- ------------- -------------- --------------
Weighted-average common
shares outstanding on a diluted basis 10,915 11,964 11,313 11,984
============== ============= ============== ==============
Diluted (loss) earnings per share $ (0.06) $ 0.20 $ 0.32 $ 0.79
============== ============= ============== ==============
10
7. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which supersedes Statement of
Financial Accounting Standards No. 14. This statement changes the way that
publicly-held companies report information about operating segments as well as
disclosures about products and services, geographic areas and major customers.
Operating segments are defined as revenue-producing components of the
enterprise, which are generally used internally for evaluating segment
performance. SFAS 131 will be effective for the Company's year ending October
3, 1999 and is not expected to affect the Company's financial position or
results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which will become effective for the Company in fiscal year 2001. SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. SFAS 133
is not expected to materially affect the Company's financial position or results
of operations.
8. STATEMENT OF CASH FLOWS
For purposes of the unaudited Consolidated Statements of Cash Flows, the Company
considers all short-term, highly liquid investments having a maturity of three
months or less at the date of acquisition to be cash equivalents.
Supplementary information
- -------------------------
Nine Months Nine Months
Ended Ended
July 4, June 28,
1999 1998
------------- -------------
(amounts in 000's)
Cash paid during the period for:
Interest $ 2,130 $ 1,349
============= =============
Income taxes $ 306 $ 6,763
============= =============
Non-cash financing activities:
Conversions of subordinated debt into 2,852,829 shares of
common stock $ - $ 33,733
============= =============
Business acquired in purchase transactions:
Fair values of assets acquired $ 35,897 $ 7,260
Goodwill 1,091 9,839
Less liabilities assumed (7,500) (3,359)
------------- -------------
Cash paid for acquisitions $ 29,488 $ 13,740
============= =============
9. ACQUISITIONS
On April 14, 1999, Microsemi acquired LinFinity Microelectronics, Inc.
("LinFinity"), a subsidiary of Symmetricom, Inc., located in Garden Grove,
California. LinFinity manufactures analog and mixed signal integrated circuits
(ICs), as well as systems-engineered modules for use primarily in power
management and communication applications in commercial, industrial, defense and
space markets. In the most recent twelve-month period, LinFinity had sales of
approximately $45,000,000. The purchase price was $24,125,000, which was funded
with cash and bank borrowings. The Company also paid approximately
11
$363,000 for expenses related to this acquisition. The acquisition was accounted
for under the purchase method. The Company's consolidated results of operations
included those of LinFinity since the date of acquisition. The costs of the
acquisition were allocated to the assets acquired and liabilities assumed based
on their estimated fair market values to the extent of the purchase price.
Microsemi wrote off $1,950,000 of Acquired In-Process Research and Development
related to this acquisition.
The following table reflects the unaudited pro forma combined results of
operations of the Company and LinFinity as if the acquisition had occurred at
the beginning of fiscal year 1998:
Nine months ended
---------------------------------
July 4, 1999 June 28, 1998
--------------- ---------------
(in 000's, except per share data)
Net sales $ 154,169 $ 156,277
Net income 4,099 876
Earnings per share .36 .08
These unaudited pro forma results have been prepared for comparative purposes
only and included certain pro forma adjustments. Such pro forma amounts are not
necessarily indicative of what actual consolidated results of operations might
have been if the acquisition had been effective at the beginning of fiscal year
1998.
On June 28, 1999 the Company acquired, from L-3 Communications Corporation,
certain assets of Narda Microwave East/Semiconductor Operation ("Narda") located
in Lowell, Massachusetts for $5,000,000 in cash. The assets acquired are used
in the manufacture of semiconductor components including varactor diodes, pin
diodes, chip capacitors and Schottky devices used in telecommunications,
wireless, satellite and industrial test/measurement applications. The results of
operations of Narda prior to June 28, 1999 were not material to the Company's
consolidated results of operations.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q includes forward looking statements, the
realization of which may be impacted by certain important factors discussed
below under "Important Factors Related to Forward-Looking Statements and
Associated Risks" and in Form 10-K for the fiscal year ended September 27, 1998.
The unaudited consolidated financial statements and notes should be read in
conjunction with the financial statements and notes thereto in the Annual Report
on Form 10-K for the fiscal year ended September 27, 1998.
INTRODUCTION
- ------------
Microsemi Corporation is a multinational supplier of commercial analog
integrated circuits and power and signal discrete semiconductors for the
satellite, telecommunications, computer and peripherals, military/aerospace,
industrial/commercial and medical markets. The Company's semiconductor products
include analog and mixed signal integrated circuits, diodes, transistors and
silicon controlled rectifiers (SCR's) which are used in virtually all electrical
and electronic circuits. Typical functions include solid state switching,
signal processing, voltage and power regulation, circuit protection and
absorption of electrical surges and transient voltage spikes.
12
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JULY 4, 1999 COMPARED TO THE QUARTER
- --------------------------------------------------------------------------------
ENDED JUNE 28, 1998.
- --------------------
Net sales for the third quarter of fiscal year 1999 increased $9,467,000 to
$48,758,000, from $39,291,000 for the third quarter of fiscal year 1998. Sales
for the third quarter of fiscal year 1999 included $10,427,000 from the
LinFinity division which was acquired in April 1999. Excluding sales from
LinFinity, sales for the third quarter of current fiscal year decreased $960,000
compared to the same quarter of last year. This decrease was primarily due to
lower demand for commercial satellite and telecommunications products.
Gross profit decreased $280,000 to $10,594,000 or 21.7% of sales for the current
quarter of fiscal year 1999 from $10,874,000 or 27.7% of sales for the third
quarter of fiscal year 1998. Gross profit in the third quarter of fiscal year
1999 included $2,016,000 from the LinFinity division. The decrease in gross
profit was due to lower total sales and lower sales of commercial satellite
products, which typically have higher margins than commercial products, and the
effects of pricing pressure and lower utilization of plant capacity.
Selling expenses increased $890,000 to $4,165,000 for the current quarter of
fiscal year 1999, compared to that of the corresponding period of the prior
year. The increase was primarily due to the addition of the LinFinity division.
General and administrative expenses increased $1,146,000 in the third quarter of
fiscal year 1999 from the same period of fiscal year 1998. The increase was
primarily due to the addition of the LinFinity division and amortization of
goodwill related to the BKC acquisition. The charge for acquired in-process
research and development of $1,950,000 was related to the LinFinity acquisition
in the quarter ended July 4, 1999.
Interest expense increased $618,000 due to increase in borrowings related to the
BKC and LinFinity acquisitions.
The effective tax rates of 37% and 38% in the quarters ended July 4, 1999 and
June 28, 1998, respectively, were the combined result of taxes computed on
foreign and domestic income. The decrease in the current quarter effective tax
rate is primarily attributable to expected changes in the proportion of income
earned within various taxing jurisdictions and the tax rates applicable to such
taxing jurisdictions.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JULY 4, 1999 COMPARED TO THE
- ----------------------------------------------------------------------------
NINE MONTHS ENDED JUNE 28, 1998.
- -------------------------------
Net sales for the nine months of fiscal year 1999 increased $3,129,000 to
$127,666,000, from $124,537,000 for the nine months of fiscal year 1998. Sales
in the current quarter included $10,427,000 from the LinFinity division, which
was acquired in April 1999. The increase was partially offset by lower demand
for the commercial satellite, telecommunications, computer and certain
commercial products.
Gross profit decreased $3,529,000 to $31,045,000 or 24.3% of sales for the
current nine months of fiscal year 1999 from $34,574,000 or 27.8% of sales for
the first nine months of fiscal year 1998. Gross profit contributed by
LinFinity for the nine-month period ended July 4, 1999 was $2,016,000. The
decrease of gross profit was due to lower total sales and lower sales of
commercial satellite products, which typically have higher margins than
commercial products, effects of pricing pressures and lower utilization of plant
capacity.
Selling expenses increased $2,359,000 to $10,665,000 for the first nine months
of fiscal year 1999, compared to that of the corresponding period of the prior
year. The increase was primarily due to the addition of the BKC and LinFinity
divisions. General and administrative expenses increased $544,000 to
$10,748,000 for the first nine months of fiscal year 1999, compared to
$10,204,000 for the corresponding period of the prior year. The increase was
primarily due to the addition of the BKC and LinFinity divisions; partially
offset by lower incentive-related costs. The charge for acquired in-process
research and
13
development of $1,950,000 was taken in the third quarter of fiscal year 1999
upon completion of the LinFinity acquisition.
Interest expense increased $239,000 to $1,975,000 for the first nine months of
fiscal year 1999 from $1,736,000 for the first nine months of fiscal year 1998;
primarily due to the higher borrowings related to the LinFinity acquisition in
April 1999; partially offset by the interest savings from the conversions of
debt in fiscal year 1998.
The effective tax rates of 37% and 38% in the nine months ended July 4, 1999 and
June 28, 1998, respectively, were the combined result of taxes computed on
foreign and domestic income. The decrease in the effective tax rate is
primarily attributable to expected changes in the proportion of income earned
within various taxing jurisdictions and the tax rates applicable to such taxing
jurisdictions.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
Microsemi Corporation's operations in the nine months ended July 4, 1999 were
funded with internally generated funds and borrowings under the Company's
revolving line of credit, which expires in March 2003. Under this line of
credit, the Company can borrow up to $30,000,000. As of July 4, 1999,
$19,550,000 was borrowed under this credit facility. At July 4, 1999, the
Company had $7,400,000 in cash and cash equivalents.
In April 1999 the Company obtained a new credit agreement with its banks which
included a term loan of $30,000,000 and the previously mentioned revolving line
of credit of $30,000,000 to finance the LinFinity acquisition and to pay off the
existing term loan and the revolving line of credit.
The $30,000,000 term loan is secured by substantially all of the assets of the
Company. It bears an interest rate at the bank's prime rate plus .75% to 1.50%
per annum or, at the Company's option, at the Eurodollar rate plus 1.75% to 2.5%
per annum. The interest rate is determined by the ratio of total funded debt to
EBITDA. It requires quarterly principal payments of $1,000,000 from June 1999 to
March 2000, $1,500,000 from June 2000 to March 2001, $2,000,000 from June 2001
to March 2002 and $3,000,000 from June 2002 to March 2003 and monthly interest
payments. The terms of the term loan contain covenants regarding net worth and
working capital and restricting payment of cash dividends or share repurchases.
The required principal payment of $1,000,000 due in June 1999, was paid as
agreed in the terms of the loan.
The $30,000,000 revolving line of credit expires in March 2003 and is secured by
substantially all of the assets of the Company. It bears an interest at the
bank's prime rate plus .75% to 1.50% per annum or, at the Company's option, at
the Eurodollar rate plus 1.75% to 2.5% per annum. The interest rate is
determined by the ratio of total funded debt to EBITDA. The terms of the
revolving line of credit contain covenants regarding net worth and working
capital and restricting payment of cash dividends or share repurchases.
An Industrial Revenue Bond was issued in November 1975 through the City of
Broomfield, Colorado and carries an interest rate of 7.875% per annum. The
remaining balance of $2,075,000 is due in May 2000.
An Industrial Development Revenue Bond was originally issued in April 1985,
through the City of Santa Ana Industrial Development Authority for the
improvements and construction of new facilities at the Company's Santa Ana
plant. It was remarketed in 1995 and carries an average interest rate of 6.75%
per annum. The terms of the bond require principal payments of $100,000
annually from 2000 to 2004 and $3,700,000 in 2005. A $4,466,000 letter of
credit is carried by a bank to guarantee the repayment of this bond. The Company
pays an annual commitment fee of 2% for this letter of credit.
14
In June 1997, the Company entered into a $2,700,000 equipment loan agreement,
providing for monthly principal payments through July 2002 of $45,000 plus
interest at 5.93% per annum. $1,665,000 of this loan remained outstanding at
July 4, 1999.
In September 1997, the Company issued and assumed notes payable of $2,370,000
related to the PPC acquisition. These notes are payable to the former owners,
bear an interest rate of 7%, and are due in monthly installments over various
periods through September 2009. $1,870,000 of these notes remained outstanding
at July 4, 1999.
On April 14, 1999, Microsemi acquired LinFinity, a subsidiary of Symmetricom,
Inc. LinFinity manufactures analog and mixed signal integrated circuits (ICs),
as well as systems-engineered modules for use primarily in power management and
communication applications in commercial, industrial, defense and space markets.
In the most recent twelve-month period, LinFinity had sales of approximately
$45,000,000. The total cost of this acquisition was approximately $24,500,000,
which was funded with cash and bank borrowings.
On June 28, 1999 Microsemi acquired assets of Narda Microwave Semiconductor.
The acquired assets are used in the manufacture of semiconductor components
including varactor diodes, pin diodes, chip capacitors and Schottky devices.
The purchase price was $5,000,000 in cash.
Microsemi has repurchased 759,950 shares of its common stock for $6,073,000 in
the nine months ended July 4, 1999.
The Company has no other significant capital commitments.
Based upon information currently available, the Company believes that it can
meet its current operating cash and debt service requirements with internally
generated funds together with its available borrowings.
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
- ----------------------------------------------------------------------------
This Form 10-Q contains certain forward-looking statements that are based on
current expectations and involve a number of risks and uncertainties. The
forward-looking statements included herein are based on, among other items,
current assumptions that the Company will be able to meet its current operating
cash and debt service requirements with internally generated funds and its
available line of credit, that it will be able to successfully resolve disputes
and other business matters as anticipated, that competitive conditions within
the semiconductor, surface mount and custom diode assembly industries will not
change materially or adversely, that the Company will retain existing key
personnel, that the Company's forecasts will reasonably anticipate market demand
for its products, and that there will be no materially adverse change in the
Company's operations or business. Adverse changes could result from any number
of factors, including fluctuations in economic conditions, potential effects of
inflation, lack of earnings visability, dependence upon a small number of
customers or markets, dependence upon suppliers, future capital needs, rapid
technological changes, difficulties integrating acquired businesses, ability to
realize cost savings or productivity gains, potential cost increases, dependence
on key personnel, difficulties regarding hiring and retaining qualified
personnel in a competitive labor market, risks of doing business in
international markets, and Year 2000 problems of the Company and/or third
parties. Other factors that could cause results to vary materially from current
expectations are discussed elsewhere in this Form 10-Q or in the Company's Form
10-K filed with the Securities and Exchange Commission for the prior fiscal
year. Assumptions relating to the foregoing involve judgments that are
difficult to predict accurately and are subject to many factors that can
materially affect results. Forecasting and other management decisions are
subjective in many respects and thus susceptible to interpretations and periodic
revisions based on actual experience and business developments, the impact of
which may cause the Company to alter its forecasts, which may in turn affect the
Company's results. In light of the factors that can materially affect the
forward-looking information included herein, investors are cautioned against
placing undue
15
reliance thereon. The inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved, and the Company does not undertake to update
such information. Additional factors that could cause results to vary
materially from current expectations are discussed under the heading "Important
factors related to forward-looking statements and associated risks" in the
Company's annual report in the Form 10-K as filed on December 28, 1998 with the
Securities and Exchange Commission, and elsewhere in that Form 10-K, including
but not limited to under the headings, "Legal Proceedings," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the notes to the financial statements.
ORDER BACKLOG
- -------------
The Company's consolidated order backlog was $64,000,000, including $11,000,000
from LinFinity, as of July 4, 1999, compared to $59,000,000 at June 28, 1998 and
$51,000,000 at September 27, 1998.
The Company's backlog as of any particular date may not be representative of
actual sales for any succeeding period because lead times for the release of
purchase orders depend upon the scheduling practices of individual customers,
the delivery times of new or non-standard products can be affected by scheduling
factors and other manufacturing considerations, the rate of booking new orders
can vary significantly from month to month, and the possibility of customer
changes in delivery schedules, ordering practices, or cancellations of orders.
The Company receives minimal notice of some changes that materially affect
backlog.
YEAR 2000
- ---------
The information below constitutes a "Year 2000 Readiness Disclosure" for
purposes of the Year 2000 Information and Readiness Disclosure Act.
Microsemi has made and will continue to make certain investments in its
equipment and business system and application software to ensure the Company is
year 2000 ("Y2K") compliant.
The Company has established a global Y2K team as well as local site teams to
address the issues and to ensure that all aspects of its business will be Y2K
compliant. These teams are studying business system software and hardware,
equipment and software used in the manufacturing of product, facilities,
telecommunications and internal network. The global and the local site teams
consist of management as well as operational and information technology staff
members. The global Y2K team was formed to address company-wide Y2K issues,
such as overall project integration and management, project schedules and report
to management. Local site teams address research and remediation for site-
specific equipment, facilities, customers, suppliers and other business
partners. The teams' responsibilities include the following functional areas:
(1) factory equipment and facilities, (2) business system software, (3) desktop
computers, telecommunications system and network hardware and software systems,
and (4) customers, suppliers, and business partners.
Factory equipment includes automated test equipment and test data collection
systems. The high reliability nature of the Company's products calls for test,
test data collection and data retention. This need is generally called for in
product performance specifications, such as mil PF 19500. Microsemi is taking
an inventory of factory and facility equipment to determine their Y2K readiness.
The Company estimates this inventory will be finished, and a compliance report
and a contingency plan will be presented to management by September 1999.
The initial study of the impact of the internal information system (business
system software) has been completed and non-compliant items have been
identified. Approximately 85% of the Company's business software is Y2K
compliant. The Company is in the process of installing Y2K compliant software
for the remaining units of the Company. The Company is planning to complete the
installation of Y2K compliant
16
business system software at its five largest units by September 1999 and the
remaining small units by December 1999. The Company is planning to develop a
contingency plan by September 1999.
Networking and telecommunication hardware and software are Y2K compliant. The
Company has taken an inventory and assessed Y2K compliance of desktop computers.
This project was completed in June 1999.
The Company is currently engaged in surveying customers, suppliers, service
providers and business partners, including banks and other financial
institutions to determine whether they are Y2K compliant. The survey is
partially complete and, accordingly, Microsemi is unable to evaluate the extent
to which such entities may be Y2K compliant and the effect that any non-
compliance might have. The Company anticipates cooperation in these efforts from
its customers, suppliers, service providers and business partners; however, the
Company has no control and no assurance of their cooperation as well as their
Y2K readiness. Microsemi is expecting to have an internal contingency plan for
non-Y2K compliance of its customers, suppliers, service providers and business
partners by September 1999.
The activities of the Company's Y2K project teams include the development of
contingency plans. Due to the complexity of the Y2K issues, there can be no
assurance that such plans will be sufficient to address all internal and
external failures or that unresolved or undetected Y2K issues will not have a
material adverse effect on the Company's business, financial condition, results
of operations and cash flows. The contingency plans, even if successful and
effective, may result in loss of efficiencies, increased costs, and other
adverse effects on the Company's business and operations.
The Company estimates that the expenses to date for the Y2K project have been
approximately $1,250,000. Completion of the project is expected to require an
additional expenditure of $400,000 by December 1999.
Microsemi believes that its Y2K project teams have identified all of the
Company's material Y2K issues in the course of their assessments. However, given
the pervasiveness of Y2K issues and the complexity of and interrelationships
among Y2K issues, both internal and external, there can be no assurance that
Microsemi will be able to identify and accurately evaluate all such issues.
Identification of these issues is crucial to an effective remediation plan. In
the process of compiling an inventory of and developing the remediation plan for
Y2K issues, the Company may discover material undetected or unanticipated Y2K
issues that will require substantial time and significant expense to address and
that certain known issues may take longer and may be more costly to remedy.
Further, any delayed or unsuccessful remediation of Y2K issues could result in
material adverse effects on the Company, such as failure to efficiently utilize
manufacturing capacity, shipping delays, loss of critical data, disrupted
communications, product defects, inventory write-offs, waste of inventory and
supplies, personal injury, difficulties in managing international operations,
errors in accounting, and such indirect adverse effects as claims by third
parties against the Company that may relate thereto. In addition, if Y2K
problems experienced by any of the Company's significant customers, suppliers,
public utilities, service providers or business partners cause or contribute to
delays or interruptions in placing orders, or in delivery of products or
services to the Company, or in collection of receivables, or in interruptions in
the Company's electrical or telecommunications utilities, such delays or
interruptions could have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows. Disruption in and
throughout the global economy resulting from Y2K issues may have a chain
reaction and could also have materially adverse affects on the Company. The
Company believes that such disruption is especially likely in foreign countries,
including those of Europe and Asia, whose Y2K compliance programs are believed
to trail those in the United States. However, no assurance is given as to Y2K
readiness in the United States, whose technological infrastructure is especially
complex and interrelated. The occurrence of any of the aforementioned or other
risks may have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows, including but not limited to
such effects on the Company's foreign operations. In addition, insurance
coverage for the risks described above may be unavailable or available only at
17
prohibitive costs and the Company may be responsible itself for all of the
potential adverse financial effects thereof.
Recently Issued Accounting Standard
- -----------------------------------
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which supersedes Statement of Financial Accounting Standards No.
14. This statement changes the way that publicly-held companies report
information about operating segments as well as disclosures about products and
services, geographic areas and major customers. Operating segments are defined
as revenue-producing components of the enterprise, which are generally used
internally for evaluating segment performance. SFAS 131 will be effective for
the Company's year ending October 3, 1999 and is not expected to affect the
Company's financial position or results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which will become effective for the Company in fiscal year 2001. SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. SFAS 133
is not expected to affect the Company's financial position or results of
operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Inapplicable.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Inapplicable
Item 2. Changes in Securities
---------------------
The terms of the Company's new credit agreement restrict payment
of cash dividends or share repurchases.
Item 3. Defaults Upon Senior Securities
-------------------------------
Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit:
Exhibit 10.85 Credit Agreement, dated as of April 2, 1999,
among the Company, the Lenders from time to time
party thereto and Canadian Imperial Bank of
Commerce, as Agent
Exhibit 27 Unaudited Financial Data Schedule for the nine
months ended July 4, 1999.
(b) Reports on Form 8-K:
On April 29, 1999, the completion of the acquisition of LinFinity
Microelectronics, Inc. was reported on Form 8-K under Item 2 and
the related Agreement and Plan of Reorganization dated February
10, 1999 was filed as an exhibit thereto under Item 7.
On June 28, 1999, financial information and pro forma financial
information regarding the acquisition of LinFinity
Microelectronics, Inc. was reported on Form 8-K/A and filed as an
exhibit thereto under Item 7.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROSEMI CORPORATION
By: /s/ DAVID R. SONKSEN
--------------------
David R. Sonksen
Vice President - Finance and
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer and duly
authorized to sign on behalf of the
Registrant)
DATED: August 13, 1999
20