<PAGE>
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 April 4, 1999
--------------------------------------------
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
--------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2830 South Fairview Street, Santa Ana, California 92704
--------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(714) 979-8220
------------------------------------------------------
(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 April 27, 1999 was 10,953,879.
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The unaudited consolidated financial information for the quarter and six months
ended April 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 by this
reference.
2
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MICROSEMI CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Balance Sheets
(amounts in 000's)
<TABLE>
<CAPTION>
April 4, September 27,
1999 1998
-------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,800 $ 9,610
Accounts receivable less allowance for doubtful accounts,
$1,987 at April 4, 1999 and $2,457 at September 27, 1998 22,087 23,094
Inventories 56,953 54,433
Deferred income taxes 6,049 6,049
Other current assets 1,828 1,319
-------- --------
Total current assets 92,717 94,505
-------- --------
Property and equipment, at cost 80,016 77,667
Less: Accumulated depreciation (44,919) (42,113)
-------- --------
35,097 35,554
-------- --------
Other assets 16,198 15,029
-------- --------
TOTAL ASSETS $144,012 $145,088
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks and other $ 8,807 $ 6,172
Current maturity of long-term debt 3,782 4,339
Accounts payable 6,330 6,656
Accrued liabilities 12,071 14,401
Income taxes payable 7,803 5,874
-------- --------
Total current liabilities 38,793 37,442
-------- --------
Long-term debt 17,716 18,667
-------- --------
Other long-term liabilities 1,956 1,962
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.20 par value; authorized 20,000 shares;
issued 10,954 at April 4, 1999 and 11,666 at
September 27, 1998 2,191 2,333
Capital in excess of par value of common stock 46,843 49,896
Retained earnings 37,466 35,734
Cumulative translation adjustment (953) (946)
-------- --------
Total stockholders' equity 85,547 87,017
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $144,012 $145,088
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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MICROSEMI CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Income Statements
(amounts in 000's, except earnings per share)
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
April 4, 1999 March 29, 1998
------------- --------------
<S> <C> <C>
Net sales $39,491 $41,194
Cost of sales 29,553 29,513
------- -------
Gross profit 9,938 11,681
------- -------
Operating expenses:
Selling 3,369 2,489
General and administrative 2,985 3,258
------- -------
Total operating expenses 6,354 5,747
------- -------
Income from operations 3,584 5,934
------- -------
Other income (expense):
Interest expense (411) (430)
Other (66) 6
------- -------
Total other expense (477) (424)
------- -------
Income before income taxes 3,107 5,510
Provision for income taxes 1,113 2,094
------- -------
Net income $ 1,994 $ 3,416
======= =======
Earnings per share:
-Basic $ 0.18 $ 0.33
======= =======
-Diluted $ 0.18 $ 0.29
======= =======
Weighted average common shares outstanding:
-Basic 11,261 10,473
-Diluted 11,370 12,001
</TABLE>
The accompanying notes are an integral part of these statements.
4
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MICROSEMI CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Income Statements
(amounts in 000's, except earnings per share)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
April 4, 1999 March 29, 1998
---------------- ----------------
<S> <C> <C>
Net sales $78,908 $85,246
Cost of sales 58,457 61,546
------- -------
Gross profit 20,451 23,700
------- -------
Operating expenses:
Selling 6,500 5,031
General and administrative 6,254 6,856
------- -------
Total operating expenses 12,754 11,887
------- -------
Income from operations 7,697 11,813
------- -------
Other income (expense):
Interest expense (963) (1,342)
Other 50 26
------- -------
Total other expense (913) (1,316)
------- -------
Income before income taxes 6,784 10,497
Provision for income taxes 2,510 3,989
------- -------
Net income $ 4,274 $ 6,508
======= =======
Earnings per share:
-Basic $ 0.38 $ 0.67
======= =======
-Diluted $ 0.37 $ 0.58
======= =======
Weighted average common shares outstanding:
-Basic 11,337 9,691
-Diluted 11,449 11,969
</TABLE>
The accompanying notes are an integral part of these statements.
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MICROSEMI CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Statements of Retained Earnings
(amounts in 000's)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
April 4, 1999 March 29, 1998
---------------- ----------------
<S> <C> <C>
Retained earnings at beginning of period $35,734 $24,742
Net income 4,274 6,508
Treasury stock repurchased and canceled (2,542) -
------- -------
Retained earnings at end of period $37,466 $31,250
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
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MICROSEMI CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(amounts in 000's)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
April 4, 1999 March 29, 1998
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,274 $ 6,508
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,386 2,134
Allowance for doubtful accounts (470) (582)
Changes in assets and liabilities:
Accounts receivable 1,477 (2,950)
Inventories (2,520) (937)
Other current assets (509) 1,299
Other assets (1,749) 1,063
Accounts payable (326) (3,245)
Accrued liabilities (2,330) 364
Income taxes payable 1,929 (945)
------- -------
Net cash provided by operating activities 3,162 2,709
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition - 5,000
Investment in an unconsolidated affiliate - (1,000)
Purchases of property and equipment (2,349) (3,252)
------- -------
Net cash provided by (used in) investing activities (2,349) 748
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable to banks and other 2,635 (4,508)
Payments of long-term debt (1,508) (1,454)
Reduction of other long-term liabilities (6) (2)
Repurchases of common stock (5,764) -
Exercise of employee stock options 27 552
------- -------
Net cash used in financing activities (4,616) (5,412)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (7) (31)
------- -------
Net decrease in cash and cash equivalents (3,810) (1,986)
Cash and cash equivalents at beginning of period 9,610 6,145
------- -------
Cash and cash equivalents at end of period $ 5,800 $ 4,159
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
7
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MICROSEMI CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
April 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 first six 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 applied to each product line.
Inventories used in the computation of cost of goods sold were:
<TABLE>
<CAPTION>
September 27,
April 4, 1999 1998
------------------- -------------------
(amounts in 000's)
<S> <C> <C>
Raw materials $ 13,933 $ 14,759
Work in process 18,391 18,282
Finished goods 24,629 21,392
------------------- -------------------
$ 56,953 $ 54,433
=================== ===================
</TABLE>
8
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3. BORROWINGS
Long-term debt consisted of:
<TABLE>
<CAPTION>
September 27,
April 4, 1999 1998
------------------- -------------------
<S> <C> <C>
(amounts in 000's)
Industrial Development Bond, bearing interest at 7.875%, due
May 2000; secured by first deed of trust $ 2,305 $ 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 1,800 2,070
Notes payable (PPC Acquisition), bearing interest at 7%,
payable monthly through September 2009 1,945 2,092
Notes payable to a bank, bearing interest at the bank's prime
rate (7.75% at April 4, 1999), payable in monthly
installments through July 2003 8,667 9,667
Notes payable, bearing interest at ranges of 5% - 9.75%, due
between April 1999 and September 2009 2,581 2,572
------------------- -------------------
21,498 23,006
Less current portion (3,782) (4,339)
-------------------
17,716 18,667
=================== ===================
</TABLE>
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.
$2,305,000 of this loan remained outstanding at April 4, 1999. The terms of the
bond require principal payments of $230,000 in 1999 and $2,075,000 in 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 April 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 April 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. $1,800,000 of this loan remained outstanding at
April 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. $1,945,000 of these notes remained outstanding
at April 4, 1999.
9
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In June 1998, the Company finalized an amendment to its existing bank credit
facility which added a $10,000,000 term loan ($8,667,000 was outstanding at
April 4, 1999), used by Microsemi to finance a portion of the BKC acquisition.
The terms of the term loan require monthly principal payments of $167,000 plus
interest at the bank's prime rate from August 1998 through July 2003 and is
secured by substantially all of the assets of the Company. The Company also has
an option to borrow from this term loan at 1.5% per annum plus the LIBOR rate.
The terms of the loan also contain covenants regarding net worth and working
capital. The Company was in compliance with the aforementioned covenants at
April 4, 1999. This term loan was paid in full when the Company obtained new
credit arrangements with its banks in April 1999 (see note 9, "Subsequent
events").
The Company maintains a revolving credit facility with domestic banks which
continues according to its terms through September 1999. Under the credit
facility the Company can borrow up to $15,000,000. The credit line bears
interest at the bank's prime rate and is secured by substantially all of the
assets of the Company. The Company also has an option to borrow from this
credit line at 1.5% per annum plus the LIBOR rate. In addition, the credit
agreement contains covenants regarding net worth and working capital. The
Company was in compliance with the aforementioned covenants at April 4, 1999.
As of April 4, 1999, $8,767,000 was borrowed under this credit facility. This
revolving credit facility was paid in full and was replaced with a $30,000,000
credit line when the Company obtained new credit arrangements with its banks in
April 1999 (see note 9, "Subsequent events").
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 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 nonowner sources. Total comprehensive
income was $1,994,000 and $3,415,000 for the quarters ended April 4, 1999 and
March 29, 1998, respectively. Total comprehensive income was $4,270,000 and
10
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$6,489,000 for the six months ended April 4, 1999 and March 29, 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 six months ended April 4, 1999 and March
29, 1998 were calculated as follows:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
--------------------------------- ----------------------------------
April 4, March 29, April 4, March 29,
1999 1998 1999 1998
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
BASIC
Net income $ 1,994 $ 3,416 $ 4,274 $ 6,508
============== =============== =============== ===============
Weighted-average common shares outstanding 11,261 10,473 11,337 9,691
============== =============== =============== ===============
Basic earnings per share $ 0.18 $ 0.33 $ 0.38 $ 0.67
============== =============== =============== ===============
DILUTED
Net income $ 1,994 $ 3,416 $ 4,274 $ 6,508
Interest savings from assumed conversions of
convertible debt, net of income taxes - 118 - 428
-------------- --------------- --------------- ---------------
Net income assuming conversions $ 1,994 $ 3,534 $ 4,274 $ 6,936
============== =============== =============== ===============
Weighted-average common shares outstanding
for basic 11,261 10,473 11,337 9,691
Dilutive effect of stock options 109 288 112 307
Dilutive effect of convertible debt - 1,240 - 1,971
-------------- --------------- --------------- ---------------
Weighted-average common
shares outstanding on a diluted basis 11,370 12,001 11,449 11,969
============== =============== =============== ===============
Diluted earnings per share $ 0.18 $ 0.29 $ 0.37 $ 0.58
============== =============== =============== ===============
</TABLE>
7. RECENTLY ISSUED ACCOUNTING STANDARD
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
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evaluating segment performance. SFAS 131 will be effective for the Company's
year ending October 3, 1999 and will not 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 2000. 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
will not 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
- -------------------------
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
April 4, March 29,
1999 1998
-------------- --------------
(amounts in 000's)
Cash paid during the period for:
<S> <C> <C>
Interest $ 997 $ 783
Income taxes $ 390 $ 5,610
============== ==============
Non-cash financing activities:
Conversions of subordinated debt into 2,852,829 shares of
common stock $ - $ 33,733
============== ==============
</TABLE>
9. SUBSEQUENT EVENTS
On April 15, 1999, Microsemi acquired Linfinity Microelectronics, Inc.
("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 purchase
price was approximately $24,000,000, which was funded with cash and bank
borrowings. The acquisition will be accounted for under the purchase method.
The costs of the acquisition will be allocated to the assets acquired and
liabilities assumed based on their estimated fair market values to the extent of
the purchase price. Microsemi expects to record a charge for In-Process Research
and Development of between $2,000,000 and $2,500,000 in its third quarter.
In connection with this acquisition, the Company obtained new credit
arrangements with its banks, which included a term loan of $30,000,000 and a
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 LIBOR rate plus 1.75% to 2.5% per
annum. The interest rate is determined by the ratio of total funded debt and
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
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<PAGE>
monthly interest payments. The terms of the term loan contain covenants
regarding net worth and working capital.
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 LIBOR rate plus 1.75% to 2.5% per annum. The interest rate is determined by
the ratio of total funded debt and EBITDA. The terms of the revolving line of
credit contain covenants regarding net worth and working capital.
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 high reliability power
semiconductors, surface mount and custom diode assemblies for the electronics,
computer, telecommunications, defense/aerospace and medical markets. The
Company's semiconductor products include diodes, transistors and silicon
controlled rectifiers (SCR's) which can be 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. Technologies for these devices
range from the very mature mesa rectifier diodes, still used in all types of
power supply applications, to the newly designed micro-miniature transient
absorbers, which are mounted within the cables used to connect computer or
telecommunications equipment.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED APRIL 4, 1999 COMPARED TO THE
- -------------------------------------------------------------------------
QUARTER ENDED MARCH 29, 1998.
- -----------------------------
Net sales for the second quarter of fiscal year 1999 decreased $1,703,000 to
$39,491,000, from $41,194,000 for the second quarter of fiscal year 1998. This
decrease was primarily due to lower demand for the satellite,
telecommunications, computer and certain commercial markets.
Gross profit decreased $1,743,000 to $9,938,000 or 25.2% of sales for the
current quarter of fiscal year 1999 from $11,681,000 or 28.4% of sales for the
second quarter of fiscal year 1998. The decrease of gross profit was due to
lower total sales and lower sales of space level products, which typically have
higher margins than commercial products, effects from pricing pressure and lower
utilization of plant capacity.
Selling expenses increased $880,000 to $3,369,000 for the current quarter of
fiscal year 1999, compared to that of the corresponding period of the prior
year, primarily due to higher payments of commissions for commercial products,
increased sales and marketing costs and the addition of the BKC subsidiary.
The effective tax rates of 35.8% and 38.0% in the quarter ended April 4, 1999
and March 29, 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.
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RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED APRIL 4, 1999 COMPARED TO THE SIX
- --------------------------------------------------------------------------------
MONTHS ENDED MARCH 29, 1998.
- ----------------------------
Net sales for the first six months of fiscal year 1999 decreased $6,338,000 to
$78,908,000, from $85,246,000 for the first six months of fiscal year 1998.
This decrease was primarily due to lower demand for the space satellite,
telecommunications, computer and certain commercial markets.
Gross profit decreased $3,249,000 to $20,451,000 or 25.9% of sales for the
current six months of fiscal year 1999 from $23,700,000 or 27.8% of sales for
the first six months of fiscal year 1998. The decrease of gross profit was due
to lower total sales and lower sales of space level products, which typically
have higher margins than commercial products, effects of pricing pressures and
lower utilization of plant capacity.
Selling expenses increased $1,469,000 to $6,500,000 for the first six months of
fiscal year 1999, compared to that of the corresponding period of the prior
year, primarily due to higher payments of commissions for commercial products,
increased sales and marketing costs and the addition of the BKC subsidiary.
General and administrative expenses decreased $602,000 to $6,254,000 for the
current six months of fiscal year 1999, compared to $6,856,000 for the
corresponding period of the prior year. The decrease was primarily due to lower
employee benefit costs, the elimination of the GMI subsidiary, partially offset
by the addition of the BKC subsidiary.
Interest expense decreased $379,000 to $963,000 for the first six months of
fiscal year 1999 from $1,342,000 for the first six months of fiscal year 1998;
primarily due to the conversions of debt into common stock in February 1998,
resulting in lower average borrowings, partially offset by borrowings to finance
the BKC acquisition in May 1998.
The effective tax rates of 37.0% and 38.0% in the six months ended April 4, 1999
and March 29, 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 six months ended April 4, 1999 were
funded with internally generated funds and borrowings under the Company's line
of credit. In September 1997, the Company renewed its credit line with a bank
through September 1999. Under this line of credit, the Company can borrow up to
$15,000,000. As of April 4, 1999, $8,767,000 was borrowed under this credit
facility. At April 4, 1999, the Company had $5,800,000 in cash and cash
equivalents.
In June 1998, the Company finalized an amendment to its existing bank credit
facility which added a $10,000,000 term loan ($8,667,000 was outstanding at
April 4, 1999), used by Microsemi to finance a portion of the BKC acquisition.
The terms of the term loan require monthly principal payments of $167,000 plus
interest at the bank's prime rate from August 1998 through July 2003 and is
secured by substantially all of the assets of the Company. This term loan and
the outstanding balance of the aforementioned line of credit were paid in full
with new credit arrangements upon completion of the acquisition of Linfinity
Microelectronics, Inc. ("Linfinity").
On April 15, 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 purchase price was approximately $24,000,000, which was funded
with cash and bank borrowings.
14
<PAGE>
In connection with this acquisition, the Company obtained new credit
arrangements with its banks, which included a term loan of $30,000,000 and a
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 LIBOR rate plus 1.75% to 2.5% per
annum. The interest rate is determined by the ratio of total funded debt and
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.
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 LIBOR rate plus 1.75% to 2.5% per annum. The interest rate is determined by
the ratio of total funded debt and EBITDA. The terms of the revolving line of
credit contain covenants regarding net worth and working capital.
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 terms
of the bond require principal payments of $230,000 in 1999 and $2,075,000 in
2000.
An Industrial Development Revenue Bond was originally issued in April 1985,
through the City of Santa Ana Industrial Development Authority for the
construction of improvements and 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.
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. $1,800,000 of this loan remained outstanding at
April 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. $1,945,000 of these notes remained outstanding
at April 4, 1999.
Microsemi has repurchased 720,050 shares of its common stock for $5,764,000 in
the six months ended April 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
15
<PAGE>
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,
dependence upon a small number of customers or markets, dependence upon
suppliers, future capital needs, rapid technological changes, difficulties
integrating acquired businesses, dependence on key personnel, 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 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 $51,000,000 as of April 4, 1999,
compared to $58,000,000 at March 29, 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
- ---------
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,
16
<PAGE>
(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, a compliance report and a
contingency plan will be presented to management by June 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 50% 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 business system software at its five largest units
by August 1999 and the remaining small units by December 1999. The Company is
planning to develop a contingency plan by August 1999.
Networking and telecommunication hardware and software are Y2K compliant. The
Company is taking an inventory and assessing Y2K compliance of desktop
computers. This project should be completed and the Company anticipates that
non-compliant equipment will be upgraded or replaced by 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 not yet
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 June 1999.
The activities of the Company's Y2K project teams include the development of
contingency plans in the event the Company and/or its related third parties have
not completed all remediation programs by December 1999. 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 $1,100,000. Completion of the project is expected to require an
additional expenditure of $500,000 by December 1999.
Microsemi believes that its Y2K project teams will identify 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
17
<PAGE>
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 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 will not 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 2000. 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
will not affect the Company's financial position or results of operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Inapplicable.
18
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Inapplicable
Item 2. Changes in Securities
---------------------
Inapplicable
Item 3. Defaults Upon Senior Securities
-------------------------------
Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) An election of the Board of Directors was held at the annual
meeting of Stockholders on February 23, 1999.
(b) Names and personal information about the nominees to the Board of
Directors were included in the Proxy Statement dated January 19,
1999.
(c) Votes were received for each of the nominees to the Board of
Directors as follows:
<TABLE>
<CAPTION>
For Withheld
-------------------- --------------------
<S> <C> <C>
Philip Frey, Jr. 10,265,808 11,546
Joseph M. Scheer 10,265,390 11,964
Brad Davidson 10,265,890 11,464
Robert B. Phinizy 10,265,890 11,464
Martin H. Jurick 10,265,890 11,464
</TABLE>
(d) Inapplicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
Exhibit 2.2 Agreement and Plan of Reorganization, dated as of
February 10, 1999, among the Company, Micro-
Linfinity Acquisition Corporation, Linfinity
Microelectronics, Inc. and Symmetricom, Inc.,
incorporated by reference to the same numbered
exhibit to the Company's Form 8-K filed with the
Securities and Exchange Commission on April 29,
1999.
Exhibit 27 Unaudited Financial Data Schedule for the six
months ended April 4, 1999.
(b) Reports on Form 8-K:
None
19
<PAGE>
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: May 18, 1999
20
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-3-1999
<PERIOD-START> SEP-28-1998
<PERIOD-END> APR-4-1999
<CASH> 5,780
<SECURITIES> 20
<RECEIVABLES> 24,074
<ALLOWANCES> 1,987
<INVENTORY> 56,953
<CURRENT-ASSETS> 92,717
<PP&E> 80,016
<DEPRECIATION> 44,919
<TOTAL-ASSETS> 144,012
<CURRENT-LIABILITIES> 38,793
<BONDS> 17,716
0
0
<COMMON> 2,191
<OTHER-SE> 83,356
<TOTAL-LIABILITY-AND-EQUITY> 144,012
<SALES> 78,908
<TOTAL-REVENUES> 78,908
<CGS> 58,457
<TOTAL-COSTS> 58,457
<OTHER-EXPENSES> 50
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 963
<INCOME-PRETAX> 6,784
<INCOME-TAX> 2,510
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