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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
--- Act of 1934
For the fiscal year ended March 31, 1998 or
Transition report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the transition period from to
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Commission File Number: 0-21184
MICROCHIP TECHNOLOGY INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
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Delaware 86-0629024
(State of Incorporation) (I.R.S. Employer Identification No.)
2355 W. Chandler Blvd., Chandler, AZ 85224
(Address of Principal Executive Offices, Including Zip Code)
(602) 786-7200
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value Per Share
Preferred Share Purchase Rights
The registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of Form 10-K or any amendment to this Form
10-K. (X)
The approximate aggregate market value of the voting stock of the
registrant beneficially owned by stockholders, other than directors, officers
and affiliates of the registrant, at April 26, 1998 was $1,497,258,399.
Number of shares of Common Stock, $.001 par value, outstanding as of April
26, 1998 was: 52,870,389.
Documents Incorporated by Reference
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Document Part of Form 10-K
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Proxy Statement for the 1998 Annual III
Meeting of Stockholders
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<PAGE>
PART I
Item 1. BUSINESS
Microchip Technology Incorporated, a Delaware corporation ("Microchip" or
the "Company"), develops, manufactures and markets 8-bit microcontrollers,
application-specific standard products (ASSPs) and related memory products for
high-volume embedded control applications in the consumer, automotive, office
automation, communications and industrial markets. The Company provides highly
cost-effective embedded control products for a wide variety of applications and
believes that its PIC(R) product family is a price/performance leader in the
worldwide 8-bit microcontroller market. Microchip's embedded control products
also offer the advantages of a small footprint and low voltage operation along
with ease of development, enabling timely and cost-effective product integration
by its customers. The Company's ASSP products include a variety of specialized
integrated circuits, including its family of KEELOQ(R) security products. The
Company's memory products are primarily comprised of Serial EEPROMs, which are
used primarily to provide non-volatile memory storage in embedded control
systems.
Except as noted below, references to the Company include the Company and
its subsidiaries. The Company's executive offices are located at 2355 West
Chandler Boulevard, Chandler, Arizona 85224-6199 and its telephone number is
(602) 786-7200.
The following discussion of the Company's business contains certain risk
factors that may affect future operating results. For further discussion on
certain risk factors that may affect the Company's future operating results, see
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operation," below.
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 which involve risks and uncertainties, including
statements regarding the Company's strategy, financial performance, and revenue
sources. The Company's actual results could differ materially from the results
anticipated in these forward-looking statements as a result of certain factors
including those set forth under "Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operations" and elsewhere in this report.
Industry Background
Competitive pressures increasingly require manufacturers to expand product
functionality and provide differentiation while maintaining or reducing cost. To
address these requirements, manufacturers increasingly use integrated
circuit-based embedded control systems which provide an integrated solution for
application-specific control requirements. Embedded control systems enable
manufacturers to differentiate their products, replace less efficient
electromechanical control devices, add product functionality and significantly
reduce product costs. In addition, embedded control systems facilitate the
emergence of complete new classes of products. Embedded control systems have
been incorporated into thousands of products and subassemblies in a wide variety
of markets worldwide, including automotive air bag systems, remote control
devices, handheld tools, appliances, portable computers, cordless and cellular
telephones, motor controls and security systems.
Embedded control systems typically incorporate a microcontroller as the
principal active, and sometimes sole, component. A microcontroller is a
self-contained computer-on-a-chip consisting of a central processing unit,
non-volatile program memory, RAM memory for data storage and various
input/output functions. In addition to the microcontroller, a complete embedded
control system incorporates application-specific software and may include
specialized peripheral device controllers and external non-volatile memory
components, such as EEPROMs, to store additional program software.
The increasing demand for embedded control has made the market for
microcontrollers one of the largest segments of the semiconductor logic market.
Microcontrollers are currently available in 4-bit through 32-bit architectures.
Although 4-bit microcontrollers are relatively inexpensive, typically costing
under $1.00 each, they generally lack the minimum performance and features
required by today's design engineers for product differentiation and are
typically used only to produce basic functionality in products. While 16- and
32-bit architectures provide very high performance, they are prohibitively
expensive for most high-volume embedded control applications, typically costing
over $5.00 each. As a result, manufacturers of competitive, high-volume products
have increasingly found 8-bit microcontrollers, that typically cost $1.00 to
$8.00 each, to be the most cost-effective embedded control solution. For
example, a typical new automobile may include one 32-bit microcontroller for
engine control, three 16-bit microcontrollers for transmission control, audio
systems and anti-lock braking, and up to 50 8-bit microcontrollers to provide
other embedded control functions, such as door locking,
<PAGE>
automatic windows, sun roof, adjustable seats, electric mirrors, air bags, fuel
pump, speedometer, and the security and climate control systems.
Most microcontrollers available today are ROM-based and must be programmed
by the semiconductor supplier during manufacturing, resulting in six-to-20 week
lead times for delivery of such microcontrollers. In addition to delayed product
introduction, these long lead times can result in potential inventory
obsolescence and factory shutdowns when changes to the firmware are required. To
address time-to-market constraints, some suppliers have made EPROM-, EEPROM-, or
Flash Memory-based programmable microcontrollers available for prototyping and
preproduction runs. However, these microcontrollers have been relatively
expensive, and manufacturers have still been required to send program code to
the semiconductor factory for ROM programming as product changes are made. As a
result, the long lead times for production volume microcontrollers have not been
significantly reduced by traditional approaches.
Products
Microchip's strategic focus is on embedded control products, including
microcontrollers, ASSPs, related memory products and application development
systems.
Microcontrollers
Microchip offers a broad family of proprietary 8-bit microcontrollers under
the PIC(R) name and has shipped approximately 600 million PIC(R)
microcontrollers to customers worldwide since 1990. The Company's PIC(R)
products are designed for applications requiring high performance and low cost.
They feature a variety of memory configurations, low voltage and power, small
footprint and ease of use. Microchip believes this product family is currently a
price/performance leader in the 8-bit microcontroller marketplace. Microchip's
performance results from an exclusive RISC-based architecture that provides
significant speed advantages over the alternative 8-bit CISC architectures. In
addition to providing up to 40 MHz performance, this architecture offers up to a
2:1 software compaction advantage, thereby significantly reducing software
development time. RISC architectures also have the advantage of being more
easily scaled to higher internal clock speeds in future products. Prices for
Microchip's 8-bit microcontrollers range from approximately $.49 to $12.00 per
unit.
Microchip's original market focus was in the lowest cost segment of the
8-bit microcontroller marketplace. With its baseline 8-bit products, the Company
built its current market position as the leading supplier of field programmable
microcontrollers. Over the past three years, Microchip has introduced more than
100 new 8-bit microcontrollers targeted at baseline, mid-range and high-end
segments of the 8-bit microcontroller marketplace, as well as the lower end of
the 16-bit microcontroller market. In addition, with its 8-pin, 8-bit
microcontroller, introduced in the first quarter of fiscal 1997, the Company has
also targeted a portion of the large 4-bit microcontroller marketplace. The
Company believes that these additional segments represent a significant
opportunity for future sales growth.
Microchip has used its manufacturing experience and design and process
technology to bring additional enhancements and manufacturing efficiencies to
the development and production of its PIC(R) family of microcontroller products.
This extensive experience base has enabled the Company to develop its advanced,
low cost user programmability feature by incorporating non-volatile memory
(EPROM, EEPROM and Flash Memory) into the microcontroller in addition to masked
ROM program memory.
Development Systems
The Company offers a comprehensive set of low cost and easy-to-learn
application development tools. These tools enable system designers to quickly
and easily program a PIC(R) microcontroller for specific applications and are a
key factor for obtaining design wins. Microchip's family of development tools
operates in the standard Windows environment on standard PC hardware.
Entry-level systems, which include an assembler and programmer hardware, are
priced at less than $200. A fully configured system, which also provides
in-circuit emulation hardware, performance simulators and software debuggers, is
priced at approximately $3,700. Customers moving from entry-level designs to
those requiring real-time emulation are able to preserve their investment in
software tools as they migrate to future PIC(R) devices since all the product
families are assembly- and C- language compatible.
Many independent companies also develop and market application development
tools and systems which support Microchip's standard microcontroller product
architecture. The Company believes that familiarity with and adoption of the
Company's, and third-party, development systems by an increasing number of
product designers will be an important factor
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in the future selection of Microchip's embedded control products. These
development tools allow design engineers to develop thousands of
application-specific products from Microchip's standard microcontrollers.
Currently, there are more than 120 third-party tool suppliers worldwide whose
products support the Company's proprietary microcontroller architecture.
ASSPs (Application-Specific Standard Products)
Microchip's application-specific standard products are specialized products
designed to perform specific end-user applications as opposed to the Company's
other products which are more general purpose in nature. The Company's ASSP
device families currently include the KEELOQ(R) family of secure data
transmission products, as well as other specialized integrated circuit devices.
KEELOQ(R) security products are designed for low cost, secure, uni-directional
communications and verification purposes. Applications include automotive remote
keyless entry systems, automotive immobilizer systems, automatic garage and gate
openers and smart cards.
Memory Products
Microchip's memory products consist primarily of Serial EEPROMs. The
Company sells these devices primarily into the embedded control market and is
the third largest supplier of such devices worldwide. EEPROM (electrically
erasable programmable read only memory) products are used for non-volatile
program and data storage in systems where such data must be modified frequently.
Serial EEPROMs have a very low I/O pin requirement, permitting production of
very small devices. As a result, Serial EEPROMs are widely used to supply
non-volatile memory in space-sensitive applications such as portable computers,
cellular and cordless telephones, pagers and remote control devices.
Within this market, Microchip has emphasized providing Serial EEPROMs to
customers that require features such as highly compact packaging, low operating
voltage, reduced power consumption, extended data retention and high endurance.
The Company addresses these requirements by offering products with extremely
small package sizes and very low operating voltage for both read and write
functions (1.8 volts in contrast with the industry standard of 3.3 volts),
together with a wide operating voltage range (1.8 to 5.5 volts). High
performance circuitry and microcode are also available to reduce power
consumption when a device is not in use, while permitting immediate operating
capability when required. The products also feature long data retention and high
erase/write endurance.
Microchip currently offers a complete Serial EEPROM family, which meets
three principal industry bus interface standards and is available in most
standard density, configuration and packaging alternatives. The Company's Smart
Serials(TM) line of specialized Serial EEPROMs with user-configurable
architecture and other advanced features targets applications such as cellular
telephones and data communications.
Manufacturing
Microchip's ownership of its manufacturing resources is an important
component of its business strategy, enabling it to maintain a high level of
manufacturing control and to be one of the lowest cost producers in the embedded
control industry. By owning its wafer fabrication and the majority of its test
operations, and by employing proprietary statistical process control techniques,
the Company has been able to achieve high production yields. Direct control over
wafer fabrication also allows Microchip to shorten the Company's design and
production cycles and to capture the manufacturing and a portion of the testing
profit margin. Wafer fabrication and wafer test facilities are located in
Chandler ("Fab 1") and Tempe ("Fab 2"), Arizona. The Company performs product
test at its facilities in Kaohsiung, Taiwan and Chachoengsao, Thailand, located
near Bangkok.
Wafers are produced in Class 10 fabrication modules in Fab 1 and Fab 2. Fab
1 currently contains approximately 27,000 square feet. Fab 2 has approximately
50,000 square feet of useable clean room space of which approximately 40,000
square feet are used to support current production requirements. Fab 1 currently
produces 5-inch and 6-inch wafers, while Fab 2 currently produces 6-inch and
8-inch wafers. Wafer sort is performed in an 8,000 square foot, Class 10,000
clean room, equipped with automated wafer handlers and test equipment. The two
wafer fabrication sites are managed by the same management team and utilize
similar production techniques.
The Company is continuing the process of transitioning products to smaller
geometries and to larger wafer sizes. The Company has transitioned a portion of
its products to a 0.7 micron process and has commenced development of its next
generation process technology. Other companies in the industry have experienced
difficulty in effecting transitions to
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smaller geometry processes and to larger wafers and, consequently, have
experienced reduced manufacturing yields or delays in product deliveries. The
Company believes that its transition to smaller geometries and to larger wafers
will be important for the Company to remain competitive and operating results,
particularly gross profit margins, could be adversely affected if the Company's
transition is substantially delayed or inefficiently implemented.
Microchip currently employs proprietary design and manufacturing processes
in developing its microcontroller and memory products. The Company believes its
processes afford it both cost-effective designs in existing and derivative
products and greater functionality in new product designs. While many of the
Company's competitors develop and optimize separate processes for their logic
and memory product lines, Microchip uses a common process technology for both
microcontroller and non-volatile memory products. This allows Microchip to more
fully absorb its process research and development costs and to deliver new
products to market more rapidly. Microchip engineers utilize advanced CAD tools
and software to perform circuit design, simulation and layout. The Company's
in-house photomask and wafer fabrication facilities enable it to rapidly verifiy
design techniques by processing test wafers quickly and efficiently.
The Company's Taiwan and Thailand subsidiaries test the majority of the
products produced in Fab 1 and Fab 2. Currently, the 150,000 square foot
Chachoengsao test facility has the capacity to handle up to 30 million units per
month. If required, the Chachoengsao facility could be expanded in the future to
more than double its current capacity. The 88,700 square foot Kaohsiung facility
has a monthly capacity of 19 million plastic packages. Final test and burn-in
functions are handled by advanced automated equipment. The Company uses
third-party contractors in Bangkok, Thailand to assemble a significant portion
of its products. The balance of Microchip's assembly and test requirements are
fulfilled by several third-party assembly and test contractors in Thailand, the
Philippines, People's Republic of China, and several other countries in Asia and
the Pacific Rim.
Over the last several years, Microchip shifted its assembly operations from
Company-owned facilities to third-party contractors in order to meet increased
product shipment requirements. At March 31, 1998, all assembly was conducted by
third-party contractors. The Company will continue to use third-party
contractors to provide a majority of its assembly services. Reliance on third
parties involves some reduction in the Company's level of control over the
assembly and test portion of its business. While the Company reviews the
quality, delivery and cost performance of these third-party contractors, there
can be no assurance that increased reliance on third-party contractors will not
adversely impact results in future reporting periods if any third-party
contractor is unable to maintain assembly and test yields and costs at
approximately their current levels. See also "Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations - Gross Profit,"
below.
The Company's reliance on facilities in Taiwan, Thailand, the Philippines
and other foreign countries, and maintenance of substantially all of its
finished goods in inventory overseas, entails certain political and economic
risks, including political instability and expropriation, supply disruption,
currency controls and exchange fluctuations, as well as changes in tax laws,
tariff and freight rates. Microchip currently employs the Alphatec Electronics
Public Company Limited group of companies ("Alphatec") headquartered in Bangkok,
Thailand for a significant portion of its product assembly volume. While
Alphatec's assembly operations have performed reliably for the Company for
several years, Alphatec has experienced financing issues in connection with some
of its joint ventures involving semiconductor fabrication facilities in
Thailand. Such financing difficulties have not impacted Alphatec's assembly
facilities nor its provision of services to the Company. However, there can be
no assurance that assembly operations will not be affected in the future.
Microchip currently has second sources for product assembly for most of its
package types and can shift additional wafer output to other factories, if
necessary. However, there can be no assurance that such action would not result
in short-term disruption including possible temporary product shortages. The
Company has not experienced any significant interruptions in its foreign
business operations to date. Nonetheless, the Company's business and operating
results could be adversely affected if foreign operations or international air
transportation were disrupted.
Due to the high fixed cost inherent in semiconductor manufacturing,
increased manufacturing yields can have significant positive effects on gross
profits and overall operating results. During fiscal 1998, the Company continued
to focus on manufacturing productivity, and maintained average wafer fab line
yields in excess of 90%. The yields are primarily driven by a comprehensive
implementation of statistical process control, extensive employee training and
selective upgrading of the Company's manufacturing facilities and equipment.
Maintenance of manufacturing productivity and yields are important factors in
the achievement of the Company's operating results. As is typical in the
semiconductor industry, the Company has from time to time experienced lower than
anticipated manufacturing yields. The Company's operating results would be
adversely affected if it were unable to maintain yields at approximately the
current levels.
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The raw materials and equipment used in the production of the Company's
integrated circuits currently are available from a number of suppliers, and the
Company is not materially dependent on any single source of supply. Although the
Company has not experienced any material difficulty to date in obtaining raw
materials or equipment, the interruption of certain components or ingredients of
certain raw materials could reduce the availability or increase the cost of raw
materials used by the Company. The manufacture and assembly of integrated
circuits, particularly non-volatile, erasable CMOS memory and logic devices such
as those produced by the Company, is a highly complex process and sensitive to a
wide variety of factors, including the level of contaminants in the
manufacturing environment, impurities in the materials used and the performance
of the fabrication equipment.
Research and Development
The Company's current research and development activities focus on the
design of new microcontroller and memory products, ASSPs, new development
systems, and software and application-specific software libraries. The Company
is also developing new design and process technology to achieve further cost
reductions and performance improvements in existing products. As of April 26,
1998, 277 employees were engaged in research and development. In fiscal 1998,
1997 and 1996, the Company's research and development expenses were $38.4
million, $32.1 million and $27.5 million, respectively. The Company expects that
it will continue to spend substantial funds on research and development
activities.
The Company's future operating results will depend to a significant extent
on its ability to continue to develop and introduce new products on a timely
basis which compete effectively on the basis of price and performance and which
address customer requirements. If the Company were unable to design, develop and
introduce competitive products on a timely basis, its future operating results
would be adversely affected.
Sales and Distribution
The Company markets its products worldwide through a direct sales
organization and through distributors. In fiscal 1998, the Company derived
approximately 47% of its net sales from direct sales to OEM customers and 53%
from sales through distributors.
The Company's direct sales force, currently consisting of 166 people,
focuses on three geographical markets: the Americas, Europe and Asia. In the
Americas, the Company currently has Technical Support Centers in San Jose, Los
Angeles, Dallas, Dayton, Chicago, Atlanta, Boston, New York and Toronto.
Microchip also maintains Technical Support Centers in Tokyo, London, Munich,
Paris, Milan, Taipei, Seoul, Singapore, Hong Kong, Shanghai, and Bangalore,
India. Microchip's direct sales force is augmented by a worldwide network of
national distributors and regional distributors in North and South America.
Microchip's distribution effort also includes a network of manufacturer's
representatives in North America and Europe.
Microchip believes that a strong technical service presence is essential to
the continued development of the embedded control market. The majority of
Microchip's field sales engineers (FSEs), field application engineers (FAEs) and
sales management have technical degrees and have been previously employed in an
engineering environment. The Company believes the technical knowledge of its
sales force is a key competitive advantage in the sale of field programmable
products. Currently, Microchip has at least one dedicated application engineer
in every Technical Support Center. The primary mission of the FAE team is to
provide technical assistance to OEM customers and to conduct periodic training
sessions for FSEs, manufacturer's representatives and distributor sales teams.
The FAEs also conduct frequent technical seminars in major cities around the
world. FAEs also work closely with the Company's distributors and manufacturer's
representatives to provide technical assistance in end-user support and to
assist in the sales process.
As is common in the semiconductor industry, the Company grants price
protection to distributors. Under this policy, distributors receive a credit for
the difference, at the time of a price reduction, between the price they were
originally charged for products in inventory and the reduced price which the
Company subsequently charges distributors. From time to time, distributors also
receive credit on an individual basis for Company-approved price reductions on
specific transactions. The Company also grants some distributors limited rights
to return products. The Company defers recognition of net sales and profit on
sales to distributors that have rights of return and price protection until
those distributors have resold the products to end-customers.
Foreign sales, primarily in Asia and Europe, represented approximately 68%,
66% and 65% of consolidated net sales in fiscal years 1998, 1997 and 1996,
respectively. International sales are predominately billed in U.S. Dollars.
Although
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foreign sales are subject to certain government export restrictions, the Company
has not experienced any material difficulties as a result of export restrictions
to date.
The Company's policy is to hedge its net foreign currency positions in the
normal course of business to reduce its exposure to fluctuations in foreign
exchange rates. Foreign exchange gains and losses were not material during
fiscal years 1996 through 1998.
Backlog
As of April 26, 1998, the Company's backlog was approximately $76.7 million
as compared to $93.7 million as of April 27, 1997. The Company includes in its
backlog all purchase orders scheduled for delivery within the subsequent 12
months.
Microchip produces standard products that can be shipped from inventory
within a short time after receipt of an order. The Company's business and, to a
large extent, that of the entire semiconductor industry is characterized by
short-term orders and shipment schedules. Orders constituting the Company's
current backlog are subject to changes in delivery schedules or to cancellation
at the option of the purchaser without significant penalty. Accordingly,
although useful for scheduling production, backlog as of any particular date may
not be a reliable measure of sales for any future period. Turns orders (orders
received in a quarter for shipment in that quarter) have become an increasingly
important component of the Company's quarterly operating results. See "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations - Net Sales," below.
Competition
The semiconductor industry is intensely competitive and has been
characterized by price erosion, rapid technological change and foreign
competition with respect to many products. The Company competes with major
domestic and international semiconductor companies, many of which have greater
market recognition and substantially greater financial, technical, marketing,
distribution and other resources than the Company with which to pursue
engineering, manufacturing, marketing and distribution of their products.
Emerging companies are also increasing their participation in the market for
embedded control applications. The Company's overall average selling prices for
its microcontroller products have remained relatively constant, while average
selling prices of its memory products have declined over time. The Company
expects to continue to experience increased pricing competition and declining
prices for memory products. While average selling prices for microcontrollers
have remained relatively constant, the Company has experienced, and expects to
continue to experience, increasing pricing pressure in certain microcontroller
product lines, due primarily to competitive conditions. The Company has been
able to maintain average selling prices by continuing to introduce new products
with more features and higher prices, thereby offsetting price declines in older
products. There can be no assurance that average selling prices for the
Company's microcontroller or other products can be maintained due to increased
pricing pressure in the future. An increase in pricing pressure could adversely
affect the Company's operating results. In addition, the Company's ability to
compete successfully depends on a number of factors both within and outside its
control, including the quality, performance, reliability, features, ease of use,
pricing and diversity of its products; the quality of its customer service and
its ability to address the needs of its customers; its success in designing and
manufacturing new products including those implementing new technologies;
efficiency of production, adequate sources of raw materials and other supplies
at acceptable prices; protection of the Company's products and processes by
effective utilization of intellectual property laws; the rate at which customers
incorporate the Company's products into their own products; product
introductions by the Company's competitors; the number, nature and success of
its competitors in a given market; and general market and economic conditions.
Furthermore, capacity in the semiconductor industry is increasing over time and
such increased capacity or improved product availability could adversely affect
the Company's competitive position.
The Company currently competes principally on the basis of the technical
innovation and performance of its embedded control products, including their
speed, functionality, density, power consumption, reliability and packaging
alternatives, as well as on price and product availability. The Company believes
that other important competitive factors in the embedded control market include
ease of use, functionality of application development systems and technical
service and support. The Company believes that it competes favorably with other
companies on all of these factors, although there is no assurance that the
Company will continue to be able to compete successfully in the future.
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Patents, Licenses and Trademarks
The Company's success depends in part on its ability to obtain patents,
licenses and other intellectual property rights covering its products and
manufacturing processes, and to protect its proprietary information. As of March
31, 1998, the Company owned 60 U.S. patents and 11 foreign patents, expiring on
various dates between 1997 and 2015, and had an additional 78 U.S. patent
applications and 55 foreign patent applications pending. The Company intends to
continue to seek patents on its inventions used in its products and
manufacturing processes. However, the Company believes that its continued
success depends primarily on such factors as the technological skills and
innovative abilities of its personnel rather than on its patents. There can be
no assurance the Company's existing patents or any new patents that are issued
will be of sufficient scope or strength to provide meaningful protection or
other commercial advantage to the Company.
The Company has entered into certain intellectual property licenses and
cross-licenses with other companies related to semiconductor products and
manufacturing processes. As is typical in the semiconductor industry, the
Company has from time to time received, and may in the future receive,
communications alleging possible infringement of patents or other intellectual
property rights of others. The Company investigates all such notices and
responds as it believes is appropriate. The Company is currently in discussions
with several other companies regarding intellectual property licenses of such
other companies' semiconductor patents and technology. Based on industry
practice, the Company believes that in most cases it could obtain any necessary
licenses or other rights on commercially reasonable terms. However, no assurance
can be given that licenses would be on acceptable terms, that litigation would
not ensue, that damages for any past infringement would not be assessed or that
the Company would not be forced to pay royalties on future sales. Litigation,
which could result in substantial cost to the Company and diversion of
management effort, may be necessary to enforce patents or other intellectual
property rights of the Company or to defend the Company against claimed
infringement of the rights of others. See "Item 3 - Legal Proceedings."
Environmental Regulation
The Company is subject to a variety of federal, state and local
governmental regulations related to the use, storage, discharge and disposal of
toxic, volatile or otherwise hazardous chemicals used in its manufacturing
processes, including the Resource Conversation and Recovery Act, the
Comprehensive Environmental Response, Compensation and Liability Act, the
Superfund Amendment and Reauthorization Act, the Clean Air Act and the Water
Pollution Control Act. The Company believes it has obtained all necessary
environmental permits to conduct its business. Although the Company believes
that its activities conform to presently applicable environmental regulations,
the failure to comply with present or future regulations could result in fines
being imposed on the Company, suspension of production or a cessation of
operations. While the Company has not experienced any materially adverse effects
on its operations from governmental regulations, there can be no assurance that
changes in such regulations will not require the Company to acquire costly
equipment or to incur other significant expenses to comply with environmental
regulations. Any failure by the Company to control the use of or adequately
restrict the discharge of hazardous substances could subject it to future
liabilities. There can be no assurance that environmental problems will not
occur in the future which could subject the Company to future costs or
liabilities.
Employees
As of April 26, 1998, the Company had 2,153 employees, including 1,555 in
manufacturing, 277 in research and development, 196 in sales and marketing and
125 in finance and administration. Approximately 41% of the Company's employees
work at the final test facilities located in Kaohsiung, Taiwan and Chachoengsao,
Thailand. No employees in the U.S. or Thailand are represented by a labor
organization. All employees in the Kaohsiung facility, except for certain
management employees, are represented by a labor organization. The Company has
never had a work stoppage and believes that its employee relations are good.
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Executive Officers
The following sets forth certain information regarding the Company's
executive officers as of April 26, 1998:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Steve Sanghi 42 Chairman of the Board, President and Chief Executive Officer
Timothy B. Billington 55 Vice President, Manufacturing Operations
C. Philip Chapman 44 Vice President, Chief Financial Officer and Secretary
George P. Rigg 58 Vice President, Advanced Microcontroller and Systems Group
Mitchell R. Little 45 Vice President, Americas Sales
</TABLE>
Mr. Sanghi is currently, and has been since August, 1990, President of the
Company, since October, 1991, Chief Executive Officer and since October, 1993,
Chairman of the Board of Directors. He has served as a director of the Company
since August, 1990. He served as the Company's Chief Operating Officer from
August, 1990 through October, 1991 and as Senior Vice President of Operations
from February, 1990 through August, 1990. Mr. Sanghi holds an M.S. degree in
Electrical and Computer Engineering from the University of Massachusetts and a
B.S. degree in Electronics and Communication from Punjab University, India. Mr.
Sanghi is also a director of ADFlex Solutions, Inc., a U.S. supplier of flexible
circuit-based interconnect solutions.
Mr. Billington has served as Vice President, Manufacturing Operations since
October, 1994 and was Vice President, Process Development and Manufacturing
Operations from April, 1991 until October, 1994. Prior to his appointment as
Vice President, Mr. Billington served as Director of Wafer Fabrication from
November, 1990 to April, 1991 and Wafer Fabrication Manager from June, 1989 to
November, 1990. Mr. Billington holds a B.S. degree in marketing from Abilene
Christian University.
Mr. Chapman has served as the Company's Vice President and Chief Financial
Officer since joining the Company in September, 1992 and as Secretary of the
Company since December, 1992. Mr. Chapman holds an M.B.A. from the Harvard
Graduate School of Business Administration and B.A. degrees in Accounting and
Managerial Finance from the University of California.
Mr. Rigg has served as Vice President, Advanced Microcontroller and Systems
Group since March, 1997. From November, 1995 to March, 1997 he served as Vice
President, Advanced Microcontroller and Technology Division. From June, 1989 to
November, 1995, he served as Vice President, Logic Products Division. Mr. Rigg
holds a B.S. degree in Physics from Manchester University, England.
Mr. Little has served as Vice President, Americas Sales since April, 1998.
From November, 1995 to April, 1998 he served as Vice President, Standard
Microcontroller and ASSP Division. From September, 1993 to November, 1995, he
served as Vice President, Memory Products and ASSP Division. Prior to his
appointment as Vice President, Mr. Little served as Division Director for the
Company's Memory Products Division from July, 1991 to September, 1993, and as
Director of Memory Marketing from November, 1989 to July, 1991. Mr. Little holds
a BSET from United Electronics Institute.
Item 2. PROPERTIES
The Company's current headquarters, research and development center and one
of its U.S wafer fabrication facilities are located in three buildings totaling
approximately 242,000 square feet situated on a 77-acre parcel of land in
Chandler, Arizona. A second U.S. manufacturing site consisting of a wafer
fabrication facility, office and warehouse facilities and a development systems
center, totaling approximately 253,000 square feet, is situated on a 22-acre
parcel of land in Tempe, Arizona. The Chandler and Tempe facilities are owned by
the Company. Company-owned final test facilities are located in Taiwan and
Thailand. The Taiwan operations are housed in a three-story, 88,700 square foot
building located in the Kaohsiung Export Processing Zone in Kaohsiung, Taiwan,
Republic of China. The Taiwan building is owned by the Company's Taiwan
subsidiary and is located on land that is leased to the Company pursuant to
leases from the Taiwan government expiring in December, 1998 and 2002. The
Company intends to renew the lease that expires in December, 1998. The Company's
Thailand final test operations are housed in a 150,000 square foot facility
located in the Alphatechnopolis Industrial Park in Chachoengsao, Thailand, near
Bangkok. The Thailand facility, owned by the Company's Thailand subsidiary, is
situated on land to which the Company expects to acquire title by the end of
fiscal 1999, in accordance with an agreement between the Company and the land
owner. The Company leases space for 20 Technical Support Centers in San 8
<PAGE>
Jose and Los Angeles, California; Dallas, Texas; Dayton, Ohio; Chicago,
Illinois; Atlanta, Georgia; Boston, Massachusetts; New York, New York; as well
as Toronto, Tokyo, London, Munich, Paris, Milan, Taipei, Seoul, Singapore, Hong
Kong, Shanghai and Bangalore, India. The Company's aggregate monthly rental
payments for its facilities are approximately $107,000.
The Company currently believes that its existing facilities will be
adequate to meet its requirements for the next 12 months.
Item 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is involved in a
limited number of legal actions, both as plaintiff and defendant, and could
incur uninsured liability in any one or more of them. Although the outcome of
these actions is not presently determinable, the Company believes that the
ultimate resolution of these matters will not have a material adverse effect on
the Company's results of operations or financial conditions. The Company could
also be subject to future litigation if it is unable to resolve pending
intellectual property and technology licensing discussions. The Company is
currently the defendant in one case regarding intellectual property and has
commenced litigation against other companies for alleged infringement of the
Company's intellectual property rights. The Company does not expect these
matters will have a material adverse effect on its business or results of
operation. However, the failure to obtain necessary licenses or other rights, or
litigation arising out of infringement claims, could have a material adverse
effect on the Company's business and results of operations. Litigation relating
to the semiconductor industry is not uncommon, and the Company is, and from time
to time, has been, subject to such litigation. No assurances can be given with
respect to the extent or outcome of any such litigation in the future.
The Securities and Exchange Commission is presently conducting an
investigation into matters relating to the Company's disclosure on February 26,
1996 that revenues and earnings for the quarter ended March 31, 1996 would be
lower than previously estimated. While the outcome of the investigation, and its
effect on the Company, if any, cannot be predicted at the present time, the
Company does not believe that the investigation will result in a material
adverse effect on the Company.
Microchip Technology Incorporated v. Lucent Technologies Inc. (District of
Arizona, CIV97-1502 PHX EHC) On January 13, 1998, the Company finalized a
settlement in its patent litigation with Lucent Technologies Inc. and the case
was dismissed on January 30, 1998. In connection with this settlement, the
Company recorded a $5 million charge during the quarter ended December 31, 1997.
See "Item 5 - Market For Registrant's Common Equity and Related Stockholder
Matters," below, and Note 2 to the Consolidated Financial Statements.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of fiscal 1998.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "MCHP." The Company's Common Stock has been quoted on the Nasdaq
National Market since March 19, 1993. The following table sets forth the
quarterly high and low closing prices of the Common Stock as reported by the
Nasdaq National Market for the last two years, adjusted to reflect a 3-for-2
stock split effected in January, 1997:
<TABLE>
<CAPTION>
Fiscal 1998 High Low Fiscal 1997 High Low
----------- ---- --- ----------- ---- ---
<S> <C> <C> <C> <C> <C>
First Quarter $36.25 $29.00 First Quarter $19.50 $14.67
Second Quarter 48.88 29.88 Second Quarter 25.67 14.00
Third Quarter 48.38 26.94 Third Quarter 34.84 23.34
Fourth Quarter 31.88 21.00 Fourth Quarter 39.50 25.00
</TABLE>
On May 22, 1998, the closing sale price for the Company's Common Stock was
$27.125 per share. As of such date, there were approximately 515 holders of
record of the Company's Common Stock. This figure does not reflect beneficial
ownership of shares held in nominee names.
9
<PAGE>
The Company has not paid cash dividends on its capital stock. The Company
currently anticipates that it will retain all available funds for use in the
operations of its business and therefore does not anticipate paying any cash
dividends in the foreseeable future.
The trading price of the Company's Common Stock has been, and in the future
could be, subject to wide fluctuations in response to quarterly variations in
operating results of the Company and other semiconductor companies, actual or
anticipated announcements of technical innovations or new products by the
Company or its competitors, changes in analysts' estimates of the Company's
financial performance, general conditions in the semiconductor industry,
worldwide economic and financial conditions and other events or factors. In
addition, the stock market has experienced significant price and volume
fluctuations which have particularly affected the market prices for many high
technology companies and which often have been unrelated to the operating
performance of such companies. These broad market fluctuations and other factors
may adversely affect the market price of the Company's Common Stock.
As of January 13, 1998 and in connection with the settlement of patent
infringement litigation, the Company issued a warrant to acquire 300,000 shares
of Common Stock at $25.25 per share. The warrant is currently fully exercisable
and expires on June 30, 2001. The issuance of the warrant was deemed exempt from
registration under the Securities Act of 1933, as amended, in reliance on
Section 4(2) of such Act. See "Item 3, Legal Proceedings," above and Note 2 to
the Consolidated Financial Statements.
Item 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the five-year period
ended March 31, 1998 should be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in Item
7 of this report. The Company's consolidated income statement data for each of
the years in the three year period ended March 31, 1998, and the balance sheet
data as of March 31, 1998 and 1997, are derived from the audited consolidated
financial statements of the Company, included in Item 8 of this report.
<TABLE>
<CAPTION>
Year Ended March 31,
1998 1997 1996 1995 1994
-------------------------------------------------------
(in thousands, except per share data)
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net sales ........................... $ 396,894 $ 334,252 $ 285,888 $ 207,961 $ 138,742
Cost of sales ....................... 199,538 167,330 137,708 101,039 73,765
Research and development ............ 38,362 32,073 27,517 20,746 13,840
Selling, general and administrative . 67,549 56,248 48,903 36,975 26,933
Special charges ..................... 5,000 7,544 11,448 -- --
Operating income .................... 86,445 71,057 60,312 49,201 24,204
Interest income (expense), net ...... 1,505 (1,852) (947) (881) (593)
Other income, net ................... 217 288 569 808 522
Income before income taxes .......... 88,167 69,493 59,934 49,128 24,133
Provision for income taxes .......... 23,799 18,361 16,182 12,829 4,974
Net income .......................... $ 64,368 $ 51,132 $ 43,752 $ 36,299 $ 19,159
Basic net income per share .......... $ 1.21 $ 0. 99 $ 0.86 $ 0.76 $ 0.44
Diluted net income per share ........ $ 1.14 $ 0.94 $ 0.80 $ 0.70 $ 0.42
Basic common shares outstanding ..... 53,376 51,569 50,750 47,525 43,446
Diluted common shares outstanding ... 56,313 54,683 54,533 51,641 46,155
<CAPTION>
As of March 31,
1998 1997 1996 1995 1994
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital ..................... $ 55,171 $ 91,176 $ 55,855 $ 71,307 $ 53,584
Total assets ........................ 524,743 428,092 358,187 249,480 151,425
Long-term obligations, less current
portion ............................. 8,768 5,999 33,250 15,340 14,424
Stockholders' equity ................ 367,308 316,584 219,632 161,825 87,864
</TABLE>
10
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The following table sets forth certain operational data as a percentage of
net sales for the years indicated:
Year Ended March 31,
1998 1997 1996
------------------------
Net sales ......................... 100.0% 100.0% 100.0%
Cost of sales ..................... 50.3% 50.1% 48.2%
---- ---- ----
Gross profit ...................... 49.7% 49.9% 51.8%
Research and development .......... 9.7% 9.6% 9.6%
Selling, general and administrative 17.0% 16.8% 17.0%
Special charges ................... 1.2% 2.2% 4.0%
---- ---- ----
Operating income .................. 21.8% 21.3% 21.1%
==== ==== ====
Net Sales
Microchip's net sales of $396.9 million in fiscal 1998 increased by $62.6
million, or 18.7%, over fiscal 1997 and net sales of $334.3 million in fiscal
1997 increased by $48.4 million, or 16.9%, over fiscal 1996.
The Company's family of 8-bit microcontrollers represents the largest
component of Microchip's total net sales. Microcontrollers and associated
application development systems accounted for 66%, 64% and 59% of total net
sales in fiscal 1998, 1997 and 1996, respectively. A related component of the
Company's product sales consists primarily of Serial EEPROM memories which
accounted for 34%, 36% and 41% of net sales in fiscal 1998, 1997 and 1996,
respectively.
The Company's net sales in any given quarter are dependent upon a
combination of orders received in that quarter for shipment in that quarter
("turns orders") and shipments from backlog. The Company has emphasized its
ability to respond quickly to customer orders as part of its competitive
strategy. This strategy, combined with current industry conditions, results in
customers placing orders with short delivery schedules. The Company experienced
increasing turns orders as a portion of the Company's business in fiscal 1998,
as compared to fiscal 1997, which reduced the Company's visibility in projecting
net sales levels. Because turns orders are difficult to predict, there can be no
assurance that the combination of turns orders and shipments from backlog in any
quarter will be sufficient to achieve growth in net sales. If the Company does
not achieve a sufficient level of turns orders in a particular quarter, the
Company's revenues and operating results would be adversely affected.
The Company's overall average selling prices for its microcontroller
products have remained relatively constant, while average selling prices of its
memory products have declined over time. During fiscal 1998, the Company
continued to experience increased pricing pressure on its memory products
primarily due to the less proprietary nature of these products and increased
competition, and expects this to continue in the future. While average selling
prices for microcontrollers have remained relatively constant, the Company has
experienced, and expects to continue to experience, increasing pricing pressure
in certain microcontroller product lines, due primarily to competitive
conditions. The Company has been able to maintain average selling prices by
continuing to introduce new products with more features and higher prices,
thereby offsetting price declines in older products. There can be no assurance
that average selling prices for the Company's microcontroller or other products
can be maintained due to increased pricing pressure in the future. An increase
in pricing pressure could adversely affect the Company's operating results.
The foregoing statements regarding turns orders, average selling prices and
pricing pressures are forward looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the safe harbors created
thereby. Actual results could differ materially because of the following
factors, among others: the level of orders that are received and can be shipped
in a quarter; inventory, mix and timing of customer orders; competition and
competitive pressures on pricing and product availability; customers' inventory
levels, order patterns and seasonality; the cyclical nature of both the
semiconductor industry and the markets addressed by the Company's products;
market acceptance of the products of both the Company and
11
<PAGE>
its customers; demand for the Company's products, fluctuations in production
yields, production efficiencies and overall capacity utilization; changes in
product mix; and absorption of fixed costs, labor and other fixed manufacturing
costs.
Several Asian countries have recently experienced economic difficulties
including high rates of loan defaults, business failures and currency
devaluations. During the quarters ended December 31, 1997 and March 31, 1998,
the Company experienced weakness in the expected level of turns orders and net
sales related to its business in Asia. During the fourth fiscal quarter of
fiscal 1998, shipments to Asia were lower than the preceding quarter by
approximately 30%. The Company derives a substantial portion of its net sales
from customers in Asia and there can be no assurance that such economic
difficulties will not continue to adversely affect the Company's operating
results in future periods.
Foreign sales represented 68%, 66% and 65% of net sales in fiscal 1998, 1997
and 1996, respectively. The Company's foreign sales have been predominantly in
Asia and Europe which the Company attributes to the manufacturing strength in
those areas for consumer, automotive, office automation, communications and
industrial products. The majority of foreign sales are U.S. Dollar denominated.
The Company has entered into and, from time to time, will enter into hedging
transactions in order to minimize exposure to currency rate fluctuations.
Although none of the countries in which the Company conducts significant foreign
operations have had a highly inflationary economy in the last five years, there
is no assurance that inflation rates or fluctuations in foreign currency rates
in countries where the Company conducts operations will not adversely affect the
Company's operating results in the future.
Additional Factors Affecting Operating Results
The Company believes that future growth in net sales of its 8-bit family of
microcontroller products and related memory products will depend largely upon
the Company's success in having its current and new products designed into
high-volume customer applications. Design wins typically precede the Company's
volume shipment of products for such applications by 15 months or more. The
Company also believes that shipment levels of its proprietary application
development systems are an indicator of potential future design wins and
microcontroller sales. The Company continued to achieve a high volume of design
wins and shipped increased numbers of application development systems in fiscal
1998 compared to previous fiscal years. There can be no assurance that any
particular development system shipment will result in a product design win or
that any particular design win will result in future product sales.
The Company's operating results are affected by a wide variety of other
factors that could adversely impact its net sales and profitability, many of
which are beyond the Company's control. These factors include the Company's
ability to design and introduce new products on a timely basis, market
acceptance of products of both the Company and its customers, customer order
patterns and seasonality, changes in product mix, whether the Company's
customers buy from a distributor or directly from the Company, product
performance and reliability, product obsolescence, the amount of any product
returns, availability and utilization of manufacturing capacity, fluctuations in
manufacturing yield, the availability and cost of raw materials, equipment and
other supplies, the cyclical nature of both the semiconductor industry and the
markets addressed by the Company's products, technological changes, competition
and competitive pressures on prices, and economic, political or other conditions
in the United States, and other worldwide markets served by the Company. The
Company believes its ability to continue to increase its manufacturing capacity
to meet customer demand and maintain satisfactory delivery schedules will be an
important competitive factor. As a result of the increase in fixed costs and
operating expenses related to expanding its manufacturing capacity, the
Company's operating results may be adversely affected if net sales do not
increase sufficiently to offset the increased costs. The Company's products are
incorporated into a wide variety of consumer, automotive, office automation,
communications and industrial products. A slowdown in demand for products which
utilize the Company's products as a result of economic or other conditions in
the worldwide markets served by the Company could adversely affect the Company's
operating results.
Gross Profit
The Company's gross profit was $197.3 million, $166.9 million and $148.2
million in fiscal 1998, 1997 and 1996, respectively. Gross profit as a percent
of sales was 49.7%, 49.9% and 51.8% in fiscal 1998, 1997 and 1996, respectively.
The gross profit percentage in fiscal years 1998 and 1997 was down from the
fiscal 1996 level, primarily as a result of reduced 5-inch wafer production at
one of the Company's wafer fabrication facilities and increased pricing pressure
on its non-volatile memory products. The Company is continuing the process of
transitioning products to smaller geometries and to larger wafer sizes to reduce
future manufacturing costs. Eight-inch wafer production commenced at the Tempe
wafer fabrication facility in early fiscal 1998 and the Company is continuing
the transitioning of products to its 0.7 micron process. The Company expects
that 25% of its products will come from 8-inch wafers during fiscal 1999. The
Company
12
<PAGE>
anticipates that its cost of sales and gross product margins will fluctuate over
time, driven primarily by the product mix of 8-bit microcontroller products and
related memory products, manufacturing yields, wafer fab loading levels and
competitive and economic conditions.
The foregoing statements relating to anticipated gross margins, cost of
sales, 8-inch wafer production, and the transition to higher yielding
manufacturing processes are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are subject to the safe harbors
created thereby. Actual results could differ materially because of the following
factors, among others: fluctuations in production yields, production
efficiencies and overall capacity utilization; cost and availability of raw
materials; absorption of fixed costs, labor and other direct manufacturing
costs; the timing and success of manufacturing process transition; changes in
product mix; competitive pressures on prices; and other economic conditions.
In the quarter ended June 30, 1997, the Company changed its method of
accounting for inventories from the last-in, first-out (LIFO) method to the
first-in, first-out (FIFO) method. The change did not have a material effect on
the results of operations. The FIFO method is the predominant accounting method
used in the semiconductor industry. Prior to this change, the Company's
inventory costs did not differ significantly under the two methods. Prior period
results of operations have not been restated for this change as the impact is
not material.
All of Microchip's assembly operations are performed by third-party
contractors in order to meet product shipment requirements. Reliance on third
parties involves some reduction in the Company's level of control over these
portions of its business. While the Company reviews the quality, delivery and
cost performance of these third-party contractors, there can be no assurance
that reliance on third-party contractors will not adversely impact results in
future reporting periods if any third-party contractor is unable to maintain
assembly yields and costs at approximately their current levels.
The Company's reliance on facilities in Taiwan, Thailand, the Philippines
and other foreign countries, and maintenance of substantially all of its
finished goods in inventory overseas, entails certain political and economic
risks, including political instability and expropriation, supply disruption,
currency controls and exchange fluctuations, as well as changes in tax laws,
tariff and freight rates. Microchip currently employs the Alphatec Electronics
Public Company Limited group of companies ("Alphatec") headquartered in Bangkok,
Thailand for a significant portion of its product assembly volume. While
Alphatec's assembly operations have performed reliably for the Company for
several years, Alphatec has experienced financing issues in connection with some
of its joint ventures involving semiconductor fabrication facilities in
Thailand. Such financing difficulties have not impacted Alphatec's assembly
facilities nor its provision of services to the Company. However, there can be
no assurance that assembly operations will not be affected in the future.
Microchip currently has second sources for product assembly for most of its
package types and can shift additional wafer output to other factories, if
necessary. However, there can be no assurance that such action would not result
in short-term disruption including possible temporary product shortages. The
Company has not experienced any significant interruptions in its foreign
business operations to date. Nonetheless, the Company's business and operating
results could be adversely affected if foreign operations or international air
transportation were disrupted.
Research and Development
The Company is committed to continued investment in new and enhanced
products, including its development systems software and in its design and
manufacturing process technology, which are significant factors in maintaining
the Company's competitive position. The dollar investment in research and
development increased 20% in fiscal 1998 over fiscal 1997, and 17% in fiscal
1997 over fiscal 1996. The Company will continue to invest in research and
development in the future, including an investment in process and product
development associated with the capacity expansion of the Company's fabrication
facilities.
The Company's future operating results will depend to a significant extent
on its ability to continue to develop and introduce new products on a timely
basis which can compete effectively on the basis of price and performance and
which address customer requirements. The success of new product introductions
depends on various factors, including proper new product selection, timely
completion and introduction of new product designs, development of support tools
and collateral literature that make complex new products easy for engineers to
understand and use and market acceptance of customers' end products. Because of
the complexity of its products, the Company has experienced delays from time to
time in completing development of new products. In addition, there can be no
assurance that any new products will receive or maintain substantial market
acceptance. If the Company were unable to design, develop and introduce
competitive products on a timely basis, its future operating results would be
adversely affected.
13
<PAGE>
The Company's future success will also depend upon its ability to develop
and implement new design and process technologies. Semiconductor design and
process technologies are subject to rapid technological change, requiring large
expenditures for research and development. Other companies in the industry have
experienced difficulty in effecting transitions to smaller geometry processes
and to larger wafers and, consequently, have suffered reduced manufacturing
yields or delays in product deliveries. The Company believes that its transition
to smaller geometries and to larger wafers will be important for the Company to
remain competitive, and operating results could be adversely affected if the
transition is substantially delayed or inefficiently implemented.
Selling, General and Administrative
The Company increased its level of investment in selling, general and
administrative costs to $67.5 million, $56.2 million and $48.9 million for
fiscal years 1998, 1997 and 1996, respectively. The increased costs reflect the
requirement to invest in incremental worldwide sales and technical support
resources to promote the Company's embedded control products.
Other Income (Expense)
Interest income in fiscal 1998 increased over fiscal 1997 and 1996 as a
result of increased invested cash balances, resulting from completion of an
equity offering in February, 1997. Interest expense in fiscal 1998 decreased
over fiscal 1997 and 1996 due to reductions in borrowing levels associated with
the Company's capital equipment additions. Other income represents numerous
immaterial non-operating items. The Company's interest expense could increase in
fiscal 1999 if the Company increases its borrowings and interest expense would
be adversely impacted by increased interest rates.
Provision for Income Taxes
Provisions for income taxes reflect tax on foreign earnings and federal and
state tax on U.S. earnings. The Company had an effective tax rate of 27.0%,
26.4% and 27.0% for the years ended March 31, 1998, 1997 and 1996, respectively,
due primarily to lower tax rates at its foreign locations. The Company believes
that its tax rate for the foreseeable future will be approximately 27%. The
foregoing statement regarding the Company's anticipated future tax rate is a
forward-looking statement within the meaning of section 27A of the Securities
Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934,
as amended, and is subject to the safe harbors created thereby. Actual results
could differ materially because of the following factors, among others: current
tax laws and regulations, taxation rates in geographic regions where the Company
has significant operations; and current tax holidays available in foreign
locations.
Year 2000 Conversion
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the year, thus rendering them incapable of
properly managing and manipulating data that includes 21st century dates. The
Company is currently installing business and financial systems to replace
existing software systems to address the Year 2000 compliance issue. The Company
is also currently reviewing other aspects of its computer systems, including
manufacturing and product development areas. Microchip's products, for the most
part, involve hardware integrated circuit devices manufactured by Microchip
which, subsequent to their sale, are combined with proprietary application
firmware by Microchip's customers. Thus, Microchip believes that its products
have no inherent date sensitive features. At this time management is not able to
assess the cost of Year 2000 compliance. The Company does not anticipate that
the Year 2000 will pose significant operating problems. However, delays in the
implementation of new information systems, or a failure to fully identify and
resolve all Year 2000 deficiencies in the Company's systems could have a
material adverse effect on the Company's future results of operations.
Liquidity and Capital Resources
The Company had $32.2 million in cash and cash equivalents at March 31,
1998, a decrease of $10.8 million from the March 31, 1997 balance. The Company
has an unsecured line of credit with a syndicate of domestic banks totaling
$90.0 million. Borrowings under the domestic line of credit as of March 31, 1998
were $7.0 million. The domestic line of credit requires the Company to achieve
certain financial ratios and operating results. The Company was in compliance
with these covenants at March 31, 1998. The Company also has an unsecured short
term line of credit totaling $19.8 million with certain foreign banks.
Borrowings under the foreign line of credit as of March 31, 1998 were $16.0
million. There are no covenants related to the foreign line of credit.
14
<PAGE>
At March 31, 1998, an aggregate of $86.8 million of these facilities was
available, subject to financial covenants and ratios with which the Company was
in compliance. The Company's ability to fully utilize these facilities is
dependent on the Company remaining in compliance with such covenants and ratios.
During the year ended March 31, 1998, the Company generated $136.5 million
of cash from operating activities, an improvement of $59.0 million from the year
ended March 31, 1997 and an improvement of $63.1 million from the year ended
March 31, 1996. The improvement in cash flow from operations was primarily due
to increased profitability, the impact of changes in accounts payable, accrued
expenses and accounts receivable and an increase in depreciation expense.
The Company's level of capital expenditures varies from time to time as a
result of actual and anticipated business conditions. Capital expenditures in
the years ended March 31, 1998, 1997 and 1996 were $145.3 million, $79.0 million
and $115.8 million, respectively. Capital expenditures were primarily for the
expansion of production capacity and the addition of research and development
equipment in each of these periods. The Company currently intends to spend
approximately $55.0 million during the next 12 months for additional capital
equipment to increase capacity at its existing wafer fabrication facilities and
to expand product test operations. The Company expects capital expenditures will
be financed by cash flow from operations, available debt arrangements and other
sources of financing. The Company believes that the capital expenditures
anticipated to be incurred over the next 12 months will provide sufficient
additional manufacturing capacity to meet its currently anticipated needs.
Net cash used in financing activities was $2.1 million for the year ended
March 31, 1998. Net cash provided by financing activities was $13.4 million and
$27.1 million for the years ended March 31, 1997 and 1996 respectively. Proceeds
from sale of stock and put options were $12.5 million, $59.5 million and $9.6
million for the years ended March 31, 1998, 1997 and 1996, respectively.
Proceeds from issuance of long-term debt were $2.9 million for the year ended
March 31, 1996. Payments on long term debt and capital lease obligations were
$6.1 million, $5.7 million and $5.9 million for the years ended March 31, 1998,
1997 and 1996, respectively. Proceeds from lines of credit were $23.0 million
and $20.5 million for the years ended March 31, 1998 and 1996 respectively.
Repayments on lines of credit were $21.0 million for the year ended March 31,
1997. Cash expended for the purchase of the Company's Common Stock was $31.5
million and $19.5 million for the years ended March 31, 1998 and 1997,
respectively.
On January 30, 1998 and July 26, 1997, the Company's Board of Directors
authorized the repurchase of 2,500,000 shares and 1,500,000 shares,
respectively, in connection with a Common Stock repurchase plan. On July 26,
1997, the Board of Directors also authorized the Company to sell up to 750,000
put options in connection with the same plan. As of March 31, 1998 the Company
has purchased 1,277,500 shares of Common Stock at an aggregate cost of
$31,481,000 and has outstanding 400,000 put options at prices ranging from
$29.63 to $38.81. Subsequent to March 31, 1998 the Company purchased 222,500
shares of Common Stock at an aggregate price of $6,667,000 and sold put options
of 100,000 shares of Common Stock at a price of $27.50.
Subsequent to March 31, 1998, the Company completed two transactions in
connection with the stock repurchase program. April, 1998 the Company completed
a costless collar transaction for 500,000 calls priced at $25.95 and 665,000
puts priced at $25.19. The expiration date of the transaction is April 23, 1999.
Also in connection with the stock repurchase program, the Company completed a
net share settled forward contract for 2,000,000 shares at an average price of
$29.24. The expiration date of this transaction is May, 2000 with quarterly
interim settlement dates as determined by the Company.
Also subsequent to March 31, 1998 the Company's Board of Directors
authorized an additional share repurchase of Common Stock of 2,000,000 shares
and to sell up to 500,000 additional put options. The Company expects from time
to time to purchase shares of Common Stock in connection with its authorized
Common Stock repurchase plan.
The Company believes that its existing sources of liquidity combined with
cash generated from operations will be sufficient to meet the Company's
currently anticipated cash requirements for at least the next 12 months.
However, the semiconductor industry is capital intensive. In order to remain
competitive, the Company must continue to make significant investments in
capital equipment, for both production and research and development. The Company
may seek additional equity or debt financing during the next 12 months for the
capital expenditures required to maintain or expand the Company's wafer
fabrication and product test facilities or other purposes. The timing and amount
of any such capital requirements will depend on a number of factors, including
demand for the Company's products, product mix, changes in industry conditions
and competitive factors. There can be no assurance that such financing will be
available on acceptable terms, and any additional equity financing could result
in additional dilution to existing investors.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
15
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company listed in the index
appearing under Item 14(a)(1) hereof are filed as part of this Annual Report on
Form 10-K. See also Index to Financial Statements on page F- I hereof.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the Company's directors is incorporated herein
by reference to the Company's proxy statement for the 1998 annual meeting of
stockholders under the caption "Election of Directors."
See Item I, Part I hereof under the caption "Executive Officers" for
information with respect to the Company's executive officers. Information with
respect to compliance with Section 16(a) of the Securities Exchange Act of 1934,
as amended, is incorporated herein by reference to the Company's proxy statement
for the 1998 annual meeting of stockholders under the caption "Section16(a)
Beneficial Ownership Reporting Compliance."
Item 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated herein
by reference to the information under the caption "Executive Compensation" in
the Company's proxy statement for the 1998 annual meeting of stockholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners
and management of the Company is incorporated herein by reference to the
information under the caption "Security Ownership of Principal Stockholders,
Directors and Executive Officers" in the Company's proxy statement for the 1998
annual meeting of stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
Page No.
(1) Financial Statements:
Independent Auditors' Report F-1
Consolidated Balance Sheets as of
March 31, 1998 and 1997 F-2
Consolidated Statements of Income for each
of the years in the three-year period ended
March 31, 1998 F-3
16
<PAGE>
Consolidated Statements of Cash Flows for
each of the years in the three-year period
ended March 31, 1998 F-4
Consolidated Statements of Stockholders'
Equity for each of the years in the
three-year period ended March 31, 1998 F-5
Notes to Consolidated Financial Statements F-6
(2) Financial Statement Schedules - Applicable
schedules have been omitted because informa-
tion is included in the footnotes to the Financial
Statements.
(3) The Exhibits which are filed with this report or
which are incorporated herein by reference are set
forth in the Exhibit Index which appears on page
E-1 hereof, which Exhibit Index is incorporated
herein by this reference.
(b) No current reports on Form 8-K were filed during the quarter
ended March 31, 1998.
(c) See Item 14(a)(3) above.
(d) See "Index to Financial Statements" included under Item 8
to this report.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MICROCHIP TECHNOLOGY INCORPORATED
(Registrant)
By:/s/ Steve Sanghi
-------------------------------------
Steve Sanghi
President and Chief Executive Officer
Date: May 26, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name and Signature Title Date
- ------------------ ----- ----
/s/ Steve Sanghi Director, President and May 26, 1998
- --------------------------- Chief Executive Officer
Steve Sanghi
Albert J. Hugo-Martinez* Director May 26, 1998
Jon H. Beedle* Director May 26, 1998
L. B. Day* Director May 26, 1998
Matthew W. Chapman* Director May 26, 1998
/s/ C. Philip Chapman Vice President, Chief Financial May 26, 1998
- --------------------------- Officer and Secretary (Principal
C. Philip Chapman Financial and Accounting Officer)
*By:/s/ Steve Sanghi Individually and as Attorney-in-fact May 26, 1998
-----------------------
Steve Sanghi
18
<PAGE>
Annual Report on Form 10-K
Item 8, Item 14(a)(1) and (2), (c) and (d)
---------------------------------
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
EXHIBITS
---------------------------------
YEAR ENDED MARCH 31, 1998
MICROCHIP TECHNOLOGY INCORPORATED
AND SUBSIDIARIES
CHANDLER, ARIZONA
<PAGE>
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page Number
-----------
Independent Auditors' Report F-1
Consolidated Balance Sheets
as of March 31, 1998 and 1997 F-2
Consolidated Statements of Income
for each of the years in the three-year
period ended March 31, 1998 F-3
Consolidated Statements of Cash Flows
for each of the years in the three-year
period ended March 31, 1998 F-4
Consolidated Statements of Stockholders' Equity
for each of the years in the three-year
period ended March 31, 1998 F-5
Notes to Consolidated Financial Statements F-6
i
<PAGE>
KPMG Peat Marwick LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Microchip Technology Incorporated:
We have audited the accompanying consolidated balance sheets of Microchip
Technology Incorporated and subsidiaries as of March 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended March 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Microchip Technology
Incorporated and subsidiaries as of March 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Phoenix, Arizona
April 22, 1998, except as to the
second and third paragraphs in
note 13 which are as of May 18, 1998
F-1
<PAGE>
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
ASSETS
March 31, March 31,
1998 1997
--------- ---------
<S> <C> <C>
Cash and cash equivalents $ 32,188 $ 42,999
Accounts receivable, net 56,320 61,102
Inventories 66,293 56,813
Prepaid expenses 2,208 1,715
Deferred tax asset 35,778 24,251
Other current assets 1,802 2,656
--------- ---------
Total current assets 194,589 189,536
Property, plant and equipment, net 325,892 234,058
Other assets 4,262 4,498
--------- ---------
Total assets $ 524,743 $ 428,092
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term lines of credit $ 16,000 $ --
Accounts payable 36,049 35,281
Current maturities of long-term debt 2,196 2,470
Current maturities of capital lease obligations 2,206 3,776
Accrued liabilities 53,452 36,392
Deferred income on shipments to distributors 29,515 20,441
--------- ---------
Total current liabilities 139,418 98,360
Long-term lines of credit 7,000 --
Long-term debt, less current maturities 1,420 3,616
Capital lease obligations, less current maturities 348 2,383
Long-term pension accrual 976 980
Deferred tax liability 8,273 6,169
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.001 par value; authorized 5,000,000 shares;
no shares issued or outstanding -- --
Common stock, $.001 par value; authorized 100,000,000 shares;
issued 53,891,041 and outstanding 52,870,389 shares at March 31, 1998; 54 53
issued 53,300,619 and outstanding 53,196,037 shares at March 31, 1997
Additional paid-in capital 176,865 168,185
Retained earnings 214,193 149,825
Less shares of common stock held in treasury at cost; 1,020,652 shares
at March 31, 1998 and 104,582 shares at March 31, 1997 (23,804) (1,479)
--------- ---------
Net stockholders' equity 367,308 316,584
Total liabilities and stockholders' equity $ 524,743 $ 428,092
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-2
<PAGE>
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
Years Ended March 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
Net sales $ 396,894 $ 334,252 $ 285,888
Cost of sales 199,538 167,330 137,708
--------- --------- ---------
Gross profit 197,356 166,922 148,180
Operating expenses:
Research and development 38,362 32,073 27,517
Selling, general and administrative 67,549 56,248 48,903
Special charges 5,000 7,544 11,448
--------- --------- ---------
110,911 95,865 87,868
Operating income 86,445 71,057 60,312
Other income (expense):
Interest income 2,635 1,419 2,034
Interest expense (1,130) (3,271) (2,981)
Other, net 217 288 569
--------- --------- ---------
Income before income taxes 88,167 69,493 59,934
Income taxes 23,799 18,361 16,182
--------- --------- ---------
Net income $ 64,368 $ 51,132 $ 43,752
========= ========= =========
Basic net income per share $ 1.21 $ 0.99 $ 0.86
========= ========= =========
Diluted net income per share $ 1.14 $ 0.94 $ 0.80
========= ========= =========
Weighted average common
shares outstanding 53,376 51,569 50,750
========= ========= =========
Weighted average common and common
equivalent shares outstanding 56,313 54,683 54,533
========= ========= =========
See accompanying notes to consolidated financial statements
F-3
<PAGE>
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 64,368 $ 51,132 $ 43,752
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for doubtful accounts 638 452 634
Provision for inventory valuation 2,126 1,886 7,639
Provision for pension accrual 1,202 1,316 1,197
Special charges 5,000 2,483 --
Depreciation and amortization 53,468 39,853 29,975
Amortization of purchased technology 300 300 --
Deferred income taxes (9,423) (3,000) (7,402)
Tax benefit from exercise of stock options 5,332 5,742 4,130
(Increase) decrease in accounts receivable 4,144 (14,346) (9,974)
Increase in inventories (11,606) (2,572) (23,565)
Increase (decrease) in accounts payable and accrued liabilities 12,828 (3,699) 28,788
Change in other assets and liabilities 8,164 (1,961) (1,815)
--------- --------- ---------
Net cash provided by operating activities 136,541 77,586 73,359
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (145,301) (79,012) (115,845)
Sales of marketable securities -- -- 13,796
--------- --------- ---------
Net cash used in investing activities (145,301) (79,012) (102,049)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from (repayments on) lines of credit 23,000 (21,000) 20,499
Proceeds from issuance of long-term debt -- -- 2,926
Payments on long-term debt (2,470) (2,734) (2,688)
Payments on capital lease obligations (3,605) (2,948) (3,251)
Repurchase of common stock (31,481) (19,463) --
Proceeds from sale of stock and put options 12,505 59,511 9,625
--------- --------- ---------
Net cash provided by (used in) financing activities (2,051) 13,366 27,111
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (10,811) 11,940 (1,579)
Cash and cash equivalents at beginning of year 42,999 31,059 32,638
--------- --------- ---------
Cash and cash equivalents at end of year $ 32,188 $ 42,999 $ 31,059
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIAIRES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Common Net
Stock and Additional Stock held in Retained Stockholders'
Paid-in Capital Treasury Earnings Equity
(in thousands) Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance March 31, 1995 49,955 $ 106,884 -- -- $ 54,941 $ 161,825
Sale of Stock
Exercise of stock options 1,368 5,686 -- -- -- 5,686
Employee stock purchase plan 258 3,292 -- -- -- 3,292
Sale of put options -- 647 -- -- -- 647
Tax benefit from exercise of options -- 4,130 -- -- -- 4,130
Unrealized holding loss -- 240 -- -- -- 240
Compensation expense -- 60 -- -- -- 60
Net income -- -- -- -- 43,752 43,752
- -----------------------------------------------------------------------------------------------------------------------
Balance March 31, 1996 51,581 $ 120,939 -- -- $ 98,693 $ 219,632
Sale of Stock
Public offering (net of offering
Costs of $2,905) 1,380 47,120 -- -- -- 47,120
Exercise of stock options 1,315 8,388 -- -- -- 8,388
Employee stock purchase plan 246 3,576 -- -- -- 3,576
Purchase of treasury stock -- -- 1,326 (19,463) -- (19,463)
Issuance of treasury stock for the
exercise of options and purchases in
the employee stock purchase plan (1,221) (17,984) (1,221) 17,984 -- --
Sale of put options, net -- 427 -- -- -- 427
Tax benefit from exercise of options -- 5,742 -- -- -- 5,742
Compensation expense -- 30 -- -- -- 30
Net income -- -- -- -- 51,132 51,132
- -----------------------------------------------------------------------------------------------------------------------
Balance March 31, 1997 53,301 $ 168,238 105 $ (1,479) $ 149,825 $ 316,584
Sale of Stock
Exercise of stock options 778 5,972 -- -- -- 5,972
Employee stock purchase plan 173 4,318 -- -- -- 4,318
Purchase of treasury stock -- -- 1,277 (31,481) -- (31,481)
Issuance of treasury stock for the
exercise of options and purchases in
the employee stock purchase plan (361) (9,156) (361) 9,156 -- --
Sale of put options, net -- 2,215 -- -- -- 2,215
Tax benefit from exercise of options -- 5,332 -- -- -- 5,332
Net income -- -- -- -- 64,368 64,368
- -----------------------------------------------------------------------------------------------------------------------
Balance March 31, 1998 53,891 $ 176,919 1,021 $ (23,804) $ 214,193 $ 367,308
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
Principles of Consolidation
The consolidated financial statements include the accounts of Microchip
Technology Incorporated and its wholly owned subsidiaries (the
"Company"). All significant intercompany accounts and transactions have
been eliminated in consolidation.
Cash and Cash Equivalents
All highly liquid investments including marketable securities purchased
with an original maturity of three months or less are considered to be
cash equivalents. At March 31, 1997, the Company had classified
marketable securities of $25,964,000, with a maturity of less than
three months as cash and cash equivalents. There were no marketable
securities at March 31, 1998.
Inventories
Inventories are valued at the lower of cost or market using the
first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major renewals and
improvements are capitalized, while maintenance and repairs are
expensed when incurred. Depreciation is provided on a straight-line
basis over the estimated useful lives of the related assets which range
from three to twenty-five years.
Assets acquired under capital lease arrangements have been recorded at
the present value of the future minimum lease payments and are being
amortized on a straight-line basis over the estimated useful life of
the asset or the lease term, whichever is shorter. Amortization of this
equipment is included in depreciation and amortization expense.
Foreign Currency Translation and Forward Contracts
The Company's foreign subsidiaries are considered to be extensions of
the U.S. company and any translation gains and losses related to these
subsidiaries are included in income. As the U.S. Dollar is utilized as
the functional currency, gains and losses resulting from foreign
currency transactions (transactions denominated in a currency other
than the subsidiaries' functional currency) are also included in
income. Gains and losses associated with currency rate changes on
forward contracts are recorded currently in income.
Revenue Recognition
Revenue from product sales to direct customers is recognized upon
shipment. The Company defers recognition of net sales and profits on
sales to distributors that have rights of return and price protection
until the distributors have resold the products.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which these temporary differences are expected to be recovered
or settled.
Computation of Net Income per Share
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings per Share ("SFAS No. 128"). SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic
and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share.
All earnings per share amounts for all periods have been presented, and
where appropriate restated, to conform to the SFAS No. 128
requirements.
F-6
<PAGE>
Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount.
Stock Option Plans
Prior to April 1, 1996, the Company accounted for its stock option
plans in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense would be
recorded, only if, on the date of grant, the current market price of
the underlying stock exceeded the exercise price. On April 1, 1996, the
Company adopted SFAS No. I23, Accounting for Stock-Based Compensation,
which permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option
grants made in fiscal 1996 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
Use of Estimates
The Company has made a number of estimates and assumptions relating to
the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements
in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
Reclassifications
Certain 1997 and 1996 fiscal year balances have been reclassified to
conform to the fiscal year 1998 presentation.
2. SPECIAL CHARGES
---------------
Legal Settlement With Lucent Technologies Inc.
On January 13, 1998, the Company finalized a settlement of its patent
litigation with Lucent Technologies Inc. resulting in the Company
recording a $5 million special charge during the quarter ended December
31, 1997. Under the terms of the settlement, Microchip made a one-time
cash payment to Lucent and issued to Lucent warrants to acquire 300,000
shares of Common Stock of the Company priced at $25.25 per share. The
terms of the settlement also provide for the Company to make a
contingent payment to Lucent if the Company's earnings per share
performance for the three and one-half year period ending June 30, 2001
does not meet certain targeted levels. It is currently anticipated that
any contingent payment required under the terms of the settlement would
be expensed in the period the amount is determined.
Acquisitions
------------
Keeloq(R) Hopping Code
On November 17, 1995, the Company acquired the Keeloq(R) hopping code
technology and patents developed by Nanoteq Ltd. of the Republic of
South Africa, and the marketing rights related thereto (the "Keeloq
Acquisition"). The Keeloq Acquisition was treated as an asset purchase
for accounting purposes. The amount paid for the Keeloq Acquisition,
including all related costs, was $12,948,000. The Company has written
off a substantial portion of the purchase price that relates to
in-process research and development costs, which is consistent with the
Company's ongoing treatment of research and development costs, as well
as all Keeloq Acquisition-related costs. The special charge associated
with the Keeloq Acquisition was $11,448,000, with the balance treated
as purchased technology and amortized on a straight line basis over
five years. Under the terms of the Keeloq Acquisition, the Company
agreed to a secondary payment which will be determined by a formula
based on the net sales and gross margin results of the division for the
six month period ended December 31, 1998. Any such secondary payment is
based on future performance and is currently not determinable. It is
currently anticipated that any such payment would be expensed in the
quarter the amount is determined. The impact of the Keeloq Acquisition
to the Company's reported financial position and results of operations
is immaterial, therefore, pro-forma information illustrating the
combined results after the Keeloq Acquisition has not been provided.
F-7
<PAGE>
ASIC Technical Solutions
On June 25, 1996, the Company acquired ASIC Technical Solutions, Inc.,
a fabless provider of quick turn gate array devices (the "ASIC
Acquisition"). The ASIC Acquisition was treated as a purchase for
accounting purposes. The amount paid for the ASIC Acquisition and
related costs was $1,750,000. As part of the ASIC Acquisition, the
Company allocated a substantial portion of the purchase price to
in-process research and development costs, which is consistent with the
Company's on-going treatment of research and development costs. The
total special charge associated with the ASIC Acquisition was
$1,575,000, with the balance treated as purchased technology related to
current products and amortized over five years. The impact of the ASIC
Acquisition to the Company's reported financial position and results of
operations is immaterial, therefore, pro-forma information illustrating
the combined results after the ASIC Acquisition has not been provided.
Restructuring Charges
During the quarter ended June 30, 1996, primarily in response to
inventory correction activities at the Company's customers, the Company
implemented a series of actions to reduce production capacity, curtail
the growth of inventories and reduce operating expenses. These actions
included delaying capital expansion plans and deferring capital
spending, a 15% production cutback in wafer fabrication, a headcount
reduction in early April, 1996 representing approximately 3% of the
Company's worldwide employees, and a two-week wafer fab shut down in
early July, 1996. As a result of these actions, the Company recorded a
pre-tax special charge of $5,969,000 in the quarter ended June 30, 1996
to cover costs primarily related to idling part of the Company's 5-inch
wafer fab capacity, paying continuing expenses during the wafer
fabrication facility shutdown and paying severance costs associated
with the April, 1996 headcount reduction.
3. CONTINGENCIES
-------------
The Company is subject to lawsuits and other claims arising in the
ordinary course of its business. In the Company's opinion, based on
consultation with legal counsel, as of March 31, 1998, the effect of
such matters will not have a material adverse effect on the Company's
financial position.
4. ACCOUNTS RECEIVABLE
-------------------
Accounts receivable consists of the following (amounts in thousands):
March 31,
1998 1997
-----------------
Trade accounts receivable $57,922 $62,165
Other 790 1,031
-----------------
58,712 63,196
Less allowance for doubtful accounts 2,392 2,094
-----------------
$56,320 $61,102
=================
5. INVENTORIES
-----------
The components of inventories are as follows (amounts in thousands):
March 31,
1998 1997
-----------------
Raw materials $ 5,795 $ 3,365
Work in process 40,000 44,813
Finished goods 30,021 16,966
-----------------
75,816 65,144
Less allowance for inventory valuation 9,523 8,331
-----------------
$66,293 $56,813
=================
F-8
<PAGE>
In the quarter ended June 30, 1997, the Company changed its method of
accounting for inventories from the last-in, first-out (LIFO) method to
the first-in, first-out (FIFO) method. The change did not have a
material effect on the results of operations. The FIFO method is the
predominant accounting method used in the semiconductor industry. Prior
to this change, the Company's inventory costs did not differ
significantly under the two methods. Prior period results of operations
have not been restated for this change as the impact is not material.
6. PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Property, plant and equipment consists of the following (amounts in
thousands):
March 31,
1998 1997
-------------------
Land $ 11,749 $ 10,837
Building and building improvements 59,725 51,796
Machinery and equipment 322,624 218,284
Projects in process 82,528 52,608
-------- --------
476,626 333,525
Less accumulated depreciation
and amortization 150,734 99,467
-------- --------
$325,892 $234,058
======== ========
7. LONG-TERM DEBT
--------------
Long-term debt consists of borrowings (denominated in U.S. Dollars)
from three Taiwan financial institutions, secured by equipment financed
thereby. Interest rates are at the Singapore Interbank Offering Rate
(SIBOR) (5.69% at March 31, 1998) plus 0.75% and at the London
Interbank Offering Rate (LIBOR) (5.69% at March 31, 1998) plus .75%.
The weighted average interest rate on these borrowings was 5.89% at
March 31, 1998. Payments, including interest, are due semi-annually
through September 15, 2000. The aggregate annual maturities of long
term debt as of March 31, 1998 are $2,196,000, $1,147,000 and $273,000
for the years ending March 31, 1999, 2000 and 2001, respectively.
The Company has an unsecured line of credit with a syndicate of U.S.
banks for up to $90,000,000, bearing interest at the LIBOR plus .325%
expiring in October, 2000. At March 31, 1998 the Company had utilized
$7,000,000 of this line of credit. At March 31, 1997 there were no
borrowings against the line of credit. The agreement between the
Company and the syndicate of banks requires the Company to achieve
certain financial ratios and operating results. The Company was in
compliance with these covenants as of March 31, 1998.
The Company has an additional unsecured line of credit with various
Taiwan financial institutions for up to $19,750,000 (U.S. Dollar
equivalent). These borrowings are predominantly denominated in New
Taiwan Dollars, bearing interest at SIBOR plus .75% and expiring on
various dates through November, 1998. At March 31, 1998 the Company had
utilized $16,000,000 of this line of credit.
8. EMPLOYEE BENEFIT PLANS
----------------------
The Company maintains a contributory profit-sharing plan for a majority
of its domestic employees meeting certain service requirements. The
plan qualifies under Section 401(k) of the Internal Revenue Code, and
allows employees to contribute up to 15% of their compensation, subject
to maximum annual limitations prescribed by the Internal Revenue
Service. Company contributions to the plan were at the discretion of
the Board of Directors until January 1, 1997, when the employer match
was revised to provide for a fixed and discretionary component. The
Company shall make a matching contribution of up to 25% of the first 4%
of the participant's eligible compensation and may award up to an
additional 25% under the discretionary match. All matches are provided
on a quarterly basis and require the participant to be an active
employee at the end of each quarter. For the fiscal years ended March
31, 1998, 1997 and 1996, the Company contributions to the plan totaled
$525,000, $452,000 and $407,000, respectively.
F-9
<PAGE>
The Company's Employee Stock Purchase Plan (the "Purchase Plan") allows
eligible employees of the Company to purchase shares of Common Stock at
semi-annual intervals through periodic payroll deductions. The purchase
price per share, in general, will be 85% of the lower of the fair
market value of the Common Stock on the participant's entry date into
the offering period or 85% of the fair market value on the semi-annual
purchase date. As of March 31, 1998, 312,772 shares were available for
issuance under the Purchase Plan. Since the inception of the Purchase
Plan, 3,306,000 shares of Common Stock have been reserved for issuance
under the Purchase Plan. During fiscal 1995, a purchase plan was
adopted for employees in non-U.S. locations. The plan allows for the
purchase price per share to be 100% of the lower of the fair market
value of the Common Stock on the beginning or end of the semi-annual
purchase plan period.
Effective January 1, 1997, the Company adopted a non-qualified deferred
compensation arrangement. This plan is unfunded and is maintained
primarily for the purpose of providing deferred compensation for a
select group of management as defined in ERISA Sections 201, 301 and
401. There are no Company matching contributions with respect to this
plan.
Substantially all employees in foreign locations are covered by a
statutory pension plan. Contributions are accrued based on an
actuarially determined percentage of compensation and are funded in
amounts sufficient to meet statutory requirements. Pension expense
amounted to $1,202,000, $1,316,000 and $1,197,000 for the years ended
March 31, 1998, 1997 and 1996, respectively.
The Company has an incentive compensation plan which provides for
awards, based on a percentage of base salary, from an incentive pool
created from operating profits of the Company, at the discretion of the
Board of Directors. During the years ended March 31, 1998, 1997 and
1996, $1,851,000, $2,064,000 and $1,357,000, respectively, was charged
against operations for this plan.
The Company also has a plan which provides a cash bonus based on the
operating profits of the Company for all employees, at the discretion
of the Board of Directors. During the years ended March 31, 1998, 1997
and 1996, $1,746,000, $1,373,000 and $1,025,000, respectively, was
charged against operations for this plan.
9. STOCK OPTION PLANS
------------------
Under the Company's stock option plans (the "Plans"), key employees,
non-employee directors and consultants may be granted incentive stock
options or non-statutory stock options to purchase shares of Common
Stock at a price not less than 100% of the fair value of the option
shares on the grant date. Options granted under the Plans vest over the
period determined by the Board of Directors at the date of grant, at
periods ranging from one year to four years.
At March 31, 1998 there were 4,887,709 shares available for grant under
the Plans. The per share weighted-average fair value of stock options
granted under the Plans for the years ended March 31, 1998, 1997 and
1996 was $15.61, $9.66 and $13.22, respectively, based on the date of
grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
Years Ended March 31,
1998 1997 1996
-------------------------
Expected life (years) 3.64 3.50 3.50
Risk-free interest rate 5.75% 6.25% 6.25%
Volatility 62% 60% 60%
Dividend yield 0% 0% 0%
Under the Plans, 18,897,476 shares of Common Stock had been reserved
for issuance since the inception of the Plans.
F-10
<PAGE>
The stock option activity is as follows:
Options Outstanding
Shares Weighted Average Exercise Price
-----------------------------------------------
Outstanding at March 31, 1995 7,110,672 $ 7.76
Granted 981,833 23.77
Exercised (1,367,832) 4.01
Canceled (177,366) 10.86
----------
Outstanding at March 31, 1996 6,547,307 10.88
Granted 2,092,952 17.74
Exercised (1,314,977) 6.16
Canceled (967,610) 21.28
----------
Outstanding at March 31, 1997 6,357,672 $ 12.50
Granted 1,631,821 27.80
Exercised (778,418) 7.72
Canceled (1,006,781) 25.99
----------
Outstanding at March 31, 1998 6,204,294 $ 14.84
==========
The following table summarizes information about the stock options
outstanding at March 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range Options Remaining Average Options Average
Exercise Prices Outstanding Contractural Life Exercise Price Exercisable Exercise Price
--------------- ----------- ----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.0300 - $ 2.4070 423,506 4.64 $ 1.80 423,478 $ 1.80
$ 3.9630 - $ 7.1110 1,322,632 5.47 $ 7.09 1,322,632 $ 7.09
$ 7.5930 - $ 13.7220 1,436,296 6.28 $ 13.50 583,262 $ 13.21
$ 14.5550 - $ 16.8330 953,292 8.15 $ 16.71 59,867 $ 15.68
$ 17.0000 - $ 21.5000 1,257,033 8.77 $ 19.02 182,759 $ 18.03
$ 22.5000 - $ 45.6250 811,535 8.57 $ 27.97 53,829 $ 25.93
------- ---- ------- ------ -------
$ 0.0300 - $ 45.6250 6,204,294 7.09 $ 14.84 2,625,827 $ 8.94
========= ==== ======= ========= =======
</TABLE>
At March 31, 1998 and 1997, the number of options exercisable was
2,625,827 and 2,208,808, respectively, and the weighted-average
exercise price of those options was $8.94 and $6.60, respectively.
On March 2, 1998, the Board of Directors of the Company approved an
option exchange program for options priced in excess of $25.00.
Excluding executive officers, corporate officers and directors,
employees who were issued stock options in this category and who were
active employees on March 2, 1998, could elect to keep their options to
buy Common Stock at the original grant price or elect to exchange such
options for options priced at $21.50 per share, the fair market value
of the Company's Common Stock on March 9, 1998. If the employee elected
to exchange the options for options priced at $21.50 per share, the
vesting commencement date was extended by 90 days from the original
vesting date. There were 534,522 shares exchanged under the option
exchange program.
For certain options granted, the Company recognized as compensation
expense the excess of the deemed value for accounting purposes of the
Common Stock issuable upon exercise of such options over the exercise
price of such options. This deferred compensation expense is amortized
ratably over the vesting period of each option. During the years ended
March 31, 1997 and 1996, the Company recorded compensation expense of
$30,000 and $60,000, respectively.
The Company received a tax benefit of $5,332,000, $5,742,000 and
$4,130,000 for the years ended March 31, 1998, 1997 and 1996,
respectively, on the exercise of non-qualified stock options and the
disposition of stock acquired
F-11
<PAGE>
with incentive stock options or through the Purchase Plan. For
financial reporting purposes, the tax effect of this deduction is
accounted for as a credit to additional paid-in capital rather than as
a reduction of income tax expense.
The Company applies APB Opinion No. 25 in accounting for its various
stock plans and, accordingly, no compensation cost has been recognized
for the Plans or the Purchase Plan in the financial statements. Had the
Company determined compensation cost in accordance with SFAS No. 123,
the Company's net income per share would have been reduced to the pro
forma amounts indicated below:
Years Ended March 31,
1998 1997 1996
------------------------------------
Net income As reported $ 64,368 $ 51,132 $ 43,752
Pro forma 58,063 48,202 40,691
Basic net income As reported $ 1.21 $ 0.99 $ 0.86
per share Pro forma 1.09 0.93 0.80
Diluted net income As reported $ 1.14 $ 0.94 $ 0.80
per share Pro forma 1.03 0.88 0.75
Pro forma net income reflects only options granted during the fiscal
years ended March 31, 1998, 1997 and 1996. Therefore, the full impact
of calculating compensation cost for stock options under SFAS No. 123
is not reflected in pro forma net income amounts presented above
because compensation cost is reflected over the options' vested period
and compensation cost for options granted prior to April 1, 1995 is not
considered.
10. LEASE COMMITMENTS
-----------------
The Company leases office space, transportation and other equipment
under capital and operating leases which expire at various dates
through March, 2007. The future minimum lease commitments under these
leases are payable as follows (amounts in thousands):
Year ended Capital Operating
March 31, Leases Leases
--------- ------ ------
1999 $ 2,319 $ 1,288
2000 363 1,099
2001 -- 806
2002 -- 591
2003 -- 476
Thereafter -- 1,707
------------------------
Total minimum lease payments $ 2,682 $ 5,967
=======
Less amount representing interest
(at rates ranging from 6.7% to 8.5%) (128)
-------
Present value of net minimum lease payments 2,554
Less current maturities 2,206
-------
Capital lease obligations $ 348
=======
Rental expense under operating leases totaled $2,811,000, $2,644,000
and $1,675,000 for the years ended March 31, 1998, 1997 and 1996,
respectively.
F-12
<PAGE>
11. INCOME TAXES
------------
The provision for income taxes is as follows (amounts in thousands):
Years Ended March 31,
1998 1997 1996
--------------------------------
Current expense:
Federal $ 22,575 $ 13,814 $ 15,923
State 2,508 3,454 4,122
Foreign 8,139 4,093 3,539
-------- -------- --------
33,222 21,361 23,584
-------- -------- --------
Deferred expense (benefit):
Federal (6,315) (1,322) (5,922)
State (702) (331) (1,480)
Foreign (2,406) (1,347) --
-------- -------- --------
(9,423) (3,000) (7,402)
-------- -------- --------
$ 23,799 $ 18,361 $ 16,182
======== ======== ========
The tax benefit associated with the exercise of employee stock options
reduced taxes currently payable by $5,332,000, $5,742,000 and
$4,130,000 for the years ended March 31, 1998, 1997 and 1996,
respectively.
The provision for income taxes differs from the amount computed by
applying the statutory federal tax rate to income before income taxes.
The sources and tax effects of the differences are as follows (amounts
in thousands):
Years Ended March 31,
1998 1997 1996
--------------------------------
Computed expected provision $ 30,858 $ 24,323 $ 20,977
State income taxes, net
of federal benefit 1,630 2,245 1,669
Foreign sales corporation benefit (3,707) (2,552) (2,123)
Foreign income taxed at
lower than the federal rate (4,982) (5,655) (4,341)
-------- -------- --------
$ 23,799 $ 18,361 $ 16,182
======== ======== ========
Pretax income from foreign operations was $39,554,000, $32,172,000 and
$29,434,000 for the years ended March 31, 1998, 1997 and 1996,
respectively. Unremitted foreign earnings that are considered to be
permanently invested outside the United States and on which no deferred
taxes have been provided, amounted to approximately $147,874,000 at
March 31, 1998.
F-13
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows (amounts in thousands):
March 31,
1998 1997
--------------------
Deferred tax assets:
Intercompany profit in inventory $ 15,168 $ 10,408
Deferred income on shipments
to distributors 9,398 6,475
Inventory reserves 3,550 2,392
Technology assets 2,798 2,934
Accrued expenses and other 7,662 4,976
-------- --------
Gross deferred tax assets 38,576 27,185
-------- --------
Deferred tax liabilities:
Property, plant and equipment,
principally due to differences in
depreciation (11,071) (8,479)
Other deferred liabilities -- (624)
-------- --------
Gross deferred tax liability (11,071) (9,103)
-------- --------
Net deferred tax asset $ 27,505 $ 18,082
======== ========
Management believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize
the deferred tax assets.
The Company has benefited from a partial tax holiday for its Taiwan
manufacturing operations over the past several years. The Company is
currently benefiting from a tax holiday for its Thailand manufacturing
operations. The aggregate dollar benefits derived from this tax holiday
status approximated $5,614,000, $5,415,000 and $5,003,000 for the years
ended March 31, 1998, 1997 and 1996, respectively. The benefit the tax
holiday status had on net income per share approximated $0.10, $0.10
and $0.09 for the years ended March 31, 1998, 1997 and 1996,
respectively. The Company's tax holiday status in Taiwan expired in
March, 1997, and expires in Thailand in March, 2005.
12. ACCRUED LIABILITIES
-------------------
Accrued liabilities consists of the following (amounts in thousands):
March 31,
1998 1997
-----------------
Accrued salaries and wages $ 7,468 $ 6,344
Income taxes 22,396 14,957
Other accrued expenses 23,588 15,091
------- -------
$53,452 $36,392
======= =======
13. STOCKHOLDERS' EQUITY
--------------------
Stockholder Rights Plan. On February 13, 1995, the Company's Board of
Directors adopted a Stockholder Rights Plan (the "Plan"). Under the
Plan, each share of the Company's Common Stock has one right which
entitles the stockholder to buy 1/100th of a share of the Company's
Series A Participating Preferred Stock. The rights have an exercise
price of $66.67 and expire in February, 2005. The rights become
exercisable and transferable upon the occurrence of certain events.
Stock Repurchase Activity. In connection with a stock repurchase
program, during the years ended March 31, 1998 and 1997, the Company
purchased a total of 1,277,500 and 1,326,477 shares of the Company's
Common Stock in open market activities at a total cost of $31,481,000
and $19,463,000 respectively. Subsequent to March 31, 1998 the Company
purchased 222,500 additional shares of Common Stock at a cost of
$6,667,000. Also, in connection
F-14
<PAGE>
with a stock repurchase program, during fiscal 1998 and fiscal 1997 the
Company sold put options for 700,000 shares and 500,000 shares of
Common Stock, respectively. Pricing per share ranged from $29.50 to
$38.81 in fiscal 1998 and from $15.00 to $24.88 in fiscal 1997.
Subsequent to March 31, 1998 the Company sold put options for 100,000
shares of Common Stock. Pricing per share was $27.50. During fiscal
1998 and 1997, the Company repurchased put options for 300,000 and
142,500 shares, respectively. As of March 31, 1998, the Company had
outstanding put options for 400,000 shares which have expiration dates
ranging from June 16, 1998 to March 3, 1999 at prices ranging from
$29.63 to $38.81 per share. The net proceeds from the sale and
repurchase of these options, in the amount of $2,215,330 and $427,750
for fiscal years 1998 and 1997, respectively, has been credited to
additional paid-in capital.
Subsequent to March 31, 1998, the Company completed two transactions in
connection with the stock repurchase program. April, 1998 the Company
completed a costless collar transaction for 500,000 calls priced at
$25.95 and 665,000 puts priced at $25.19. The expiration date of the
transaction is April 23, 1999. Also in connection with the stock
repurchase program, the Company completed a net share settled forward
contract for 2,000,000 shares at an average price of $29.24. The
expiration date of this transaction is May, 2000 with quarterly interim
settlement dates as determined by the Company.
Also subsequent to March 31, 1998 the Company's Board of Directors
authorized an additional share repurchase of Common Stock of 2,000,000
shares and to sell up to 500,000 additional put options. The Company
expects from time to time to purchase shares of Common Stock in
connection with its authorized Common Stock repurchase plan.
14. GEOGRAPHIC INFORMATION
----------------------
The Company operates in one industry segment and engages primarily in
the design, development, manufacture and marketing of semiconductor
products. The Company sells its products to system manufacturers and
distributors in a broad range of industries, performs on-going credit
evaluations of its customers and generally requires no collateral. The
Company's operations outside the United States consist of comprehensive
product final test facilities in Taiwan and Thailand and sales offices
in certain foreign countries. Domestic operations are responsible for
the design, development and wafer fabrication of all products, as well
as the coordination of production planning and shipping to meet
worldwide customer commitments. The Taiwan and Thailand test facilities
are reimbursed in relation to value added with respect to test
operations and other functions performed, and certain foreign sales
offices receive a commission on export sales within their territory.
Accordingly, for financial statement purposes, it is not meaningful to
segregate sales or operating profits for the test and foreign sales
office operations. Identifiable assets by geographic area are as
follows (amounts in thousands):
March 31,
1998 1997
-------------------
United States $306,142 $254,477
Taiwan 136,128 101,036
Thailand 57,374 44,126
Other 25,099 28,453
-------- --------
Total Assets $524,743 $428,092
======== ========
Sales to unaffiliated customers located outside the United States,
primarily in Asia and Europe, aggregated approximately 68%, 66% and 65%
of consolidated net sales for the years ended March 31, 1998, 1997 and
1996, respectively.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The carrying amount of cash equivalents approximates fair value because
their maturity is less than three months. The carrying amount of
accounts receivable, accounts payable and accrued liabilities
approximates fair value due to the short term maturity of the amounts.
The fair value of capital lease obligations, long-term debt and lines
of credit approximate their carrying value as they are estimated by
discounting the future cash flows at rates currently offered to the
Company for similar debt instruments.
F-15
<PAGE>
The Company is party to financial instruments with off-balance-sheet
risk in the normal course of business to reduce its exposure to
fluctuations in foreign exchange rates. These financial instruments
include standby letters of credit and foreign currency forward
contracts. When engaging in forward contracts, risks arise from the
possible inability of counterparties to meet the terms of their
contracts and from movements in securities values, interest rates and
foreign exchange rates. At March 31, 1998 and 1997, the Company held
contracts totaling $9,158,000 and $5,421,000, respectively, which were
entered into and hedged the Company's foreign currency risk. The
contracts matured in April and May of 1998 and 1997, respectively.
Unrealized gains and losses as of the balance sheet dates and realized
gains and losses for the years ending March 31, 1998, 1997 and 1996
were not material.
16. NET INCOME PER SHARE
--------------------
The following table sets forth the computation of basic and diluted net
income per share (in thousands except per share amounts):
Years Ended March 31,
1998 1997 1996
---------------------------
Net income $64,368 $51,132 $43,752
======= ======= =======
Weighted average common
shares outstanding 53,376 51,569 50,750
Dilutive effect of stock options 2,937 3,114 3,783
------- ------- -------
Weighted average common and common 56,313 54,683 54,533
equivalent shares outstanding ======= ======= =======
Basic net income per share $ 1.21 $ 0.99 $ 0.86
======= ======= =======
Diluted net income per share $ 1.14 $ 0.94 $ 0.80
======= ======= =======
17. QUARTERLY RESULTS (UNAUDITED)
-----------------------------
The following table presents the Company's selected unaudited quarterly
operating results for eight quarters ended March 31, 1998. The Company
believes that all necessary adjustments have been made to present
fairly the related quarterly results (in thousands except per share
amounts).
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiscal 1998
-----------
Net sales $ 97,228 $103,036 $103,550 $ 93,080 $396,894
Gross profit 49,393 52,141 49,804 46,018 197,356
Operating income 23,955 25,563 17,583 19,344 86,445
Net income 17,832 19,182 13,127 14,227 64,368
Diluted net income per share .32 .34 .23 .26 1.14
Fiscal 1997
-----------
Net sales $ 74,161 $ 79,510 $ 87,076 $ 93,505 $334,252
Gross profit 36,636 39,788 43,514 46,984 166,922
Operating income 9,545 18,517 20,791 22,204 71,057
Net income 6,686 13,126 14,755 16,565 51,132
Diluted net income per share 0.12 0.24 0.27 0.30 0.94
</TABLE>
F-16
<PAGE>
18. SUPPLEMENTAL FINANCIAL INFORMATION
----------------------------------
Cash paid for income taxes amounted to $19,857,000, $8,108,000 and
$17,557,000 during the years ended March 31, 1998, 1997 and 1996,
respectively. Cash paid for interest amounted to $796,000, $3,183,000
and $2,643,000 during the years ended March 31, 1998, 1997 and 1996,
respectively.
A summary of additions and deductions related to the allowances for
accounts receivable and inventories for the years ended March 31, 1998,
1997 and 1996 follows:
Balance at Charged to
beginning costs and Balance at
of year expenses Deductions end of year
------------------------------------------------------
Allowance for doubtful accounts:
1998 $ 2,094 $ 638 $ (340) $ 2,392
1997 1,834 452 (192) 2,094
1996 1,394 634 (194) 1,834
Allowance for inventory valuation:
1998 $ 8,331 $ 2,126 $ (934) $ 9,523
1997 10,372 1,886 (3,927) 8,331
1996 4,373 7,639 (1,640) 10,372
F-17
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of Registrant
[Incorporated by reference to Exhibit 3.1 to Registration
Statement No. 33-70608]
3.1.1 Certificate of Amendment to Registrant's Restated Certificate of
Incorporation [Incorporated by reference to Exhibit 3.3.1 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1994]
3.1.2 Certificate of Designation of Rights, Preferences and Privileges
of Series A Participating Preferred Stock of Registrant
[Incorporated by reference to Exhibit No. 3.1.2 to Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31,
1995]
3.1.3 Certificate of Amendment to Registrant's Restated Certificate of
Incorporation [Incorporated by reference to Exhibit No. 1 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995]
3.1.4 Certificate of Amendment to Registrant's Certificate of
Incorporation [Incorporated by reference to Exhibit No. 3.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997
3.2 Amended and Restated By-Laws of Registrant, as amended through
May 19, 1997 [Incorporated by reference to Exhibit No. 3.2 to
Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1997]
4.1 Preferred Share Rights Agreement dated as of February 13, 1995
between Registrant and Bank One, Arizona, N.A., including the
form of Rights Certificate and the Summary of Rights attached as
exhibits thereto [Incorporated by reference to Exhibit No. 1 to
Registrant's Registration Statement on Form 8-A as filed with
the Securities and Exchange Commission as of February 14, 1995]
10.1 Form of Indemnification Agreement between Registrant and its
directors and certain of its officers [Incorporated by reference
to Exhibit No. 10.1 to Registration Statement No. 33-57960]
10.2 Land Lease Contract dated January 1, 1989 between Registrant's
subsidiary and Kaohsiung Export Processing Zone Administration
Summary (English Summary) [Incorporated by reference to Exhibit
No. 10.10 to Registration Statement No. 33-57960]
10.3 Land Lease Contract dated September 1, 1992 between Registrant's
subsidiary and Kaohsiung Export Processing Zone Administration
Summary (English Summary) [Incorporated by reference to Exhibit
No. 10.11 to Registration Statement No. 33-57960]
10.4 Amended and Restated 1989 Stock Option Plan [Incorporated by
reference to Exhibit No. 10.14 to Registration Statement No.
33-57960]
</TABLE>
E-1
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
10.5 1993 Stock Option Plan, as amended through April 25, 1997
[Incorporated by reference to Exhibit 10.11 to Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31,
1997]
10.6 Form of Notice of Grant For 1993 Stock Option Plan, with Exhibit
A thereto, Form of Stock Option Agreement; and Exhibit B
thereto, Form of Stock Purchase Agreement [Incorporated by
reference to Exhibit No. 10.6 Registration Statement No.
333-872]
10.7 Employee Stock Purchase Plan, as amended through April 25, 1997
[Incorporated by reference to Exhibit 10.13 to Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31,
1997]
10.8 Form of Stock Purchase Agreement for Employee Stock Purchase
Plan [Incorporated by reference to Exhibit No. 10.2 to
Registration Statement No. 333-872]
10.9 Form of Enrollment Form For Employee Stock Purchase Plan
[Incorporated by reference to Exhibit No. 10.3 to Registration
Statement No. 333-872]
10.10 Form of Change Form For Employee Stock Purchase Plan
[Incorporated by reference to Exhibit No. 10.4 to Registration
Statement No. 333-872]
10.11 Form of Executive Officer Severance Agreement [Incorporated by
reference to Exhibit No. 10.7 to Registration Statement No.
333-872]
10.12 Credit Agreement dated as of October 28, 1997 among Registrant,
the Banks named therein, Bank One, Arizona, NA as Administrative
Agent and The First National Bank of Chicago, as Documentation
Agent [Incorporated by reference to Exhibit No. 10.1 to
Registrant's Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 1997]
10.13 Modification Agreement dated as of March 30, 1998 to the Credit
Agreement dated as of October 28, 1997 among Registrant, the
Banks named therein, Bank One, Arizona, NA, as Administrative
Agent and The First National Bank of Chicago, as Documentation
Agent
10.14 Development Agreement dated as of August 29, 1997 by and between
Registrant and the City of Chandler, Arizona [Incorporated by
reference to Exhibit No. 10.1 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1997]
</TABLE>
E-2
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
10.15 Development Agreement dated as of July 17, 1997 by and between
Registrant and the City of Tempe, Arizona [Incorporated by
reference to Exhibit No. 10.2 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1997]
10.16 1997 Nonstatutory Stock Option Plan
10.17 Form of Notice of Grant For 1997 Nonstatutory Stock Option Plan,
with Exhibit A thereto, Form of Stock Option Agreement
10.18 International Employee Stock Purchase Plan as Amended Through
April 25, 1997 [Incorporated by reference to Exhibit 10 to
Registration Statement No. 333-40791]
18.1 Letter from KPMG Peat Marwick LLP re: Change in Accounting
Principles [Incorporated by reference to Exhibit No. 18.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997]
21.1 Subsidiaries of Registrant [Incorporated by reference to Exhibit
No. 21.1 to Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1996]
23.1 Consent of KPMG Peat Marwick LLP
24.1 Power of Attorney Re: Microchip Technology Incorporated, the
Registrant
</TABLE>
E-3
MODIFICATION AGREEMENT
BY THIS MODIFICATION AGREEMENT (the "Agreement"), made and entered into
as of the 30th day of March, 1998, BANK ONE, ARIZONA, NA, a national banking
association, as administrative agent for the Banks (as hereinafter defined) (the
"Administrative Agent"), and MICROCHIP TECHNOLOGY INCORPORATED, a Delaware
corporation (the "Borrower"), in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, hereby confirm and agree as follows:
RECITALS:
---------
A. Borrower, the Administrative Agent, The First National Bank of
Chicago, a national banking association, as Documentation Agent and the "Banks"
named therein entered into that Credit Agreement dated October 28, 1997 (the
"Credit Agreement") to provide financial accommodations to the Borrower as
provided therein.
B. Borrower and the Administrative Agent, with the consent of the
Banks, desire to modify the Credit Agreement as set forth herein.
C. All undefined capitalized terms used herein shall have the meaning
given them in the Credit Agreement.
AGREEMENT:
----------
SECTION 1. ACCURACY OF RECITALS.
--------------------
Borrower acknowledges the accuracy of the Recitals.
SECTION 2. MODIFICATION OF CREDIT AGREEMENT.
--------------------------------
2.1 Section 6.9 of the Credit Agreement is hereby amended to read as
follows:
SECTION 6.9 Debt/EBITDA Ratio. At any time, permit the ratio
of (i) the sum of its Consolidated Debt plus its Convertible
Subordinated Indebtedness, less its accruals and accounts payables and
deferred income, to (ii) its Cash Flow to be greater than 0.8 to 1.0.
2.2 Each of the Loan Documents is modified to provide that it shall be
a default or an event of default thereunder if Borrower shall fail to comply
with any of the covenants of Borrower herein or if any representation or
warranty by Borrower herein is materially incomplete, incorrect, or misleading
as of the date hereof.
<PAGE>
2.3 Each reference in the Loan Documents to any of the Loan Documents
is hereby amended to be a reference to such document as modified herein.
SECTION 3. RATIFICATION OF LOAN DOCUMENTS.
------------------------------
The Loan Documents are ratified and affirmed by Borrower and shall
remain in full force and effect as modified herein.
SECTION 4. BORROWER REPRESENTATIONS AND WARRANTIES.
---------------------------------------
Borrower represents and warrants to the Banks:
4.1 No default or event of default under any of the Loan Documents as
modified herein, nor any event, that, with the giving of notice or the passage
of time or both, would be a default or an event of default under the Loan
Documents as modified herein has occurred and is continuing.
4.2 There has been no material adverse change taken as a whole, in the
financial condition of Borrower or any other person whose financial statement
has been delivered to the Administrative Agent in connection with the Loans from
the most recent financial statement received by the Administrative Agent.
4.3 Each and all representations and warranties of Borrower in the Loan
Documents are accurate in all material respects on the date hereof.
4.4. Borrower has no claims, counterclaims, defenses, or set-offs with
respect to the Loans or the Loan Documents as modified herein.
4.5 The Loan Documents as modified herein are the legal, valid, and
binding obligation of Borrower, enforceable against Borrower in accordance with
their terms.
SECTION 5. BORROWER COVENANTS.
------------------
Borrower covenants with the Banks:
5.1 Borrower shall execute, deliver, and provide to the Administrative
Agent such additional agreements, documents, and instruments as reasonably
required by the Banks to effectuate the intent of this Agreement.
5.2 Borrower fully, finally, and absolutely and forever releases and
discharges the Banks and the Administrative Agent and their present and former
directors, shareholders, officers, employees, agents, representatives,
successors and assigns, and their separate and respective heirs, personal
representatives, successors and assigns, from any and all actions, causes of
action, claims, debts, damages, demands, liabilities, obligations, and suits, of
whatever kind or nature,
-2-
<PAGE>
in law or equity of Borrower, whether now known or unknown to Borrower, and
whether contingent or matured, (i) in respect of the Loans, the Loan Documents,
or the actions or omissions of the Banks and the Administrative Agent in respect
of the Loans or the Loan Documents and (ii) arising from events occurring prior
to the date of this Agreement.
SECTION 6. CONDITIONS PRECEDENT.
--------------------
The agreements of the Banks and the Administrative Agent and the
modifications contained herein shall not be binding upon the Banks until the
Banks have executed and delivered consents to this Agreement and the
Administrative Agent has received, at Borrower's expense, all of the following,
all of which shall be in form and content satisfactory to the Administrative
Agent and shall be subject to approval by Administrative Agent:
6.1 An original of this Agreement fully executed by the Borrower.
6.2 Such resolutions or authorizations and such other documents as the
Administrative Agent may require relating to the existence and good standing of
the Borrower, and the authority of any person executing this Agreement or other
documents on behalf of the Borrower.
6.3 Payment of all the internal and external costs and expenses
incurred by the Administrative Agent in connection with this Agreement
(including, without limitation, inside and outside attorneys, expenses, and
fees).
SECTION 7. INTEGRATION, ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION, OR
--------------------------------------------------------------------
WAIVER.
------
The Loan Documents as modified herein contain the complete
understanding and agreement of Borrower and the Banks in respect of the Loans
and supersede all prior representations, warranties, agreements, arrangements,
understandings, and negotiations. No provision of the Loan Documents as modified
herein may be changed, discharged, supplemented, terminated, or waived except in
a writing signed by the parties thereto.
SECTION 8. BINDING EFFECT.
--------------
The Loan Documents as modified herein shall be binding upon and shall
inure to the benefit of Borrower and the Banks and their successors and assigns
and the executors, legal administrators, personal representatives, heirs,
devisees, and beneficiaries of Borrower, provided, however, Borrower may not
assign any of its right or delegate any of its obligation under the Loan
Documents and any purported assignment or delegation shall be void.
SECTION 9. CHOICE OF LAW.
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of Arizona, without giving effect to conflicts of law
principles.
-3-
<PAGE>
SECTION 10. COUNTERPART EXECUTION.
---------------------
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original and all of which together shall constitute one
and the same document. Signature pages may be detached from the counterparts and
attached to a single copy of this Agreement to physically form one document.
DATED as of the date first above stated.
MICROCHIP TECHNOLOGY INCORPORATED,
a Delaware corporation
By: /s/ Gordon Parnell
-------------------------------------
Name: Gordon Parnell
-----------------------------------
Title: VP Controller & Treasurer
----------------------------------
BORROWER
BANK ONE, ARIZONA, NA, a national
banking association
By: /s/ Steve Reinhart
-------------------------------------
Name: Steve Reinhart
-----------------------------------
Title: Vice President
----------------------------------
ADMINISTRATIVE AGENT
-4-
<PAGE>
CONSENT OF THE BANKS
Re: Microchip Technology Incorporated
The following:
(a) is a Bank named in that Credit Agreement dated October 28,
1997 between Microchip Technology Incorporated, a Delaware corporation (the
"Borrower"), Bank One, Arizona, NA, a national banking association, as
administrative agent for the Banks (the "Administrative Agent"), The First
National Bank of Chicago, a national banking association, as Documentation
Agent, and the Banks; and
(b) consents to that Modification Agreement dated March 30,
1998 entered into between the Borrower and the Administrative Agent.
THE FIRST NATIONAL BANK OF CHICAGO, a
national banking association
By: /s/ Mark A. Isley
-------------------------------------
Name: Mark A. Isley
-----------------------------------
Title: First Vice President
----------------------------------
"Documentation Agent" and "Bank"
<PAGE>
CONSENT OF THE BANKS
Re: Microchip Technology Incorporated
The following:
(a) is a Bank named in that Credit Agreement dated October 28,
1997 between Microchip Technology Incorporated, a Delaware corporation (the
"Borrower"), Bank One, Arizona, NA, a national banking association, as
administrative agent for the Banks (the "Administrative Agent"), The First
National Bank of Chicago, a national banking association, as Documentation
Agent, and the Banks; and
(b) consents to that Modification Agreement dated March 30,
1998 entered into between the Borrower and the Administrative Agent.
THE INDUSTRIAL BANK OF JAPAN, LIMITED,
San Francisco Agency
By: /s/ Haruhiko Masuda
-------------------------------------
Name: Haruhiko Masuda
-----------------------------------
Title: Deputy General Manager
----------------------------------
"Bank"
-2-
<PAGE>
CONSENT OF THE BANKS
Re: Microchip Technology Incorporated
The following:
(a) is a Bank named in that Credit Agreement dated October 28,
1997 between Microchip Technology Incorporated, a Delaware corporation (the
"Borrower"), Bank One, Arizona, NA, a national banking association, as
administrative agent for the Banks (the "Administrative Agent"), The First
National Bank of Chicago, a national banking association, as Documentation
Agent, and the Banks; and
(b) consents to that Modification Agreement dated March 30,
1998 entered into between the Borrower and the Administrative Agent.
NORWEST BANK ARIZONA, N.A.
By: /s/ Mae G. DelaBarre
-------------------------------------
Name: Mae G. DelaBarre
-----------------------------------
Title: Vice President
----------------------------------
"Bank"
-3-
<PAGE>
CONSENT OF THE BANKS
Re: Microchip Technology Incorporated
The following:
(a) is a Bank named in that Credit Agreement dated October 28,
1997 between Microchip Technology Incorporated, a Delaware corporation (the
"Borrower"), Bank One, Arizona, NA, a national banking association, as
administrative agent for the Banks (the "Administrative Agent"), The First
National Bank of Chicago, a national banking association, as Documentation
Agent, and the Banks; and
(b) consents to that Modification Agreement dated March 30,
1998 entered into between the Borrower and the Administrative Agent.
WELLS FARGO BANK, N.A.
By: /s/ Stephanie Arnold
-------------------------------------
Name: Stephanie Arnold
-----------------------------------
Title: Vice President
----------------------------------
"Bank"
-4-
MICROCHIP TECHNOLOGY INCORPORATED
1997 NONSTATUTORY STOCK OPTION PLAN
NOVEMBER 10, 1997
ARTICLE I
1.1. PURPOSES OF THE PLAN. The purposes of this Nonstatutory Stock Option
Plan are:
o to attract and retain the best available personnel for
positions of substantial responsibility;
o to provide additional incentive to Employees and Consultants,
and
o to promote the success of the Company's business.
Options granted under the Plan will be Nonstatutory Stock Options.
1.2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or the Employee Committee as shall
be administering the Plan, in accordance with Section 1.4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or
quotation system on which the Common Stock is listed or quoted and the
applicable laws of any foreign country or jurisdiction where Options are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) Common Stock" means the common stock, par value $0.001 per share,
of the Company.
(f) "Company" means Microchip Technology Incorporated, a Delaware
corporation.
(g) "Consultant" means any person, including an advisor but not
including Directors, engaged by the Company or a Parent or Subsidiary to
render services to such entity.
(h) "Director" means a member of the Board.
<PAGE>
(i) "Disability" means total or permanent disability as defined in
Code Section 22(e)(3).
(j) "Employee" means any person, excluding Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. A
Service Provider shall not cease to be an Employee in the case of (i) any
leave of absence approved by the Company or (ii) transfers between
locations of the Company or between the Company, its Parent, any
Subsidiary, or any successor. Neither service as a Director nor payment of
a director's fee by the Company shall be sufficient to constitute
"employment" by the Company.
(k) "Employee Committee" means a committee of Directors appointed by
the Board in accordance with Section 1.4 of the Plan.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without
limitation the Nasdaq National Market or The Nasdaq
SmallCap Market of The Nasdaq Stock Market, its Fair
Market Value shall be the closing sales price for such
stock (or the closing bid, if no sales were reported) as
quoted on such exchange or system for the market trading
day on the date of determination or the closing sales
price on the last market trading day prior to the date of
determination if there is no reported closing sales price
on the date of determination, as reported in The Wall
Street Journal or such other source as the Administrator
deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the
Fair Market Value of a Share of Common Stock shall be the
mean between the high bid and low asked prices for the
Common Stock on the last market trading day prior to the
day of determination, as reported in The Wall Street
Journal or such other source as the Administrator deems
reliable;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good
faith by the Administrator.
(n) "Notice of Grant" means a written or electronic notice evidencing
certain terms and conditions of an individual Option grant. The Notice of
Grant is part of the Option Agreement.
2
<PAGE>
(o) "Officer" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder or who is otherwise considered an "officer" under
applicable NASD or stock exchange rules.
(p) "Option" means a nonstatutory stock option granted pursuant to the
Plan, that is not intended to qualify as an incentive stock option within
the meaning of Code Section 422 and the regulations promulgated thereunder.
(q) "Option Agreement" means an agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant.
The Option Agreement is subject to the terms and conditions of the Plan.
(r) "Optioned Stock" means the Common Stock subject to an Option.
(s) "Optionee" means the holder of an outstanding Option granted under
the Plan.
(t) "Parent" means "parent corporation," whether now or hereafter
existing, as defined in Code Section 424(e).
(u) "Plan" means this 1997 Nonstatutory Stock Option Plan.
(v) "Service Provider" means an Employee or Consultant.
(w) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 1.3(b), 2.2 and 2.3 of the Plan.
(x) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Code Section 424(f).
1.3. STOCK SUBJECT TO THE PLAN.
(a) Reservation of Shares; Unpurchased Shares. Subject to the
provisions of Sections 1.3(b), 2.2 and 2.3 of the Plan, the maximum
aggregate number of Shares which may be optioned and sold under the Plan is
2,000,000 Shares. The Shares may be authorized, but unissued, or reacquired
Common Stock including shares repurchased by the Company on the open
market.
If an Option expires or becomes unexercisable without having been
exercised in full, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan
has terminated).
If Shares otherwise issuable under the Plan are withheld by the
Company in satisfaction of the withholding taxes incurred in connection
with the exercise of an outstanding Option, then the number of Shares
available for issuance shall be reduced by the gross number of Shares for
which the Option is exercised, and not by the net number of Shares actually
issued to the Optionee.
3
<PAGE>
(b) Adjustments for Organic Changes. Should any change be made to the
Common Stock issuable under the Plan by reason of any stock split, stock
dividend, recapitalization, combination of shares, exchange of shares or
other change affecting the outstanding Common Stock as a class without the
Company's receipt of consideration, then appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under
the Plan, and (ii) the number and/or class of securities and price per
share in effect under each Option outstanding under the Plan. Such
adjustments to the outstanding Options are to be effected in a manner which
shall preclude the enlargement or dilution of rights and benefits under
such Options. The adjustments determined by the Board shall be final,
binding and conclusive.
1.4. ADMINISTRATION OF THE PLAN.
(a) Administration of the Plan. The Plan shall be administered by the
Board. The Board, however, may at any time appoint a committee (the
"Employee Committee") of one or more persons who are members of the Board
and delegate to such Employee Committee the power, in whole or in part, to
administer the Plan. Unless otherwise required by law, decisions among
members of an Administrator shall be by majority vote.
(b) Term on Committee. Members of the Employee Committee shall serve
for such period of time as the Board may determine and shall be subject to
removal by the Board at any time. The Board at any time may terminate the
functions of the Employee Committee and reassume all powers and authority
previously delegated to the Employee Committee.
(c) Powers of the Administrator. Subject to the provisions of the
Plan, the Administrator shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock;
(ii) to select the Service Providers to whom Options may be
granted hereunder;
(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each Option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted
hereunder. Such terms and conditions include, but are not
limited to, the exercise price, the time or times when
Options may be exercised (which may be based on
performance criteria), any vesting acceleration or waiver
of forfeiture restrictions, and any restriction
4
<PAGE>
or limitation regarding any Option or the shares of Common
Stock relating thereto, based in each case on such factors
as the Administrator, in its sole discretion, shall
determine;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the
Common Stock covered by such Option shall have declined
since the date the Option was granted;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations
relating to sub-plans established for the purpose of
qualifying for preferred tax treatment under foreign tax
laws;
(x) to modify or amend each Option (subject to Section 3.1(b)
of the Plan), including the discretionary authority to
extend the post-termination exercisability period of
Options longer than is otherwise provided for in the Plan
as provided in Section 2.1(g);
(xi) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an
Option or previously granted by the Administrator;
(xii) to determine the terms and restrictions applicable to
Options;
(xiii) to allow Optionees to satisfy withholding tax obligations
as provided in Section 3.2; and
(xiv) to make all other determinations deemed necessary or
advisable for administering the Plan.
(d) Effect of Administrator's Decision. The Administrator's decisions,
determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options.
(e) Indemnification. In addition to such other rights of
indemnification as they may have, the members of each Administrator shall
be indemnified and held harmless by the Company to the extent permitted
under applicable law, for, from and against all costs and expenses
reasonably incurred by them in connection with any action, legal proceeding
to which any such member thereof may be party, by reason of any action
taken or failed to be taken, under or in connection with the Plan or any
rights granted thereunder, and against all amounts paid by them in
settlement thereof or paid by them in satisfaction of a judgment of any
such action, suit or proceeding, except a judgment based upon a finding of
bad faith.
5
<PAGE>
1.5. ELIGIBLE PERSONS UNDER THE PLAN. The persons eligible to participate
in the Plan are Employees and Consultants.
ARTICLE II
OPTION GRANTS
2.1. TERMS AND CONDITIONS OF OPTIONS.
(a) General. Options granted to eligible persons pursuant to the Plan
shall be authorized by action of the Administrator. Each granted Option
shall be evidenced by one or more instruments in the form approved by the
Administrator; provided, however, that each such instrument shall comply
with the terms and conditions specified below.
(b) Option Price. The Option price per Share shall be fixed by the
Administrator and shall in no event be less than one hundred percent (100%)
of the Fair Market Value of such Common Stock on the grant date.
(c) Payment of Option Price. The Option price shall become immediately
due upon exercise of the Option and shall be payable in one of the
following alternative forms specified below:
(i) full payment in cash or check drawn to the Company's
order;
(ii) full payment through a broker-dealer sale and remittance
procedure pursuant to which the Optionee (A) shall provide
irrevocable written instructions to a designated brokerage
firm to effect the immediate sale of the purchased Shares
and remit to the Company, out of the sale proceeds
available on the settlement date, sufficient funds to
cover the aggregate Option price payable for the purchased
Shares plus all applicable Federal and State income and
employment taxes required to be withheld by the Company in
connection with such purchase and (B) shall provide
written directives to the Company to deliver the
certificates for the purchased Shares directly to such
brokerage firm in order to complete the sale transaction.
For purposes of this Section 2.1(c), the Exercise Date
shall be the date on which written notice of the Option
exercise is delivered to the Company. Except to the extent
the sale and remittance procedure is utilized in
connection with the exercise of the Option, payment of the
Option price for the purchased Shares must accompany such
notice.
(d) Term and Exercise of Options. Each Option granted under the Plan
shall be exercisable at any time or times and during such period as is
determined by the Administrator and
6
<PAGE>
set forth in the instrument evidencing the grant. No such Option, however,
shall have a maximum term in excess of ten (10) years from the grant date.
During the lifetime of the Optionee, the Option shall be exercisable only
by the Optionee and shall not be assignable or transferable by the Optionee
other than by will or by the laws of descent and distribution following the
Optionee's death.
(e) Termination of Service. The following provisions shall govern the
exercise period applicable to any outstanding Options held by the Optionee
at the time of cessation of Service or death:
(i) Should an Optionee cease Service for any reason (including
Disability but not including death) while holding one or
more outstanding Options under the Plan, then none of
those Options shall (except to the extent otherwise
provided pursuant to Section 2.1(f) below) remain
exercisable for more than a ninety (90) day period (or
such shorter or longer period determined by the
Administrator and set forth in the instrument evidencing
the grant, but not to exceed twelve (12) months) measured
from the date of such cessation of Service.
(ii) Any Option held by the Optionee under the Plan and
exercisable in whole or in part on the date of said
Optionee's death may be subsequently exercised by the
personal representative of the Optionee's estate or by the
person or persons to whom the Option is transferred
pursuant to the Optionee's will or in accordance with the
laws of descent and distribution. Such exercise, however,
must occur prior to the earlier of six months following
the date of Optionee's death or the specified expiration
date of the Option term. Upon the occurrence of the
earlier event, the Option shall terminate and cease to be
outstanding.
(iii) Under no circumstances, however, shall any such Option be
exercisable after the specified expiration date on the
Option term.
(iv) During the applicable post-Service exercise period, the
Option shall not be exercisable for more than the number
of shares (if any) in which the Optionee is vested at the
time of Optionee's cessation of Service (less any Option
Shares subsequently purchased by the Optionee prior to
death). Upon the expiration of the limited post-Service
exercise period or (if earlier) upon the specified
expiration date of the Option term, each such Option shall
terminate and cease to be outstanding with respect to any
vested shares for which the Option has not otherwise been
exercised. However, each outstanding Option shall
immediately terminate and cease to be outstanding, at the
time of the Optionee's cessation of Service, with respect
to any shares for which the Option is not otherwise at
that time exercisable or in which the Optionee is not
otherwise at that time vested.
7
<PAGE>
(v) Should (A) the Optionee's service be terminated for
misconduct (including, but not limited to, any act of
dishonesty, willful misconduct, fraud or embezzlement) or
(B) the Optionee make any unauthorized use or disclosure
of confidential information or trade secrets of the
Company or any Parent or Subsidiary, then in any such
event all outstanding Options held by the Optionee under
the Plan shall terminate immediately and cease to be
outstanding.
(f) Discretion to Accelerate Vesting. The Administrator shall have
complete discretion, exercisable either at the time the Option is granted
or at any time while the Option remains outstanding, to permit one or more
Options held by the Optionee under this Plan to be exercised, during the
limited post-Service exercise period applicable under Section 2.1(e) above,
not only with respect to the number of vested shares of Common Stock for
which each such Option is exercisable at the time of the Optionee's
cessation of Service but also with respect to one or more subsequent
installments of vested shares for which the Option would otherwise have
become exercisable had such cessation of Service not occurred.
(g) Discretion to Extend Exercise Period. The Administrator shall also
have full power and authority to extend the period of time for which the
Option is to remain exercisable following the Optionee's cessation of
Service or death from the limited period in effect under Section 2.1(e)
above to such greater period of time as the Administrator shall deem
appropriate. In no event, however, shall such Option be exercisable after
the specified expiration date of the Option term.
(h) Definitions. For purposes of the foregoing provisions of this
Section 2.1 and for all other purposes under the Plan:
(i) The Optionee shall (except to the extent otherwise
specifically provided in the applicable Option Agreement)
be deemed to remain in Service for so long as such
individual renders services on a periodic basis to the
Company (or any Parent or Subsidiary) in the capacity of
an Employee or a Consultant.
(ii) The Optionee shall be considered to be an Employee for so
long as Optionee remains in the employ of the Company or
one or more Parent or Subsidiary corporations, subject to
the control and direction of the employer entity not only
as to the work to be performed but also as to the manner
and method of performance.
(i) Stockholder Rights. An Optionee shall have no stockholder rights
with respect to any Shares covered by the Option until such individual
shall have exercised the Option and paid the Option price for the purchased
Shares.
8
<PAGE>
2.2. CORPORATE TRANSACTIONS.
(a) Definition. For purposes of this Plan, any of the following
stockholder approved transactions to which the Company is a party shall be
considered a "Corporate Transaction":
(i) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal
purpose of which is to change the State in which the
Company is incorporated,
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company in complete
liquidation or dissolution of the Company, or
(iii) any reverse merger in which the Company is the surviving
entity but in which securities possessing more than fifty
percent (50%) of the total combined voting power of the
Company's outstanding securities are transferred to person
or persons different from those who held such securities
immediately prior to such merger.
(b) Acceleration of Option. Upon the stockholder approval of a
Corporate Transaction, each Option which is at the time outstanding under
the Plan shall automatically accelerate so that each such Option shall,
immediately prior to the specified effective date for the Corporate
Transaction, become fully exercisable with respect to the total number of
shares of Common Stock at the time subject to such Option and may be
exercised for all or any portion of such shares. However, an outstanding
Option under the Plan shall not so accelerate if and to the extent: (A)
such Option is, in connection with the Corporate Transaction, either to be
assumed by the successor corporation or parent thereof or to be replaced
with a comparable option to purchase shares of the capital stock of the
successor corporation or parent thereof, (B) such Option is to be replaced
with a cash incentive program of the successor corporation which preserves
the option spread existing at the time of the Corporate Transaction and
provides for subsequent payout in accordance with the same vesting schedule
applicable to such Option, or (C) the acceleration of such Option is
subject to other limitations imposed by the Administrator at the time of
the option grant. The determination of option comparability under clause
(A) above shall be made by the Administrator, and its determination shall
be final, binding and conclusive.
(c) Termination of Operations. Upon the consummation of the Corporate
Transaction, all outstanding options under the Plan shall terminate and
cease to be outstanding, except to the extent assumed by the successor
corporation or its parent company.
(d) Adjustments on Assumption or Continuation. Each outstanding Option
under the Plan which is assumed in connection with the Corporate
Transaction or is otherwise to continue in effect shall be appropriately
adjusted, immediately after such Corporate Transaction, to apply and
pertain to the number and class of securities which would have been issued
to the Option holder, in consummation of such Corporate Transaction, had
such person exercised the Option
9
<PAGE>
immediately prior to such Corporate Transaction. Appropriate adjustments
shall also be made to the Option price payable per share, provided the
aggregate Option price payable for such securities shall remain the same.
In addition, the class and number of securities available for issuance
under the Plan following the consummation of the Corporate Transaction
shall be appropriately adjusted.
(e) Discretion to Accelerate. The Administrator shall have the
discretion, exercisable either in advance of any actually-anticipated
Corporate Transaction or at the time of an actual Corporate Transaction, to
provide (upon such terms as it may deem appropriate) for the automatic
acceleration of one or more outstanding Options granted under the Plan
which are assumed or replaced in the Corporate Transaction and do not
otherwise accelerate at the time, in the event the Optionee's Service
should subsequently terminate within a designated period following the
effective date of such Corporate Transaction.
(f) Plan Not to Affect Company. The grant of Options under the Plan
shall in no way affect the right of the Company to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to
merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
2.3. CHANGE IN CONTROL.
(a) Definition. For purposes of this Plan, a Change in Control shall
be deemed to occur in the event:
(i) any person or related group of persons (other than the
Company or a person that directly or indirectly controls,
is controlled by, or is under common control with, the
Company) directly or indirectly acquires beneficial
ownership (within the meaning of Rule 13d-3 of the 1934
Act) of securities possessing more than fifty percent
(50%) of the total combined voting power of the Company's
outstanding securities pursuant to a tender or exchange
offer made directly to the Company's stockholders which
the Board does not recommend such stockholders to accept;
or
(ii) there is a change in the composition of the Board over a
period of twenty-four (24) consecutive months or less such
that a majority of the Board members (rounded up to the
next whole number) ceases, by reason of one or more proxy
contests for the election of Board members, to be
comprised of individuals who either (A) have been Board
members continuously since the beginning of such period or
(B) have been elected or nominated for election as Board
members during such period by at least a majority of the
Board members described in clause (A) who were still in
office at the time such election or nomination was
approved by the Board.
(b) Discretion to Accelerate. The Administrator shall have the
discretionary authority, exercisable either in advance of any actually
anticipated Change in Control or at the time of an actual Change in
Control, to provide for the automatic acceleration of one or more
outstanding Options under the Plan upon the occurrence of the Change in
Control. The Administrator shall
10
<PAGE>
also have full power and authority to condition any such option
acceleration upon the subsequent termination of the Optionee's Service
within a specified period following the Change in Control.
(c) Exercise Rights. Any Options accelerated in connection with the
Change in Control shall remain fully exercisable until the expiration or
sooner termination of the Option term.
ARTICLE III
MISCELLANEOUS
3.1. AMENDMENT AND TERMINATION OF THE PLAN.
(a) Amendment and Termination. The Board may at any time amend, alter,
suspend or terminate the Plan.
(b) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any
Optionee, unless mutually agreed otherwise between the Optionee and the
Administrator, which agreement must be in writing and signed by the
Optionee and the Company. Termination of the Plan shall not affect the
Administrator's ability to exercise the powers granted to it hereunder with
respect to Options granted under the Plan prior to the date of such
termination.
3.2 TAX WITHHOLDING.
(a) General. The Company's obligation to deliver Shares of Common
Stock upon the exercise of Options for such Shares under the Plan shall be
subject to the satisfaction of all applicable Federal, State and local
income tax and employment tax withholding requirements.
(b) Shares to Pay for Withholding. An Administrator may, in its
discretion and in accordance with the provisions of this Section 3.2(b) and
such supplemental rules as the Administrator may from time to time adopt,
provide any or all holders of Options under the Plan with the right to use
Shares in satisfaction of all or part of the Federal, State and local
income tax and employment tax liabilities incurred by such Optionees in
connection with the exercise of their Options (the "Taxes"). Such right may
be provided to any such Optionee in either or both of the following
formats:
(i) Stock Withholding. The Optionee may be provided with the
election to have the Company withhold, from the Shares
otherwise issuable upon the exercise of such Option, a
portion of these Shares with an aggregate Fair Market
Value equal to the percentage of the applicable Taxes (not
to exceed one hundred percent (100%)) designated by the
holder.
(ii) Stock Delivery. The Administrator may, in its discretion,
provide the Optionee with the election to deliver to the
Company, at the time the Option is exercised,
11
<PAGE>
one or more Shares previously acquired by such individual
(other than pursuant to the transaction triggering the
Taxes) with an aggregate Fair Market Value equal to the
percentage of the Taxes incurred in connection with such
Option exercise (not to exceed one hundred percent (100%))
designated by the Optionee.
3.3 EFFECTIVE DATE AND TERM OF PLAN. The Plan is effective as of November
10, 1997 (the "Effective Date"). It shall continue in effect for ten (10) years,
unless sooner terminated under Section 3.1 of the Plan.
3.4. USE OF PROCEEDS. Any cash proceeds received by the Company from the
sale of Shares pursuant to Option grants under the Plan shall be used for
general corporate purposes.
3.5. CONDITIONS UPON ISSUANCE OF SHARES.
(a) Legal Compliance. Shares shall not be issued pursuant to the
exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares shall comply with Applicable Laws and shall be
further subject to the approval of counsel for the Company with respect to
such compliance.
(b) Investment Representations. As a condition to the exercise of an
Option, the Company may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are
being purchased only for investment and without any present intention to
sell or distribute such Shares if, in the opinion of counsel for the
Company, such a representation is required.
(c) Securities Registration. No shares of Common Stock or other assets
shall be issued or delivered under this Plan unless and until there shall
have been compliance with all applicable requirements of Federal and State
securities laws, including the filing and effectiveness of the Form S-8
registration statement for the shares of Common Stock issuable under the
Plan, and all applicable listing requirements of any securities exchange on
which stock of the same class is then listed.
(d) Inability to Obtain Authority. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect to the failure to issue or sell such Shares as to
which such requisite authority shall not have been obtained.
3.6. NO EMPLOYMENT/SERVICE RIGHTS. Neither the action of the Company in
establishing the Plan, nor any action taken by the Administrator hereunder, nor
any provision of the Plan shall be construed so as to grant any individual the
right to remain in the employ or service of the Company (or any Parent or
Subsidiary) for any period of specific duration, and the Company (or any Parent
or Subsidiary retaining the services of such individual) may terminate such
individual's employment or service at any time and for any reason, with or
without cause.
12
<PAGE>
3.7. MISCELLANEOUS PROVISIONS.
(a) Assignment. The right to acquire Common Stock or other assets
under the Plan may not be assigned, encumbered or otherwise transferred by
any Optionee or other Option holder. The provisions of the Plan shall inure
to the benefit of, and be binding upon, the Company and its successors or
assigns, whether by Corporate Transaction or otherwise, and the Optionees,
the legal representatives of their respective estates, their respective
heirs or legatees and their permitted assignees.
(b) Choice of Law. The provisions of the Plan relating to the exercise
of options and the vesting of shares shall be governed by the laws of the
State of Arizona, as such laws are applied to contracts entered into and
performed in such State.
(c) Plan Not Exclusive. This Plan is not intended to be the exclusive
means by which the Company may issue options or warrants to acquire its
shares of Common Stock, stock awards or issuances, or any other type of
award or issuance. To the extent permitted by applicable law, any such
other option, warrants, issuance, or awards may be issued by the Company
other than pursuant to this Plan, without shareholder approval.
EXECUTED as of the 10th day of November, 1997.
MICROCHIP TECHNOLOGY INCORPORATED,
a Delaware corporation
By /s/ Steve Sanghi
----------------------------------------------
Steve Sanghi
Its: Chairman of the Board, President and
Chief Executive Officer
Attested by:
/s/ C. Philip Chapman
- -------------------------------
C. Philip Chapman
Secretary
/s/ Mary Simmons-Mothershed
- -------------------------------
Mary Simmons-Mothershed
Assistant Secretary
13
MICROCHIP TECHNOLOGY INCORPORATED
NOTICE OF GRANT OF STOCK OPTION
1997 NONSTATUTORY STOCK OPTION PLAN
Notice is hereby given of the following nonstatutory stock option grant (the
"Option") to purchase shares of the Common Stock of Microchip Technology
Incorporated, a Delaware corporation (the "Company"):
Optionee: _____________________________________________________
Grant Date: ______________________________________________, 199__
Date Vesting Begins: ______________________________________________, 199__
Vesting Period: _____________________________________________________
Option Price: _____________________________________________________
Number of Option Shares: _____________________________________________________
Expiration Date: ______________________________________________, 200__
Type of Option: Nonstatutory Stock Option
Exercise/Vesting Schedule: The Option may be exercised for any or all of the
Vested Option shares. If the Grant Date and the Date Vesting Begins are the
same, then the monthly installments for the first year of the Vesting Period
will vest only in a lump sum upon the Optionee's completion of twelve months of
Service measured from the Grant Date, the balance will vest over the remainder
of the vesting period on a monthly basis. However, if the Date Vesting Begins is
not the same as the Grant Date, then the Option Shares will vest in equal
monthly installments (12 x the number of years in the Vesting Period) over the
Optionee's period of Service, beginning one month after the Date Vesting Begins.
In no event will the Optionee vest in any additional shares following the
Optionee's cessation of Service (as defined in the attached Plan).
Optionee understands that the Option is granted subject to and in accordance
with the express terms and conditions of the Microchip Technology Incorporated
1997 Nonstatutory Stock Option Plan (the "Plan"). Optionee agrees to be bound by
the terms and conditions of the Plan and the terms and conditions of the Option
as set forth in the Stock Option Agreement attached hereto as Exhibit A.
Optionee hereby acknowledges receipt of a copy of the official Plan prospectus
in the form attached hereto as Exhibit B.
NO EMPLOYMENT OF SERVICE CONTRACT. NOTHING IN THE OPTION AGREEMENT OR THE PLAN
SHALL CONFER UPON THE OPTIONEE THE RIGHT TO CONTNUE IN THE EMPLOY OR SERVICE OF
THE COMPANY FOR ANY PERIOD OF SPECIFIC DURATION OR INTERFERE WITH OR OTHERWISE
RESTRICT IN ANYWAY THE RIGHTS OF THE COMPANY OR THE OPTIONEE, WHICH RIGHTS ARE
HEREBY EXPRESSLY RESERVED BY EACH, TO TERMINATE OPTIONEE'S SERVICE AT ANY TIME
FOR ANY REASON WHATSOEVER, WITH OR WITHOUT CAUSE.
Dated:____________, 199___ MICROCHIP TECHNOLOGY INCORPORATED
By:_______________________________
Steve Sanghi, President and CEO
Optionee: ________________________
Address: _________________________
<PAGE>
Exhibit A
---------
STOCK OPTION AGREEMENT
1997 NONSTATUTORY STOCK OPTION PLAN
THIS AGREEMENT is made by and between Microchip Technology
Incorporated, a Delaware corporation (the "Company"), and the Optionee listed on
the Notice of Grant of Stock Option (the "Grant Notice") to which this Agreement
is attached as Exhibit A.
Optionee is a key person associated with the Company, and the
Company considers it desirable and its best interest that Optionee be given an
inducement to acquire a proprietary interest in the Company and added incentive
to advance the interest of the Company by possessing an option to purchase the
Company's Common Stock, subject to the terms and conditions of the Company's
1997 Nonstatutory Stock Option Plan (the "Plan") which is attached to the Grant
Notice as Exhibit B.
Now, therefore, it is agreed by and between the parties as
follows:
1. Grant of Option. The Company hereby grants to Optionee, as
of the Grant Date specified in the Grant Notice, the right, privilege and option
to purchase shares of Common Stock as set forth in the Grant Notice (the
"Optioned Shares"), subject in all respects to the terms, conditions and
provisions of this Agreement and the Plan, which is attached to the Grant Notice
as Exhibit B and incorporated by reference in this Agreement. The Optionee
acknowledges having received and carefully reviewed a copy of the Plan.
2. Option Price. The option price (the "Option Price") as
determined by the Administrator is set forth in the Grant Notice which has been
determined by the Administrator in accordance with Sections 1.2(m) and 1.4(c)(i)
of the Plan.
3. Vesting of Option.
(a) Vesting Schedule. The time at which the Optioned
Shares vest and the optionholder may exercise this option with respect to such
Optioned Shares shall be as set forth in the Grant Notice. Optioned Shares that
have vested may be acquired at any time, and from time to time, in whole or in
part, until the option expires as provided in Section 6 hereof.
(b) Acceleration. The Optioned Shares may vest on an
accelerated basis only as provided in the Plan. In addition, the Administrator
may, by resolution adopted after the Grant Date, allow the option to be
exercised on an accelerated basis.
4. Exercise of Option.
(a) Right to Exercise. This Option is exercisable
during its term in accordance with the Vesting Schedule set out in the Grant
Notice and the applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by
delivery of an exercise notice, in the form attached as Schedule A (the
"Exercise Notice"), which shall state the election to exercise the Option, the
number of Shares in respect of which the Option is being exercised (the
<PAGE>
"Exercised Shares"), and such other representations and agreements as may be
required by the Company pursuant to the provisions of the Plan. The Exercise
Notice shall be completed by the Optionee and delivered to Human Resources,
ATTN: Stock Administration. The Exercise Notice shall be accompanied by payment
of the aggregate Exercise Price as to all Exercised Shares. This Option shall be
deemed to be exercised upon receipt by the Company of such fully executed
Exercise Notice accompanied by such aggregate Exercise Price. No Shares shall be
issued pursuant to the exercise of this Option unless such issuance and exercise
complies with Applicable Laws. Assuming such compliance, for income tax purposes
the Exercised Shares shall be considered transferred to the Optionee on the date
the Option is exercised with respect to such Exercised Shares.
5. Method of Payment. Payment of the aggregate Exercise Price
shall be by any of the following, or a combination thereof, at the election of
the Optionee:
(a) cash;
(b) check drawn to the Company's order; or
(c) consideration received by the Company under a
cashless exercise program implemented by the Company in connection with the
Plan.
6. Termination of Option. This Option, to the extent not
previously exercised, shall terminate upon the first to occur of the tenth
anniversary of the Grant Date or as otherwise set forth in the Plan.
7. No Privilege of Stock Ownership. The holder of the Option
granted hereunder shall not have any of the rights of a stockholder with respect
to the Optioned Shares until such Optionee shall have exercised the option, paid
the Option Price, and received a stock certificate for the purchased shares of
Common Stock.
8. Compliance with Applicable Laws. The exercise of this
Option and the issuance of the Shares upon such exercise shall be subject to
compliance by the Company and the Optionee with all Applicable Laws. In
connection with the exercise of this Option, Optionee shall execute and deliver
to the Company such representations in writing as may be requested by the
Company in order for it to comply with applicable requirements of federal and
state securities laws.
9. Liability of the Company. The inability of the Company to
obtain approval from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares pursuant to this Agreement shall relieve the Company of any
liability with respect to the nonissuance or sale of the Shares as to which such
approval shall not have been obtained. The Company, however, shall use its best
efforts to obtain all such approvals.
10. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES
AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS
EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND
NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
<PAGE>
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT
CAUSE.
11. Assignability. Neither this Option nor any rights or
privileges conferred thereby shall be assignable or transferable by the Optionee
other than by will or by the laws of descent and distribution, and this Option
shall be exercisable only by Optionee during the Optionee's lifetime. Upon the
death of Optionee, the rights of the successors to Optionee shall be limited as
set forth in the Plan.
12. Binding Affect. This Option Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective heirs,
executors, administrators, successors and assigns.
13. Securities Matters.
(a) Exercise of Option. The option granted hereunder
may be exercised by the Optionee only if (i) the Shares which are to be issued
upon such execution are registered under the Securities Act of 1933, as amended
(the "1933 Act"), the Arizona Securities Act, as amended (the "Arizona Act"),
and the securities laws of any other applicable jurisdiction, or (ii) the
Company, upon advice of counsel, determines that the issuance of the Shares upon
the exercise of the Optionee is exempt from registration requirements.
(b) Restriction of Shares. The Company is under no
obligation to register, under the 1933 Act, the Arizona Act or the securities
laws of any other jurisdiction, any of the Shares to be issued to the Optionee
upon the exercise of any option or to take any action which would make available
any exemption from registration. If the Shares to be issued to the Optionee upon
the exercise of any option have not been registered under the 1933 Act, the
Arizona Act or the securities laws of any other jurisdiction, those Shares will
be "restricted securities" within the meaning of Rule 144 under the 1933 Act and
must be held indefinitely without any transfer, sale or other disposition unless
(a) the shares are subsequently registered under the 1933 Act, the Arizona Act
and the securities laws of any other applicable jurisdiction, or (b) the
Optionee obtains an opinion of counsel which is satisfactory to counsel for the
Company that the Shares may be sold in reliance on an exemption from
registration requirements.
14. Tax Consequences; Withholding Taxes and Reporting of
Disposition of Shares. Some of the federal tax consequences relating to this
Option, as of the date of this Option, are set forth below. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES.
(a) Exercising the Option. The Optionee may incur
regular federal income tax liability upon exercise of a nonstatutory stock
option. The Optionee will be treated as having received compensation income
(taxable at ordinary income tax rates) equal to the excess, if any, of the Fair
Market Value of the Exercised Shares on the date of exercise over their
aggregate Exercise Price.
(b) Withholding. If the Optionee is an Employee or a
former Employee, the Company will be required to withhold from his or her
compensation or collect from Optionee and pay to
<PAGE>
the applicable taxing authorities an amount in cash equal to a percentage of
this compensation income at the time of exercise, and may refuse to honor the
exercise and refuse to deliver Shares if such withholding amounts are not
delivered at the time of exercise. Optionee hereby agrees to make appropriate
arrangements with the Company for the satisfaction of any applicable federal,
state or local income tax withholding requirements relating to the exercise of
the Option or the payment of any employment taxes due as a result of the
exercise of such Option.
(c) Disposition of Shares. If the Optionee holds
Shares acquired upon the exercise of a nonstatutory stock option for at least
one year, any gain realized on disposition of the Shares will be treated as
long-term capital gain for federal income tax purposes.
(d) Reporting of Disposition of Shares. The Optionee
shall, at the Company's request, promptly complete and return any and all
informational requests regarding the Optionee's disposition of Shares acquired
upon exercise of the Options covered by this Agreement.
15. Defined Terms. All capitalized terms herein which are not
otherwise defined herein shall have the same meaning ascribed to such terms in
the Plan.
16. Notices. Except as set forth in Section 4 of this Option
Agreement, any notice required to be given or delivered to the Company under the
terms of this Option Agreement shall be in writing and addressed to the Company
in care of the Corporate Secretary at its principal corporate offices. Any
notice required to be given or delivered to Optionee at the address indicated in
the Grant Notice. All notices shall be deemed to have been given or delivered
upon personal delivery or upon deposit in the U.S. mail, postage prepaid and
properly addressed to the party to be notified.
17. Construction. This Option Agreement and the Option
evidenced hereby are made and granted pursuant to the Plan and are in all
respects limited by and subject to the express terms and provisions of the Plan.
Subject to Section 3.1(b) of the Plan, in the event of a conflict between the
terms and conditions of the Plan and the terms and conditions of this Option
Agreement, the terms and conditions of the Plan shall prevail. All decisions of
the Administrator with respect to any question or issue arising under the Plan
or this Agreement shall be conclusive and binding on all persons having an
interest in this option.
18. Entire Agreement; Governing Law. The Plan and the Grant
Notice are incorporated herein by reference. This Option Agreement, the Plan and
the Grant Notice constitute the entire agreement of the parties with respect to
the subject matter hereof and supersede in their entirety all prior undertakings
and agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by
means of a writing signed by the Company and the Optionee. The interpretation,
performance, and enforcement of this Agreement shall be governed by the internal
substantive laws, but not the choice of law rules, of the State of Arizona.
Initials of Optionee: ________________________
<PAGE>
SCHEDULE A
FORM OF EXERCISE NOTICE UNDER THE
1997 NONSTATUTORY STOCK OPTION PLAN
MICROCHIP TECHNOLOGY INCORPORATED
2355 West Chandler Boulevard
Chandler, Arizona 85224
Attention: Human Resources, Stock Administration
Exercise of Option. Effective as of today, _____________, 19__, the
undersigned ("Purchaser") hereby elects to purchase shares (the "Shares") of the
Common Stock of Microchip Technology Incorporated (the "Company") under and
pursuant to the 1997 Nonstatutory Stock Option Plan (the "Plan") for the
grant(s) specified in the Stock Option Exercise Instruction Form accompanying
this Exercise Notice. The purchase price for the Shares shall be as required by
the individual Grant Notice(s) and Option Agreement(s).
Delivery of Payment. Purchaser herewith delivers to the Company the
full purchase price for the Shares.
Representations of Purchaser. Purchaser acknowledges that Purchaser has
received, read and understood the Plan, the Grant Notice and the Option
Agreement and agrees to abide by and be bound by their terms and conditions.
Rights as Stockholder. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a stockholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares so acquired shall
be issued to the Optionee as soon as practicable after exercise of the option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date of issuance, except as provided in Sections 2.2 and
2.3 of the Plan.
Tax Consultation. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
Entire Agreement; Governing Law. The Plan, the Grant Notice and Option
Agreement are incorporated herein by reference. This Agreement, the Plan, the
Grant Notice and the Option Agreement constitute the entire agreement of the
parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Purchaser with
respect to the subject matter hereof, and may not be modified adversely to the
Purchaser's interest except by means of a writing signed by the Company and
Purchaser. This agreement is governed by the internal substantive laws, but not
the choice of law rules, of the State of Arizona.
Submitted by: Accepted by:
PURCHASER: MICROCHIP TECHNOLOGY INCORPORATED
- -------------------------------------- --------------------------------------
Signature By
- -------------------------------------- --------------------------------------
Print Name Title
KPMG Peat Marwick LLP
Independent Auditors' Consent
-----------------------------
The Board of Directors
Microchip Technology Incorporated:
We consent to incorporation by reference in the registration statements (No.
33-59686, No. 33-80072, No. 33-81690, No. 33-83196, No. 333-872 and No.
333-40791) on Form S-8 of Microchip Technology Incorporated of our report dated
April 22, 1998, except as to the second and third paragraphs of note 13 which
are as of May 18, 1998, relating to the consolidated balance sheets of Microchip
Technology Incorporated and subsidiaries as of March 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended March 31, 1998, which
report appears in the March 31, 1998 annual report on Form 10-K of Microchip
Technology Incorporated.
/s/ KPMG Peat Marwick LLP
Phoenix, Arizona
May 22, 1998
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, That the undersigned officer and/or director of
Microchip Technology Incorporated, a Delaware corporation (the "Company"), does
hereby constitute and appoint STEVE SANGHI AND C. PHILIP CHAPMAN, and each of
them, with full power to each of them to act alone, as the true and lawful
attorneys and agents of the undersigned, with full power of substitution and
resubstitution to each of said attorneys to execute, file or deliver any and all
instruments and to do any and all acts and things which said attorneys and
agents, or any of them, deem advisable to enable the Company to comply with the
Securities Exchange Act of 1934, as amended, and any requirements of the
Securities and Exchange Commission in respect thereto relating to annual reports
on Form 10-K, including specifically, but without limitation of the general
authority hereby granted, the power and authority to sign such person's name
individually and on behalf of the Company as an officer and/or director (as
indicated below opposite such person's signature) to the Company's annual
reports on Form 10-K or any amendments or papers supplemental thereto; and each
of the undersigned does hereby fully ratify and confirm all that said attorneys
and agents or any of them, shall do or cause to be done by virtue hereof. This
power of Attorney revokes any and all previous powers of attorney granted by any
of the undersigned which such power would have entitled said attorneys and
agents, or any of them, to sign such person's name, individually or on behalf of
the Company, to any Form 10-K.
IN WITNESS WHEREOF, each of the undersigned has subscribed these
presents this 30th day of January, 1998.
<TABLE>
<CAPTION>
NAME TITLE
- ---- -----
<S> <C>
/s/ Steve Sanghi Director, President and Chairman of the Board
- ----------------------------- (Principal Executive Officer)
Steve Sanghi
/s/ C. Philip Chapman Vice President, Chief Financial Officer and
- ----------------------------- Secretary (Principal Financial and Accounting
C. Philip Chapman Officer)
/s/ Albert J. Hugo-Martinez Director
- -----------------------------
Albert J. Hugo-Martinez
/s/ Jon H. Beedle Director
- -----------------------------
Jon H. Beedle
/s/ L.B. Day Director
- -----------------------------
L.B. Day
/s/ Matthew W. Chapman Director
- -----------------------------
Matthew W. Chapman
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
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