================================================================================
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, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number: 0-21184
MICROCHIP TECHNOLOGY INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
---------------------------------------
Delaware 86-0629024
(State of Incorporation) (I.R.S. Employer Identification No.)
2355 W. Chandler Blvd., Chandler, AZ 85224
(Address of Principal Executive Offices, Including Zip Code)
(480) 786-7200
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value Per Share
Preferred Share Purchase Rights
The registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of Form 10-K or any amendment to this Form
10-K. [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 30, 1999 was $1,750,061,763.
Number of shares of Common Stock, $.001 par value, outstanding as of April
30, 1999: 51,271,135.
Documents Incorporated by Reference
Document Part of Form 10-K
-------- -----------------
Proxy Statement for the 1999 Annual III
Meeting of Stockholders
<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
(480) 786-7200.
Risks and uncertainties that may affect the Company's future operating
results are set forth throughout the following discussion of the Company's
business. 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 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 require manufacturers to expand product functionality
and provide differentiation while maintaining or reducing cost. To address these
requirements, manufacturers use integrated circuit-based embedded control
systems 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 850 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 four years, Microchip has introduced more than
100 new 8-bit microcontrollers targeted at the 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
2
<PAGE>
Company's, and third-party, development systems by an increasing number of
product designers will be an important factor in the future selection of
Microchip's embedded control products. These development tools allow design
engineers to develop thousands of application-specific products from Microchip's
standard 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
one of the largest suppliers 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. Currently, the Company performs
product test at its facilities in Kaohsiung, Taiwan and Chachoengsao, Thailand,
located near Bangkok.
During the fourth quarter of fiscal 1999, the Company ceased manufacturing
five-inch wafers at Fab 1. Also, during the fourth quarter of fiscal 1999, the
Company announced that it was phasing out test operations at its Kaohsiung,
Taiwan facility over the first two quarters of fiscal 2000. The Company intends
to shift the Kaohsiung test operations to its Thailand facility. See also "Item
2 -- Properties," and "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Introduction, and -- Gross
Profit," below.
Wafers are produced in Class 10 fabrication modules in Fab 1 and Fab 2. Fab
1 and Fab 2 currently contain approximately 27,000 square feet and 50,000 square
feet of usable clean room space, respectively. Fab 1 currently produces
3
<PAGE>
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 to reduce future manufacturing costs. The
Company is continuing the transitioning of products to its 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 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
transitions are 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.
Currently, the Company's Taiwan and Thailand subsidiaries test
approximately 90% of the products produced in Fab 1 and Fab 2. The Company
intends to shift all of its in-house test operations to the Company's Thailand
facility following the closing of the Kaohsiung facility as described above.
Currently, the 150,000 square foot Chachoengsao test facility has the capacity
to handle up to 30 million units per month. The Company is presently
constructing a 50,000 square foot expansion to the Chachoengsao facility that,
once completed, will increase the facility's capacity to 120 million units per
month. The expansion is currently scheduled to be complete by the end of the
third quarter of fiscal 2000. See "Item 2 - Properties," below. The balance of
Microchip's test requirements are fulfilled by several third-party test
contractors in Thailand, People's Republic of China, and several other countries
in Asia and the Pacific Rim. Final test and burn-in functions are handled by
advanced automated equipment.
THE FOREGOING STATEMENTS RELATED TO THE COMPANY'S INTENTION TO SHIFT ALL OF
ITS IN-HOUSE TEST OPERATIONS TO ITS THAILAND FACILITY AND THE COMPLETION OF THE
EXPANSION OF THE CHACHOENGSAO FACILITY ARE FORWARD LOOKING STATEMENTS. ACTUAL
RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS:
DELAYS IN CONSTRUCTION AND FACILITIZATION OF THE EXPANSION AREA AT THE
CHACHOENGSAO FACILITY; TIMING AND SUCCESS OF THE TRANSITION OF TEST OPERATIONS
FROM KAOHSIUNG TO CHACHOENGSAO; THE AVAILABILITY OF EQUIPMENT AND OTHER
SUPPLIES; SUPPLY DISRUPTION; LABOR UNREST; CHANGES IN PRODUCT MIX; COMPETITIVE
PRESSURES ON PRICES; POLITICAL INSTABILITY AND EXPROPRIATION; AND OTHER ECONOMIC
CONDITIONS.
At March 31, 1999, all of the Company's assembly operations were performed
by third-party contractors located in Thailand, People's Republic of China, and
several other countries in Asia and the Pacific Rim. Due primarily to cost,
yield and cycle time considerations, the Company currently intends to develop
its own in-house assembly operations over the next fiscal year and will shift a
portion of its assembly operations to the Company's Thailand facility over time.
The Company will continue to use subcontractors to provide the remainder 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 FOREGOING STATEMENTS RELATED TO THE COMPANY'S INTENTION TO DEVELOP
IN-HOUSE ASSEMBLY OPERATIONS OVER THE NEXT FISCAL YEAR AND SHIFTING A PORTION OF
ITS ASSEMBLY OPERATIONS TO ITS THAILAND FACILITY ARE FORWARD LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG
OTHERS: DELAYS IN CONSTRUCTION AND FACILITIZATION OF THE COMPANY'S IN-HOUSE
ASSEMBLY OPERATIONS; TIMING AND SUCCESS OF THE TRANSITION FROM THIRD-PARTY
ASSEMBLY PROVIDERS TO COMPANY-OWNED ASSEMBLY OPERATIONS; DIFFICULTIES IN THE
TRANSITION OF THE ASSEMBLY FUNCTION FROM THIRD PARTIES TO THE COMPANY; SUPPLY
DISRUPTION; LABOR UNREST; CHANGES IN PRODUCT MIX; COMPETITIVE PRESSURES ON
PRICES; POLITICAL INSTABILITY AND EXPROPRIATION; AND OTHER ECONOMIC CONDITIONS.
4
<PAGE>
The Company's reliance on facilities in Taiwan, Thailand, 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. To date, the Company has not experienced any significant interruptions in
its foreign business operations. 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 costs inherent in semiconductor manufacturing,
increased manufacturing yields can have significant positive effects on gross
profits and overall operating results. During fiscal 1999, the Company continued
to focus on manufacturing productivity, and maintained average wafer fab line
yields in excess of 90%. The yields are primarily driven by a comprehensive
implementation of statistical process control, extensive employee training and
selective upgrading of the Company's manufacturing facilities and equipment.
Maintenance of manufacturing productivity and yields are important factors in
the achievement of the Company's operating results. As is typical in the
semiconductor industry, the Company has from time to time experienced lower than
anticipated manufacturing yields. The Company's operating results would be
adversely affected if it were unable to maintain yields at approximately the
current levels.
The raw materials and equipment used in the production of the Company's
integrated circuits currently are available from a number of suppliers, and the
Company is not materially dependent on any single source of supply. Although the
Company has not experienced any material difficulty to date in obtaining raw
materials or equipment, the interruption of certain components or ingredients of
certain raw materials could reduce the availability or increase the cost of raw
materials used by the Company. The manufacture and assembly of integrated
circuits, particularly non-volatile, erasable CMOS 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 30,
1999, 261 employees were engaged in research and development. In fiscal 1999,
1998 and 1997, the Company's research and development expenses were $40.8
million, $38.4 million and $32.1 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
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 1999, the Company derived
approximately 38% of its net sales from direct sales to OEM customers and 62%
from sales through distributors.
The Company's direct sales force, currently consisting of 198 people,
focuses on three geographical markets: the Americas, Europe and Asia. In the
Americas, the Company currently maintains Technical Support Centers in San Jose,
Los Angeles, Dallas, Dayton, Detroit, Chicago, Atlanta, Boston, New York,
Toronto, Bramford, Connecticut and Mt. Vernon, New Hampshire. 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
5
<PAGE>
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 69%,
68% and 66% of consolidated net sales in fiscal years 1999, 1998 and 1997,
respectively. International sales are predominately billed in U.S. Dollars.
Although foreign sales are subject to certain government export restrictions,
the Company has not experienced any material difficulties as a result of export
restrictions to date.
The Company's policy is to hedge its net foreign currency positions in the
normal course of business to reduce its exposure to fluctuations in foreign
exchange rates. Foreign exchange gains and losses were not material during
fiscal years 1997 through 1999.
BACKLOG
As of April 30, 1999, the Company's backlog was approximately $73.8
million, as compared to $76.7 million as of April 26, 1998. 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. Over the last two
fiscal years, the Company has experienced increased pricing pressure on its
memory products, primarily due to the less proprietary nature of these products
and increased competition. 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
6
<PAGE>
depends on a number of factors both within and outside its control, including
the quality, performance, reliability, features, ease of use, pricing and
diversity of its products; the quality of its customer service and its ability
to address the needs of its customers; its success in designing and
manufacturing new products including those implementing new technologies;
efficiency of production, adequate sources of raw materials and other supplies
at acceptable prices; protection of the Company's products and processes by
effective utilization of intellectual property laws; the rate at which customers
incorporate the Company's products into their own products; product
introductions by the Company's competitors; the number, nature and success of
its competitors in a given market; and general market and economic conditions.
Furthermore, capacity in the semiconductor industry is increasing over time and
such increased capacity or improved product availability could adversely affect
the Company's competitive position.
The Company currently competes principally on the basis of the technical
innovation and performance of its embedded control products, including their
speed, functionality, density, power consumption, reliability and packaging
alternatives, as well as on price and product availability. The Company believes
that other important competitive factors in the embedded control market include
ease of use, functionality of application development systems and technical
service and support. The Company believes that it competes favorably with other
companies on all of these factors, although there is no assurance that the
Company will continue to be able to compete successfully in the future.
PATENTS, LICENSES AND TRADEMARKS
The Company's success depends in part on its ability to obtain patents,
licenses and other intellectual property rights covering its products and
manufacturing processes, and to protect its proprietary information. As of March
31, 1999, the Company owned 86 U.S. patents and 20 foreign patents, expiring on
various dates between 2005 and 2017, and had an additional 91 U.S. patent
applications and 96 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. 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," below.
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.
7
<PAGE>
EMPLOYEES
As of April 30, 1999, the Company had 1,977 employees, including 1,365 in
manufacturing, 261 in research and development, 224 in sales and marketing and
127 in finance and administration. Approximately 46% of the Company's employees
work at the facilities located in Kaohsiung, Taiwan and Chachoengsao, Thailand.
No employees in the U.S. or Thailand are represented by a labor organization.
All employees in the Kaohsiung facility, except for certain management
employees, are represented by a labor organization. The Company has never had a
work stoppage and believes that its employee relations are good.
EXECUTIVE OFFICERS
The following sets forth certain information regarding the Company's
executive officers as of April 30, 1999:
Name Age Position
---- --- --------
Steve Sanghi 43 Chairman of the Board, President and Chief
Executive Officer
Timothy B. Billington 56 Vice President, Manufacturing and Technology Group
C. Philip Chapman 45 Vice President, Chief Financial Officer and
Secretary
George P. Rigg 59 Vice President, Advanced Microcontroller and
Systems Group
Mitchell R. Little 46 Vice President, Americas Sales
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 also
serves as chairman of the board of directors of ADFlex Solutions, Inc., a U.S.
supplier of flexible circuit-based interconnect solutions.
Mr. Billington has served as Vice President, Manufacturing and Technology
Group since November 1998. From October 1994 to November 1998, he served as Vice
President, Manufacturing Operations. From April 1991 until October 1994, he
served as Vice President, Process Development and Manufacturing Operations.
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.
8
<PAGE>
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 Company owns the Chandler and Tempe
facilities. 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 2002 and 2003. The
Company will not renew these leases as the Company's Kaohsiung operations will
be closed by the end of the second quarter of fiscal year 2000. The Company's
Thailand final test and assembly operations are housed in a 150,000 square foot
facility located in the Alphatechnopolis Industrial Park in Chachoengsao,
Thailand, near Bangkok. An expansion of 50,000 square feet is presently under
construction and is scheduled to be complete by the end of the third quarter of
fiscal year 2000. This area will house additional test capacity and will also be
available for incremental assembly capacity. 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 2000, in accordance with an agreement
between the Company and the land owner. The Company leases space for 23
Technical Support Centers in major metropolitan areas in the United States,
Europe and Asia. See "Item 1 - Business - Sales and Distribution," above. The
Company's aggregate monthly rental payments for its leased facilities are
approximately $128,000.
The Company currently believes that its existing facilities, together with
the additional capacity presently under construction in Thailand, will be
adequate to meet its requirements for the next 12 months.
THE FOREGOING STATEMENTS RELATED TO THE SCHEDULED COMPLETION OF THE
EXPANSION OF THE CHACHOENGSAO FACILITY, ACQUISITION OF TITLE OF THE LAND ON
WHICH THE CHACHOENGSAO FACILITY IS SITUATED AND THE ADEQUACY OF FACILITIES FOR
THE NEXT 12 MONTHS ARE FORWARD LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER
MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: DELAYS IN
CONSTRUCTION AND FACILITIZATION OF THE EXPANSION AREA AT THE CHACHOENGSAO
FACILITY; THE AVAILABILITY OF EQUIPMENT AND OTHER SUPPLIES; SUPPLY DISRUPTION;
LABOR UNREST; CHANGES IN PRODUCT MIX; THE CYCLICAL NATURE OF THE SEMICONDUCTOR
INDUSTRY AND THE MARKETS ADDRESSED BY THE COMPANY'S PRODUCTS; DEMAND FOR THE
COMPANY'S PRODUCTS; FLUCTUATIONS IN PRODUCTION YIELDS, PRODUCTION EFFICIENCIES
AND OVERALL CAPACITY UTILIZATION; COMPETITIVE PRESSURES ON PRICES; POLITICAL
INSTABILITY AND EXPROPRIATION; ECONOMIC CONDITIONS IN THAILAND; AND OTHER
ECONOMIC CONDITIONS.
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. 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. See "Item
1 --Business --Patents, Licenses and Trademarks," above.
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 1999.
9
<PAGE>
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:
Fiscal 1999 High Low Fiscal 1998 High Low
----------- ---- --- ----------- ---- ---
First Quarter $31.750 $20.813 First Quarter $36.25 $29.00
Second Quarter 33.375 18.313 Second Quarter 48.88 29.88
Third Quarter 39.188 18.375 Third Quarter 48.38 26.94
Fourth Quarter 40.875 27.125 Fourth Quarter 31.88 21.00
On May 17, 1999, the closing sale price for the Company's Common Stock was
$43.0625 per share. As of such date, there were approximately 480 holders of
record of the Company's Common Stock. This figure does not reflect beneficial
ownership of shares held in nominee names.
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.
During fiscal 1999, the Company sold put options whereby the Company agreed
to acquire Common Stock at various prices as part of its stock repurchase
program. The issuance of stock put options was deemed exempt from registration
under the Securities Act of 1933, as amended, in reliance on Section 4(2) of
such Act. See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources, above,
and Note 13 to the Consolidated Financial Statements.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the five-year period
ended March 31, 1999 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, 1999, and the balance sheet
data as of March 31, 1999 and 1998, are derived from the audited consolidated
financial statements of the Company, included in Item 8 of this report.
<TABLE>
<CAPTION>
Year Ended March 31,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(in thousands, except per share data)
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net sales .......................... $406,460 $396,894 $334,252 $285,888 $207,961
Cost of sales ...................... 203,574 199,538 167,330 137,708 101,039
Research and development ........... 40,787 38,362 32,073 27,517 20,746
Selling, general and administrative 63,006 67,549 56,248 48,903 36,975
Special charges .................... 28,937 5,000 7,544 11,448 --
Operating income ................... 70,156 86,445 71,057 60,312 49,201
Interest income (expense), net ..... (2,210) 1,505 (1,852) (947) (881)
Other income, net .................. 665 217 288 569 808
Income before income taxes ......... 68,611 88,167 69,493 59,934 49,128
Provision for income taxes ......... 18,523 23,799 18,361 16,182 12,829
Net income ......................... $ 50,088 $ 64,368 $ 51,132 $ 43,752 $ 36,299
Basic net income per share ......... $ 0.98 $ 1.21 $ 0.99 $ 0.86 $ 0.76
Diluted net income per share ....... $ 0.94 $ 1.14 $ 0.94 $ 0.80 $ 0.70
Basic common shares outstanding .... 51,136 53,376 51,569 50,750 47,525
Diluted common shares outstanding .. 53,528 56,313 54,683 54,533 51,641
As of March 31,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Balance Sheet Data:
Working capital ..................... $ 93,780 $ 55,171 $ 91,176 $ 55,855 $ 71,307
Total assets ........................ 505,230 524,743 428,092 358,187 249,480
Long-term obligations, less current..
Portion ............................. 25,000 8,768 5,999 33,250 15,340
Stockholders' equity ................ 358,797 367,308 316,584 219,632 161,825
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
During fiscal 1999, the global semiconductor industry was characterized by
flat to negative sales growth, extremely low order visibility and declining
inventory levels at customers and throughout the distribution channel. Over this
period, Microchip's sales remained relatively flat overall, while the Company
experienced moderate growth in its core 8-bit microcontroller product line and
has continued to gain market share in that market. Microchip anticipates an
industry-wide return to growth during calendar year 1999 and has taken a variety
of measures to optimally position the Company for such an upturn.
11
<PAGE>
The Company has implemented two restructuring actions to position the
Company for future cost effective growth. During the March 1999 quarter, the
Company completed closure of its 5-inch wafer line which represented the
Company's least flexible and least cost-effective production capacity.
Eliminating the 5-inch production capacity reduces the Company's productive
capacity by approximately 20%. The Company intends to replace this capacity with
6-inch and 8-inch wafer production over time. This action resulted in a
restructuring charge of $7.5 million in the March 1999 quarter. The Company also
decided to restructure its test operations over the next two quarters by closing
its Kaohsiung facility and migrating its test capacity to its lower-cost,
Thailand facility. See "Item 1 - Business - Manufacturing," above. This action
resulted in a restructuring charge of $6.1 million in the March 1999 quarter.
Additionally, as indicated in Note 2 to the Consolidated Financial
Statements, under the terms of the acquisition of the Keeloq(R) technology, the
Company made the final acquisition payment to the seller of $10.3 million, net
of legal expenses of $1.1 million. Under the provision of FAS 121, Impairment of
Assets, the Company has determined that $4.3 million of the final acquisition
payment will be treated as purchased technology and amortized over the expected
life of the revenue stream of the Keeloq(R) product. The balance of the payment,
including the residual asset value capitalized as part of the initial payment,
has been written off as part of the special charge made by the Company in the
quarter ended March 31, 1999. The total charge associated with this matter was
$7.6 million.
Included in the special charge the Company has taken in the March 1999
quarter is $1.8 million related to two legal settlements associated with
intellectual property matters and $0.4 million related to the restructuring of a
portion of the Company sales infrastructure.
During the quarter ended June 30, 1998, the Company recognized a special
charge of $5.5 million which was comprised of three elements: a $3.3 million
legal settlement with another company involving an intellectual property
dispute; a $1.7 million write-off of products obsoleted by the introduction of
newer products; and a $0.5 million charge associated with the restructuring of a
portion of the Company's sales organization.
THE FOREGOING STATEMENTS RELATING TO ANTICIPATED INDUSTRY-WIDE RETURN TO
GROWTH, THE COMPANY'S POSITIONING FOR AN INDUSTRY-WIDE UPTURN AND RESTRUCTURING
OF TEST OPERATIONS OVER THE NEXT TWO QUARTERS ARE FORWARD-LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG
OTHERS: MARKET CONDITIONS IN THE SEMICONDUCTOR INDUSTRY AND DEMAND FOR THE
COMPANY'S PRODUCTS; THE TIMING AND SUCCESS OF MANUFACTURING PROCESS TRANSITION;
THE IMPACT OF COST REDUCTIONS AND THE POSSIBLE NEED FOR FURTHER COST REDUCTIONS;
DELAY IN THE FACILITATION OF THE COMPANY'S IN-HOUSE ASSEMBLY AND TEST
OPERATIONS; FLUCTUATIONS IN PRODUCTION YIELDS AND PRODUCTION EFFICIENCIES;
OVERALL CAPACITY UTILIZATION; COST AND AVAILABILITY OF RAW MATERIALS; ABSORPTION
OF FIXED COSTS, LABOR AND OTHER DIRECT MANUFACTURING COSTS; CHANGES IN PRODUCT
MIX; AND OTHER ECONOMIC CONDITIONS.
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,
1999 1998 1997
---- ---- ----
Net sales .................................. 100.0% 100.0% 100.0%
Cost of sales .............................. 50.1% 50.3% 50.1%
----- ----- -----
Gross profit ............................... 49.9% 49.7% 49.9%
Research and development ................... 10.0% 9.7% 9.6%
Selling, general and administrative ........ 15.5% 17.0% 16.8%
Special charges ............................ 7.1% 1.2% 2.2%
----- ----- -----
Operating income ........................... 17.3% 21.8% 21.3%
===== ===== =====
NET SALES
Microchip's net sales of $406.5 million in fiscal 1999 increased by $9.6
million, or 2.4%, over fiscal 1998 and net sales of $396.9 million in fiscal
1998 increased by $62.6 million, or 18.7%, over fiscal 1997.
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 76%, 68% and 66% of total net
sales in
12
<PAGE>
fiscal 1999, 1998 and 1997, respectively. A related component of the Company's
product sales consists primarily of Serial EEPROM memories which accounted for
24%, 32% and 34% of net sales in fiscal 1999, 1998 and 1997, 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 1999,
as compared to the last two years, which reduced the Company's visibility of
future net sales levels. Visibility improved at the end of fiscal 1999. Backlog
for the first quarter of fiscal 2000 grew 28% from backlog for the previous
fiscal quarter, which is the first quarter this has occurred in 12 quarters.
However, 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. Over the last two fiscal years, the
Company has experienced increased pricing pressure on its memory products,
primarily due to the less proprietary nature of these products and increased
competition. 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. 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, IMPROVED VISIBILITY,
AVERAGE SELLING PRICES AND PRICING PRESSURES are FORWARD LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG
OTHERS: THE LEVEL OF ORDERS THAT ARE RECEIVED AND CAN BE SHIPPED IN A QUARTER;
INVENTORY MIX AND TIMING OF CUSTOMER ORDERS; COMPETITION AND COMPETITIVE
PRESSURES ON PRICING AND PRODUCT AVAILABILITY; CUSTOMERS' INVENTORY LEVELS,
ORDER PATTERNS AND SEASONALITY; THE CYCLICAL NATURE OF BOTH THE SEMICONDUCTOR
INDUSTRY AND THE MARKETS ADDRESSED BY THE COMPANY'S PRODUCTS; MARKET ACCEPTANCE
OF THE PRODUCTS OF BOTH THE COMPANY AND ITS CUSTOMERS; DEMAND FOR THE COMPANY'S
PRODUCTS, FLUCTUATIONS IN PRODUCTION YIELDS, PRODUCTION EFFICIENCIES AND OVERALL
CAPACITY UTILIZATION; CHANGES IN PRODUCT MIX; AND ABSORPTION OF FIXED COSTS,
LABOR AND OTHER FIXED MANUFACTURING COSTS.
Foreign sales represented 69%, 68% and 66% of net sales in fiscal 1999,
1998 and 1997, 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
1999 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,
13
<PAGE>
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 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'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 $202.9 million, $197.4 million and $166.9
million in fiscal 1999, 1998 and 1997, respectively. Gross profit as a percent
of sales was 49.9%, 49.7% and 49.9% in fiscal 1999, 1998 and 1997, respectively.
While the gross profit percentage in the last three fiscal years was relatively
constant, the Company's performance was impacted by several factors including
reduced 5-inch wafer production at Fab 1, increased pricing pressure on its
non-volatile memory products, increased 8-inch wafer production and the
Company's ongoing cost reduction programs. 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 continues
transition products to its 0.7 micron process. The Company expects that 50% of
its products will be produced on 8-inch wafers during fiscal 2000. The Company
anticipates that its gross product margins will fluctuate over time, driven
primarily by the product mix of 8-bit microcontroller products and related
memory products, manufacturing yields, fixed cost absorption, wafer fab loading
levels and competitive and economic conditions.
During the quarter ended March 31, 1999, the Company completed the
shut-down of its 5-inch wafer production line, primarily due to the higher cost
and lower manufacturing flexibility of this production line as compared to the
Company's 6-inch and 8-inch wafer capacity. This action will reduce the
Company's production capacity by approximately 20%. The Company intends to
replace this capacity with 6-inch and 8-inch wafer production over time. The
Company also plans to restructure its test operations over the next two
quarters, by closing its test facility in Kaohsiung and transferring this
capacity to its more cost effective test facility in Thailand.
In order to offset the adverse cost absorption effects related to the
elimination of the 5-inch wafer production line, and the potential impact of
conversion of its test capacity to its location in Thailand, the Company has
instituted a series of cost reductions in all aspects of its business. There can
be no assurance that these restructuring actions and cost reductions will
sufficiently reduce fixed manufacturing costs to enable the Company to maintain
gross profit margins. In addition, these restructuring actions could result in
execution problems and manufacturing yield problems that could adversely impact
the Company's gross profit.
THE FOREGOING STATEMENTS RELATING TO ANTICIPATED GROSS PRODUCT MARGINS,
6-INCH AND 8-INCH WAFER PRODUCTION, THE TRANSITION TO HIGHER YIELDING
MANUFACTURING PROCESSES, RESTRUCTURING OF TEST OPERATIONS, AND THE IMPACT OF
COST REDUCTIONS ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER
MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: FLUCTUATIONS IN
PRODUCTION YIELDS, PRODUCTION EFFICIENCIES AND OVERALL CAPACITY UTILIZATION;
COST AND AVAILABILITY OF RAW MATERIALS; ABSORPTION OF FIXED COSTS, LABOR AND
OTHER DIRECT MANUFACTURING COSTS; THE TIMING AND SUCCESS OF MANUFACTURING
PROCESS TRANSITION; DELAYS IN CONSTRUCTION AND FACILITIZATION OF THE EXPANSION
AREA AT THE CHACHOENGSAO FACILITY; TIMING AND SUCCESS OF THE TRANSITION OF TEST
OPERATIONS FROM TAIWAN TO THAILAND, DEMAND FOR THE COMPANY'S PRODUCTS;
COMPETITION AND COMPETITIVE PRESSURE ON PRICING; THE IMPACT OF COST REDUCTIONS
AND THE POSSIBLE NEED FOR FURTHER COST REDUCTIONS; CHANGES IN PRODUCT MIX; 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.
Currently all of Microchip's assembly operations, and a portion of its test
requirements, are performed by third-party contractors. Reliance on third
parties involves some reduction in the Company's level of control over these
portions of its
14
<PAGE>
business. While the Company reviews the quality, delivery and cost performance
of these third-party contractors, there can be no assurance that reliance on
third-party contractors will not adversely impact results in future reporting
periods if any third-party contractor is unable to maintain assembly and test
yields and costs at approximately their current levels. Microchip intends to
develop its own in-house assembly operations over the next fiscal year and will
shift a portion of its assembly operations from third-party contractors to fill
this capacity. The Company currently performs test operations at Company owned
facilities in Taiwan and Thailand.
THE FOREGOING STATEMENT RELATED TO THE COMPANY'S INTENTION TO DEVELOP
IN-HOUSE ASSEMBLY OPERATIONS OVER THE NEXT 12 MONTHS IS A FORWARD-LOOKING
STATEMENT. ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING
FACTORS, AMONG OTHERS: TIMING AND SUCCESS OF THE TRANSITION FROM THIRD PARTY
ASSEMBLY SERVICES PROVIDERS TO COMPANY-OWNED ASSEMBLY OPERATIONS; DELAY IN THE
FACILITATION OF THE COMPANY'S IN-HOUSE ASSEMBLY OPERATIONS; DIFFICULTIES IN THE
TRANSITION OF THE ASSEMBLY FUNCTION FROM THIRD PARTIES TO THE COMPANY; SUPPLY
DISRUPTION; LABOR UNREST; CHANGES IN PRODUCT MIX; COMPETITIVE PRESSURES ON
PRICES; AND OTHER ECONOMIC CONDITIONS.
The Company's reliance on facilities in Taiwan, Thailand, 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. To date, the Company has not experienced any significant interruptions in
its foreign business operations. 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 6.3% in fiscal 1999 over fiscal 1998, and 19.6% in fiscal
1998 over fiscal 1997. The Company will continue to invest in research and
development in the future, including an investment in process and product
development.
The Company's future operating results will depend to a significant extent
on its ability to continue to develop and introduce new products on a timely
basis which can compete effectively on the basis of price and performance and
which address customer requirements. The success of new product introductions
depends on various factors, including proper new product selection, timely
completion and introduction of new product designs, development of support tools
and collateral literature that make complex new products easy for engineers to
understand and use and market acceptance of customers' end products. Because of
the complexity of its products, the Company has experienced delays from time to
time in completing development of new products. In addition, there can be no
assurance that any new products will receive or maintain substantial market
acceptance. If the Company were unable to design, develop and introduce
competitive products on a timely basis, its future operating results would be
adversely affected.
The Company's future success will also depend upon its ability to develop
and implement new design and process technologies. Semiconductor design and
process technologies are subject to rapid technological change, requiring large
expenditures for research and development. Other companies in the industry have
experienced difficulty in effecting transitions to smaller geometry processes
and to larger wafers and, consequently, have suffered reduced manufacturing
yields or delays in product deliveries. The Company believes that its transition
to smaller geometries and to larger wafers will be important for the Company to
remain competitive, and operating results could be adversely affected if the
transition is substantially delayed or inefficiently implemented.
SELLING, GENERAL AND ADMINISTRATIVE
The Company reduced its level of selling, general and administrative costs
to $63.0 million in fiscal 1999 compared to $67.5 million in fiscal 1998. This
reduction resulted from the Company's ongoing cost reduction programs. Selling,
general and administrative costs in fiscal year 1998 increased by $11.3 million
from selling, general and administrative costs in fiscal 1997. Selling, general
and administrative costs represented 15.5%, 17.0% and 16.8% of sales in fiscal
years 1999, 1998 and 1997, respectively. As the Company continues to invest in
incremental worldwide sales and technical support resources to promote the
Company's embedded control products, selling, general and administrative costs
are expected to rise over time.
15
<PAGE>
OTHER INCOME (EXPENSE)
Interest income in fiscal 1999 decreased from fiscal 1998 and 1997 as a
result of lower invested cash balances. Interest expense in fiscal 1999
increased over fiscal 1998 due to increased borrowing levels associated with the
Company's stock buyback programs. Other income represents numerous immaterial
non-operating items.
PROVISION FOR INCOME TAXES
Provisions for income taxes reflect tax on foreign earnings and federal and
state tax on U.S. earnings. The Company had an effective tax rate of 27.0%,
27.0% and 26.4% for the years ended March 31, 1999, 1998 and 1997, 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. 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 ISSUE
The Year 2000 ("Y2K") issue is the result of various computer programs
being written using two digits rather than four to define the year, thus
potentially rendering them incapable of properly managing and manipulating data
that includes 21st century dates. The potential for Y2K issues which could
reasonably affect the Company could arise from any combination of: a) the
Company's own internal information processing and embedded systems, b) external
systems used by providers of critical goods or services to the Company, c)
customer failures resulting from Y2K problems leading to reductions in demand
from the customer, and d) Y2K issues arising within the products manufactured by
the Company.
THE COMPANY'S CURRENT STATE OF YEAR 2000 READINESS
The Company has implemented a Y2K readiness program and has, as of March
31, 1999, taken substantial efforts to reasonably insure that its operations are
not subject to substantial adverse Y2K-related impact. This program began in
1997 with a comprehensive documentation of potential sources of Y2K exposure
which could reasonably impact the Company's business. This initial source
identification phase has been completed.
The subsequent step in the program has been to systematically analyze each
identified potential source of Y2K exposure as to its likelihood of material
effect on the Company's operations and the range of available remediation
actions. In the case of identified systems internal to the Company, analysis
generally involved performing physical tests which simulated performance of the
systems with post-year 2000 dates. For potential sources of Y2K risk which are
external to the Company, such as with the Company's external vendors and
suppliers, the Company has typically relied upon written assurances of Y2K
compliance from those various parties in lieu of physical testing by the
Company's employees. To date, the Company has not identified any Y2K issues
inherent in the products manufactured by the Company. The Company's products,
for the most part, involve hardware integrated circuits which, at the time of
sale to customers, have no inherent date sensitive features. The analysis phase
of the Y2K readiness program has been substantially completed.
The final phase of the Y2K readiness program involves the modification,
replacement or elimination of systems identified in the prior analysis phase as
being in need of remediation. To date, the Company has completed the remediation
process for the majority of its identified internal systems, with the primary
effort centered around the total replacement of information systems related to
the Company's sales order process, planning, physical distribution and finance
functions. The majority of this task was completed during the quarter ended
September 30, 1998. As of March 31, 1999, the Company had received letters of
Y2K compliance from approximately 93% of its key EXTERNAL vendors and suppliers
and expects to secure documentation of compliance from the remainder of these
key vendors and suppliers by September 30, 1999.
COSTS TO ADDRESS THE YEAR 2000 ISSUE
The total cost associated with required modifications to become Y2K
compliant is not expected to be material to the Company's financial position.
The amount expended through March 31, 1999 was approximately $14,000,000,
primarily associated with the total replacement of the information systems
related to the Company's sales order process, planning, physical distribution
and finance functions which was completed during the quarter ended September 30,
1998. The
16
<PAGE>
Company had intended to replace such systems in the ordinary course of its
business and the implementation was not substantially accelerated due to the Y2K
issue. The Company believes that the cost of its Y2K readiness program, as well
as currently anticipated costs to be incurred with respect to Y2K issues of
third parties, will not exceed $18,000,000, inclusive of the costs described
above. It is anticipated that all such expenditures will be funded from
operating cash flows and absorbed as part of the Company's ongoing operations.
MOST REASONABLY LIKELY WORST CASE SCENARIO(S)
Having reasonably determined that the Company's own hardware and software
systems will be substantially Y2K compliant and that its products inherently
have no date code-related issues, management believes that the worst case
scenarios would most likely involve massive, simultaneous Y2K-related
disruptions from the Company's key external raw material suppliers and/or
service providers. For these worst case scenarios to have maximum adverse impact
on the Company, the vendors in question would either need to be sole-source
providers or their peer companies, who would otherwise be potential
second-source suppliers, would also need to undergo similar Y2K-related
disruption. Examples on the material supplier side would include extended and
substantial disruptions of the Company's key raw material suppliers of silicon
wafers, leadframes, specialty chemicals and gasses. Examples on the service
provider side would include extended, substantial disruptions of the Company's
third-party semiconductor assembly firms, telecommunications and
datacommunications services, airfreight and delivery services, or the worldwide
banking system. Examples on the customer side would include Y2K problems
encountered by such customer adversely impacting that customer's business and
reducing the customer's purchases from the Company. The Company believes that
such massive and simultaneous disruptions of the supply of basic goods and
services due to Y2K-related issues are highly unlikely to occur.
CONTINGENCY PLANS
The Company has made no contingency plans for handling Y2K issues because
it believes that the steps it has taken to assess its own hardware and software
systems and those of its key vendors and suppliers are adequate to ensure
minimal disruption to its business processes. In the event of random, unforeseen
Y2K problems (such as the failure of specific pieces of process equipment, or
the temporary inability of certain vendors to provide materials or services),
the Company believes that these types of issues will most likely be able to be
resolved in the normal course of business, including the potential use of
alternate suppliers, in most cases.
THE FOREGOING STATEMENTS RELATED TO MATERIALITY OF Y2K COSTS, THE COSTS TO
ADDRESS Y2K ISSUES AND THE FUNDING AND ABSORPTION OF SUCH COSTS, WORST-CASE
SCENARIO(S) AND CONTINGENCY PLANS ARE FORWARD LOOKING STATEMENTS. ACTUAL RESULTS
COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: THE
FAILURE TO CORRECTLY TIMELY IDENTIFY AND CORRECT Y2K PROBLEMS, EITHER BY THE
COMPANY OR ITS KEY SUPPLIERS OR CUSTOMERS.
EURO CONVERSION ISSUES
The Company operates in the European Market and currently generates
approximately 30% of its net sales from customers located in Europe. The
Company's commercial headquarters in Europe are located in the United Kingdom,
which is not currently one of the eleven member states of the European Union
converting to a common currency.
The Company currently conducts 96% of its business in Europe in U.S.
Dollars and 2% of its business in Europe in Pounds Sterling. The balance of its
net sales are conducted in currencies which will eventually be replaced by the
Euro. The Company will be monitoring the potential commercial impact of
converting a portion of its current business to the Euro, but does not expect
any material impact to its business based on this transition.
The Company does not currently anticipate any material impact to its
business related to Euro matters from information technology, derivative
transactions, tax issues and accounting software issues.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $30.8 million in cash and cash equivalents at March 31,
1999, a decrease of $1.4 million from the March 31, 1998 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, 1999
were $25.0 million. The domestic line of credit requires the Company to achieve
certain financial ratios and operating results. The Company was in compliance
with these
17
<PAGE>
covenants at March 31, 1999. The Company also has an unsecured short term line
of credit totaling $32.8 million with certain foreign banks. Borrowings under
the foreign line of credit as of March 31, 1999 were $1.5 million. There are no
covenants related to the foreign line of credit. At March 31, 1999, an aggregate
of $96.3 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, 1999, the Company generated $102.6 million
of cash from operating activities, a decrease of $33.9 million from the year
ended March 31, 1998, and an increase of $25.1 million from the year ended March
31, 1997. The decrease in cash flow from operations during fiscal year 1999 was
primarily due to reduced profitability, the impact of special charges, and the
impact of changes in accounts payable, accrued expenses and accounts receivable.
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, 1999, 1998 and 1997 were $39.6 million, $145.3 million
and $79.0 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 $120.0 million during the next 12 months for additional capital
equipment to increase capacity at its existing wafer fabrication facilities, to
expand product test operations and to develop in-house assembly capability. 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.
THE FOREGOING STATEMENTS REGARDING THE ANTICIPATED LEVEL OF CAPITAL
EXPENDITURES OVER THE NEXT 12 MONTHS AND THE FINANCING OF SUCH CAPITAL
EXPENDITURES ARE FORWARD LOOKING STATEMENTS. ACTUAL CAPITAL EXPENDITURES COULD
DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: THE CYCLICAL
NATURE OF THE SEMICONDUCTOR INDUSTRY AND THE MARKETS ADDRESSED BY THE COMPANY'S
PRODUCTS; MARKET ACCEPTANCE OF THE PRODUCTS OF BOTH THE COMPANY AND ITS
CUSTOMERS; UTILIZATION OF CURRENT MANUFACTURING CAPACITY; DELAYS IN CONSTRUCTION
AND FACILITIZATION OF THE EXPANSION AREA AT THE CHACHOENGSAO FACILITY; THE
AVAILABILITY AND COST OF RAW MATERIALS, EQUIPMENT AND OTHER SUPPLIES; AND THE
ECONOMIC, POLITICAL AND OTHER CONDITIONS IN THE MARKETS SERVED BY THE COMPANY.
Net cash used in financing activities was $64.4 million and $2.1 million
for the years ended March 31, 1999 and March 31, 1998, respectively. Net cash
provided by financing activities was $13.4 million for the year ended March 31,
1997. Proceeds from sale of stock and put options were $16.0 million, $12.5
million and $59.5 million for the years ended March 31, 1999, 1998 and 1997,
respectively. Payments on long term debt and capital lease obligations were $4.4
million, $6.1 million and $5.7 million for the years ended March 31, 1999, 1998
and 1997, respectively. Net proceeds from lines of credit were $3.5 million and
$23.0 million for the years ended March 31, 1999 and 1998 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 $79.5
million, $31.5 million and $19.5 million for the years ended March 31, 1999,
1998 and 1997, respectively.
During the year ended March 31, 1999, the Company purchased 2,847,500
shares of Common Stock at an aggregate cost of $70,324,000 and had outstanding
700,000 put options at prices ranging from $22.30 to $28.81. The Company also
has outstanding a net share settled forward contact. See Note 8 to "Consolidated
Financial Statements." The net share settled forward contract could obligate the
Company to purchase shares of the Company's Common Stock in the future if the
price of the Company's Common Stock is below the strike price of the
instruments.
The Company expects from time to time to purchase shares of Common Stock in
connection with its authorized stock purchase program. The Company will also
have cash requirements associated with the restructuring activities described
above.
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
18
<PAGE>
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
The information required by this item is set forth at "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company listed in the index
appearing under Item 14(a)(1) hereof are filed as part of this Annual Report on
Form 10-K. See also Index to Financial Statements on page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the Company's directors is incorporated herein
by reference to the Company's proxy statement for the 1999 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 1999 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 1999 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 1999
annual meeting of stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
19
<PAGE>
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, 1999 and 1998 F-2
Consolidated Statements of Income for each
of the years in the three-year period ended
March 31, 1999 F-3
Consolidated Statements of Cash Flows for
each of the years in the three-year period
ended March 31, 1999 F-4
Consolidated Statements of Stockholders'
Equity for each of the years in the
three-year period ended March 31, 1999 F-5
Notes to Consolidated Financial Statements F-6
(2) Financial Statement Schedules - Applicable
schedules have been omitted because
information is included in the footnotes to
the Financial Statements.
(3) The Exhibits which are filed with this report
or which are incorporated herein by reference
are set forth in the Exhibit Index which
appears on page E-1 hereof, which Exhibit
Index is incorporated herein by this
reference.
(b) No current reports on Form 8-K were filed during the quarter ended
March 31, 1999.
(c) See Item 14(a)(3) above.
(d) See "Index to Financial Statements" included under Item 8 to this
report.
20
<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 17, 1999
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 17, 1999
- -------------------------- Chief Executive Officer
Steve Sanghi
- --------------------------
Albert J. Hugo-Martinez* Director May 17, 1999
- --------------------------
L. B. Day* Director May 17, 1999
- --------------------------
Matthew W. Chapman* Director May 17, 1999
/s/ C. Philip Chapman Vice President, Chief Financial May 17, 1999
- -------------------------- Officer and Secretary (Principal
C. Philip Chapman Financial and Accounting Officer)
*By: /s/ Steve Sanghi Individually and as Attorney-in-fact May 17, 1999
- --------------------------
Steve Sanghi
21
<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, 1999
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, 1999 and 1998 F-2
Consolidated Statements of Income
for each of the years in the three-year
period ended March 31, 1999 F-3
Consolidated Statements of Cash Flows
for each of the years in the three-year
period ended March 31, 1999 F-4
Consolidated Statements of Stockholders' Equity
for each of the years in the three-year
period ended March 31, 1999 F-5
Notes to Consolidated Financial Statements F-6
i
<PAGE>
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, 1999 and 1998, 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, 1999. 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 aspects, the financial position of Microchip Technology
Incorporated and subsidiaries as of March 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1999, in conformity with generally accepted accounting
principles.
Phoenix, Arizona
April 20, 1999
F-1
<PAGE>
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
ASSETS
March 31, March 31,
1999 1998
--------- ---------
Cash and cash equivalents $ 30,826 $ 32,188
Accounts receivable, net 62,545 56,320
Inventories 67,975 66,293
Prepaid expenses 2,982 2,208
Deferred tax asset 37,129 35,778
Other current assets 1,958 1,802
--------- ---------
Total current assets 203,415 194,589
Property, plant and equipment, net 293,663 325,892
Other assets 8,152 4,262
--------- ---------
Total assets $ 505,230 $ 524,743
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term lines of credit $ 1,509 $ 16,000
Accounts payable 28,489 36,049
Current maturities of long-term debt 1,403 2,196
Current maturities of capital lease obligations 413 2,206
Accrued liabilities 49,699 53,452
Deferred income on shipments to distributors 28,607 29,515
--------- ---------
Total current liabilities 110,120 139,418
Long-term lines of credit 25,000 7,000
Long-term debt, less current maturities -- 1,420
Capital lease obligations, less current maturities -- 348
Long-term pension accrual -- 976
Deferred tax liability 11,313 8,273
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 53,881,342 and outstanding 51,232,157
shares at March 31, 1999; 54 54
issued 53,881,342 and outstanding 52,870,389 shares
at March 31, 1998
Additional paid-in capital 161,242 176,865
Retained earnings 264,281 214,193
Less shares of common stock held in treasury at cost;
2,649,185 shares at March 31, 1999 and 1,010,953
at March 31, 1998 (66,780) (23,804)
--------- ---------
Net stockholders' equity 358,797 367,308
Total liabilities and stockholders' equity $ 505,230 $ 524,743
========= =========
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,
-------------------------------------
1999 1998 1997
--------- --------- ---------
Net sales $ 406,460 $ 396,894 $ 334,252
Cost of sales 203,574 199,538 167,330
--------- --------- ---------
Gross profit 202,886 197,356 166,922
Operating expenses:
Research and development 40,787 38,362 32,073
Selling, general and administrative 63,006 67,549 56,248
Special charges 28,937 5,000 7,544
--------- --------- ---------
132,730 110,911 95,865
Operating income 70,156 86,445 71,057
Other income (expense):
Interest income 754 2,635 1,419
Interest expense (2,964) (1,130) (3,271)
Other, net 665 217 288
--------- --------- ---------
Income before income taxes 68,611 88,167 69,493
Income taxes 18,523 23,799 18,361
--------- --------- ---------
Net income $ 50,088 $ 64,368 $ 51,132
========= ========= =========
Basic net income per share $ 0.98 $ 1.21 $ 0.99
========= ========= =========
Diluted net income per share $ 0.94 $ 1.14 $ 0.94
========= ========= =========
Weighted average common
shares outstanding 51,136 53,376 51,569
========= ========= =========
Weighted average common and common
equivalent shares outstanding 53,528 56,313 54,683
========= ========= =========
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,
-------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 50,088 $ 64,368 $ 51,132
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for doubtful accounts 335 638 452
Provision for inventory valuation 3,464 2,126 1,886
Provision for pension accrual 1,037 1,202 1,316
Special charges 20,017 5,000 2,483
Depreciation and amortization 64,851 53,468 39,853
Amortization of purchased technology 300 300 300
Deferred income taxes 1,689 (9,423) (3,000)
Tax benefit from exercise of stock options 4,915 5,332 5,742
Decrease (increase) in accounts receivable (6,560) 4,144 (14,346)
Increase in inventories (5,146) (11,606) (2,572)
Increase (decrease) in accounts payable
and accrued liabilities (24,797) 12,828 (3,699)
Change in other assets and liabilities (7,556) 8,164 (1,961)
--------- --------- --------
Net cash provided by operating activities 102,637 136,541 77,586
--------- --------- --------
Cash flows from investing activities:
Capital expenditures (39,640) (145,301) (79,012)
--------- --------- --------
Net cash used in investing activities (39,640) (145,301) (79,012)
--------- --------- --------
Cash flows from financing activities:
Net proceeds from (repayments of) lines of credit 3,509 23,000 (21,000)
Payments on long-term debt (2,213) (2,470) (2,734)
Payments on capital lease obligations (2,141) (3,605) (2,948)
Repurchase of common stock (79,512) (31,481) (19,463)
Proceeds from sale of stock and put options 15,998 12,505 59,511
--------- --------- --------
Net cash provided by (used in) financing activities (64,359) (2,051) 13,366
--------- --------- --------
Net increase (decrease) in cash and cash equivalents (1,362) (10,811) 11,940
Cash and cash equivalents at beginning of year 32,188 42,999 31,059
--------- --------- --------
Cash and cash equivalents at end of year $ 30,826 $ 32,188 $ 42,999
========= ========= ========
</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
Stock and Additional Stock held in Net
Paid-in Capital Treasury Retained Stockholders'
(in thousands) Shares Amount Shares Amount Earnings Equity
- -------------- ------ ------ ------ ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
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 (371) (9,156) (371) 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 53,881 $176,919 1,011 $(23,804) $214,193 $367,308
Sale of Stock
Exercise of stock options 944 9,906 -- -- -- 9,906
Employee stock purchase plan 219 3,979 -- -- -- 3,979
Purchase of treasury stock -- -- 3,328 (79,512) -- (79,512)
Issuance of treasury stock for the
exercise of options, purchases in
the employee stock purchase plan
and net share settled forward contract (1,163) (36,536) (1,690) 36,536 -- --
Sale of put options, net -- 2,113 -- -- -- 2,113
Tax benefit from exercise of options -- 4,915 -- -- -- 4,915
Net income -- -- -- -- 50,088 50,088
------- -------- ------ -------- -------- --------
Balance March 31, 1999 53,881 $161,296 2,649 $(66,780) $264,281 $358,797
======= ======== ====== ======== ======== ========
</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
NATURE OF BUSINESS
Microchip develops, manufactures and markets field programmable 8-bit
microcontrollers, application specific standard products ("ASSPs") and
related specialty memory products for high-volume embedded control
applications in the consumer, automotive, office automation, communications
and industrial markets.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Microchip
Technology Incorporated and its wholly owned subsidiaries ("Microchip" or
the "Company"). All significant intercompany accounts and transactions have
been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
All highly liquid investments including marketable securities purchased
with an original maturity of three months or less are considered to be cash
equivalents. There were no marketable securities at March 31, 1999 and
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 Statement of
Financial Accounting Standard No. 128, EARNINGS PER SHARE ("SFAS No. 128").
SFAS No. 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects
of options, warrants and convertible securities. Diluted earnings per share
is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented,
and where appropriate restated, to conform to the SFAS No. 128
requirements.
F-6
<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.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, ("SFAS No. 123") which
permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made in fiscal 1996 and
future years as if the fair-value-based method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the provisions
of APB Opinion No. 25 and provide the pro forma disclosure provisions of
SFAS No. 123.
USE OF ESTIMATES
The Company has made a number of estimates and assumptions relating to the
reporting 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 1998 and 1997 fiscal year balances have been reclassified to
conform to the fiscal year 1999 presentation.
2. SPECIAL CHARGES
LEGAL SETTLEMENT WITH LUCENT TECHNOLOGIES INC.
On January 13, 1998, the Company finalized a settlement of its patent
litigation with Lucent Technologies Inc. resulting in the Company recording
a $5,000,000 special charge during the quarter ended December 31, 1997.
Under the terms of the settlement, Microchip made a one-time cash payment
to Lucent and issued to Lucent warrants to acquire 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. Based on the current estimate of earnings per share for the
measurement period the Company has provided the appropriate reserve to meet
this liability. It is currently anticipated that any additional contingent
payment required under the terms of the settlement, in addition to the
current reserve, would be expensed in the period the amount is determined.
RESTRUCTURING CHARGES
The Company has implemented two restructuring actions to position the
Company for future cost effective growth. During the March 1999 quarter,
the Company completed closure of its 5-inch wafer line which represented
the Company's least flexible and least cost-effective production capacity.
Eliminating the 5-inch production capacity reduces the Company's productive
capacity by approximately 20%. The Company intends to replace this capacity
with 6-inch and 8-inch wafer production over time. This action resulted in
a restructuring charge of $7,561,000 in the March 1999 quarter. The Company
also decided to restructure its test operations over the next two quarters
by closing its Kaohsiung facility and migrating its test capacity to its
lower-cost, Thailand facility. This action resulted in a restructuring
charge of $6,089,000 in the March 1999 quarter.
Included in the restructuring charges resulting from elimination of the
5-inch production capacity was $6,758,000 related to equipment that was
written off, $310,000 related to employee severance costs and $493,000
related to other restructuring costs. Included in the restructuring charges
resulting from the closure of the Kaohsiung facility was $5,579,000 related
to employee severance costs and $510,000 related to other restructuring
costs.
Included in the special charge the Company recorded in the March 1999
quarter was $1,805,000 related to two legal settlements associated with
intellectual property matters, and $350,000 related to restructure of a
portion of the Company's sales infrastructure.
F-7
<PAGE>
During the quarter ended June 30, 1998, the Company recognized a special
charge of $5,500,000 which was comprised of three elements: a $3,300,000
legal settlement with another company involving an intellectual property
dispute; a $1,700,000 write-off of products obsoleted by the introduction
of newer products; and a $500,000 charge associated with the restructuring
of a portion of the Company's sales organization.
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.
ACQUISITIONS
KEELOQ(R) HOPPING COde
On November 17, 1995, the Company acquired the Keeloq(R) hopping code
technology and patents developed by Nanoteq Ltd. of the Republic of South
Africa, and the marketing rights related thereto (the "Keeloq
Acquisition"). The Keeloq Acquisition was treated as an asset purchase for
accounting purposes. The amount paid for the Keeloq Acquisition, including
all related costs, was $12,948,000. The Company has written off a
substantial portion of the purchase price that relates to in-process
research and development costs, which is consistent with the Company's
ongoing treatment of research and development costs, as well as all Keeloq
Acquisition-related costs. The special charge associated with the Keeloq
Acquisition was $11,448,000, with the balance treated as purchased
technology and amortized on a straight line basis over five years. Under
the terms of the Keeloq Acquisition, the Company agreed to a secondary
payment which has been determined to be $10,250,000, net of legal expenses
of $1,107,000. The Company has determined that $4,250,000 will be treated
as purchased technology and amortized over the remaining expected life of
the revenue stream of the Keeloq products. Under the provisions of SFAS No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG LIVED ASSETS AND FOR LONG LIVED
ASSETS TO BE DISPOSED OF, the balance of the payment including the residual
asset value capitalized as part of the initial payment has been written off
as part of the special charge made by the Company in the quarter ended
March 31, 1999. The total amount expensed as part of the special charge in
the quarter ended March 31, 1999 was $7,632,000.
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.
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, 1999, the effect of such matters will
not have a material adverse effect on the Company's financial position.
F-8
<PAGE>
4. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (amounts in thousands):
March 31,
1999 1998
---- ----
Trade accounts receivable $64,335 $57,922
Other 570 790
------- -------
64,905 58,712
Less allowance for doubtful accounts 2,360 2,392
------- -------
$62,545 $56,320
======= =======
5. INVENTORIES
The components of inventories are as follows (amounts in thousands):
March 31,
1999 1998
---- ----
Raw materials $ 4,491 $ 5,795
Work in process 46,947 40,000
Finished goods 26,531 30,021
------- -------
77,969 75,816
Less allowance for inventory valuation 9,994 9,523
------- -------
$67,975 $66,293
======= =======
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,
1999 1998
---- ----
Land $ 11,545 $ 11,749
Building and building improvements 77,600 59,725
Machinery and equipment 365,947 322,624
Projects in process 41,143 82,528
-------- --------
496,235 476,626
Less accumulated depreciation
and amortization 202,572 150,734
-------- --------
$293,663 $325,892
======== ========
F-9
<PAGE>
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) (5.125%
at March 31, 1999) plus 0.75% and at the London Interbank Offering Rate
(LIBOR) (5.125% at March 31, 1999) plus 0.75%. The weighted average
interest rate on these borrowings was 5.875% at March 31, 1999. Payments,
including interest, are due on a semi-annually basis. With the scheduled
closure of the Kaohsiung testing facility and the transfer of the equipment
secured by this financing to the Company's testing facility in Bangkok,
Thailand, the balance of $1,403,000 remaining under the terms of this
financing has been classified as a current liability.
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. The Company had utilized $25,000,000 and $7,000,000 of this
line of credit as of March 31, 1999 and 1998, respectively. 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, 1999.
The Company has an additional unsecured line of credit with various Taiwan
financial institutions for up to $32,814,000 (U.S. Dollar equivalent).
These borrowings are predominantly denominated in U.S. Dollars, bearing
interest at SIBOR plus 0.59% (average) and expiring on various dates
through November, 1999. At March 31, 1999 and 1998 the Company had utilized
$1,509,000 and $16,000,000, respectively, 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, 1999, 1998 and 1997, the Company contributions
to the plan totaled $445,000, $525,000 and $452,000, respectively.
The Company's Employee Stock Purchase Plan (the "Purchase Plan") allows
eligible employees of the Company to purchase shares of Common Stock at
semi-annual intervals through periodic payroll deductions. The purchase
price per share, in general, will be 85% of the lower of the fair market
value of the Common Stock on the participant's entry date into the offering
period or 85% of the fair market value on the semi-annual purchase date. As
of March 31, 1999, 101,710 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. In
April 1999, subject to stockholder approval, the Board reserved an
additional 400,000 shares of Common Stock for issuance under the Purchase
Plan. During fiscal 1995, a purchase plan was adopted for employees in
non-U.S. locations. Such plan allows for the purchase price per share to be
100% of the lower of the fair market value of the Common Stock on the
beginning or end of the semi-annual purchase plan period.
Effective January 1, 1997, the Company adopted a non-qualified deferred
compensation arrangement. This plan is unfunded and is maintained primarily
for the purpose of providing deferred compensation for a select group of
management as defined in ERISA Sections 201, 301 and 401. There are no
Company matching contributions with respect to this plan.
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 $1,037,000, $1,202,000
and $1,316,000 for the years ended March 31, 1999, 1998 and 1997,
respectively.
F-10
<PAGE>
The Company has a management incentive compensation plan which provides for
bonus payments, based on a percentage of base salary, from an incentive
pool created from operating profits of the Company, at the discretion of
the Board of Directors. During the years ended March 31, 1999, 1998 and
1997, $2,220,000, $1,851,000 and $2,064,000 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, 1999, 1998 and
1997, $607,000, $1,746,000 and $1,373,000, 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, 1999, there were 3,940,780 shares available for grant under
the Plans. In April 1999, the Board reserved an additional 1,500,000 shares
of Common Stock for issuance under the 1997 Nonstatutory Stock Option Plan.
The per share weighted-average fair value of stock options granted under
the Plans for the years ended March 31, 1999, 1998 and 1997 was $10.31,
$15.61 and $9.66, respectively, based on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
Years Ended March 31,
1999 1998 1997
---- ---- ----
Expected life (years) 3.96 3.64 3.50
Risk-free interest rate 5.10% 5.75% 6.25%
Volatility 68% 62% 60%
Dividend yield 0% 0% 0%
Under the Plans, 18,897,479 shares of Common Stock had been reserved for
issuance since the inception of the Plans.
The stock option activity is as follows:
Options Outstanding
Weighted Average
Shares Exercise Price
------ --------------
Outstanding at March 31, 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
Granted 1,323,606 22.79
Exercised (944,349) 10.44
Canceled (344,574) 28.94
----------
Outstanding at March 31, 1999 6,238,977 $16.83
========== ======
F-11
<PAGE>
The following table summarizes information about the stock options
outstanding at March 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range Options Remaining Average Options Average
Exercise Price Outstanding Life Exercise Price Exercisable Exercise Price
-------------- ----------- ---- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.0300 - $ 2.4070 287,296 3.84 $ 1.98 287,294 $ 1.98
$ 3.9630 - $ 7.1110 1,017,039 4.47 7.10 1,016,976 7.10
$ 7.5930 - $13.7220 1,039,148 5.28 13.52 845,834 13.48
$14.5550 - $16.8330 852,059 7.19 16.76 55,639 15.81
$17.0000 - $21.1250 1,581,340 8.26 19.57 188,320 17.77
$21.5000 - $24.0000 768,733 8.12 22.41 66,485 22.55
$24.2500 - $45.6250 693,362 8.64 29.87 45,567 28.80
$ 0.0300 - $45.6250 6,238,977 6.82 $16.83 2,506,115 $10.46
</TABLE>
At March 31, 1999 and 1998, the number of options exercisable was 2,506,115
and 2,625,827, respectively, and the weighted-average exercise price of
those options was $10.46 and $8.94, 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. This program
excluded executive officers, corporate officers and directors. Eligible
employees who were issued stock options in this category 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 this
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 year ended March 31, 1997, the
Company recorded compensation expense of $30,000.
The Company received a tax benefit of $4,915,000, $5,332,000 and $5,742,000
for the years ended March 31, 1999, 1998 and 1997, respectively, from the
exercise of non-qualified stock options and the disposition of stock
acquired with incentive stock options or through the Purchase Plan. For
financial reporting purposes, the tax effect of this deduction is accounted
for as a credit to additional paid-in capital rather than as a reduction of
income tax expense. The Company applies APB Opinion No. 25 in accounting
for its various stock plans and, accordingly, no compensation cost has been
recognized for the Plans or the Purchase Plan in the financial statements.
Had the Company determined compensation cost in accordance with SFAS No.
123, the Company's net income per share would have been reduced to the pro
forma amounts indicated below:
Years Ended March 31,
1999 1998 1997
------- ------- -------
Net income As reported $50,088 $64,368 $51,132
Pro forma 43,183 58,461 48,202
Basic net income As reported $ 0.98 $ 1.21 $ 0.99
per share Pro forma 0.84 1.10 0.93
Dilutednet income As reported $ 0.94 $ 1.14 $ 0.94
per share Pro forma 0.81 1.04 0.88
Pro forma net income reflects only options granted during the fiscal years
ended March 31, 1999, 1998, 1997 and 1996. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
reflected in pro forma net income amounts presented above because
compensation cost is reflected over the options' vesting period and
compensation cost for options granted prior to April 1, 1995 is not
considered.
F-12
<PAGE>
10. LEASE COMMITMENTS
The Company leases office space, transportation and other equipment under
capital and operating leases which expire at various dates through
September, 2007. The future minimum lease commitments under these leases
are payable as follows (amounts in thousands):
Year ended Capital Operating
March 31, Leases Leases
--------- ------ ------
2000 $424 $1,432
2001 -- 1,130
2002 -- 925
2003 -- 777
2004 -- 564
Thereafter 1,278
---- ------
Total minimum lease payments $424 $6,106
Less amount representing interest
(at rates ranging from 6.7% to 8.5%) (11)
----
Present value of net minimum lease payments 413
====
Rental expense under operating leases totaled $2,759,000, $2,811,000 and
$2,644,000 for the years ended March 31, 1999, 1998 and 1997, respectively.
11. INCOME TAXES
The provision for income taxes is as follows (amounts in thousands):
Years Ended March 31,
1999 1998 1997
-------- -------- --------
Current expense:
Federal $ 8,405 $ 22,575 $ 13,814
State 934 2,508 3,454
Foreign 7,495 8,139 4,093
-------- -------- --------
16,834 33,222 21,361
-------- -------- --------
Deferred expense (benefit):
Federal 1,413 (6,315) (1,322)
State 157 (702) (331)
Foreign 119 (2,406) (1,347)
-------- -------- --------
1,689 (9,423) (3,000)
-------- -------- --------
$ 18,523 $ 23,799 $ 18,361
======== ======== ========
The tax benefit associated with the exercise of employee stock options
reduced taxes currently payable by $4,915,000, $5,332,000, and $5,742,000
for the years ended March 31, 1999, 1998 and 1997, respectively. These
amounts were credited to additional paid in capital in each of the three
fiscal years.
F-13
<PAGE>
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,
1999 1998 1997
-------- -------- --------
Computed expected provision $24,014 $30,858 $24,323
State income taxes, net
of federal benefit 1,289 1,630 2,245
Foreign sales corporation benefit (2,824) (3,707) (2,552)
Foreign income taxed at
lower than the federal rate (3,956) (4,982) (5,655)
------- ------- -------
$18,523 $23,799 $18,361
======= ======= =======
Pretax income from foreign operations was $29,787,000, $39,554,000 and
$32,172,000 for the years ended March 31, 1999, 1998 and 1997,
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 $177,661,000 at March
31, 1999.
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,
1999 1998
-------- --------
Deferred tax assets:
Intercompany profit in inventory $ 15,474 $ 15,168
Deferred income on shipments
to distributors 9,884 9,398
Inventory reserves 3,921 3,550
Accrued expenses and other 7,850 10,460
-------- --------
Gross deferred tax assets 37,129 38,576
-------- --------
Deferred tax liabilities:
Property, plant and equipment,
principally due to differences in
depreciation (11,313) (11,071)
-------- --------
Gross deferred tax liability (11,313) (11,071)
-------- --------
Net deferred tax asset $ 25,816 $ 27,505
======== ========
Management believes 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 these tax holidays
approximated $5,121,000, $5,614,000, and $5,415,000 for the years ended
March 31, 1999, 1998 and 1997, respectively. The benefit the tax holidays
had on net income per share approximated $0.10, $0.10 and $0.10 for the
years ended March 31, 1999, 1998 and 1997, respectively. The Company's tax
holiday status in Taiwan expired in March 1997 and will partially expire in
Thailand in September 2003.
F-14
<PAGE>
12. ACCRUED LIABILITIES
Accrued liabilities consists of the following (amounts in thousands):
March 31,
1999 1998
------- -------
Accrued salaries and wages $11,437 $ 7,468
Income taxes 5,654 22,396
Keeloq acquisition 10,250 --
Other accrued expenses 21,873 23,588
------- -------
$49,214 $53,452
======= =======
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, 1999 and 1998, the Company purchased a
total of 2,847,500 and 1,277,500 shares of the Company's Common Stock in
open market activities at a total cost of $70,324,000 and $31,481,000
respectively. During the year ended March 31, 1999 the Company received
230,575 shares in conjunction with the net share settled forward contract.
Also, in connection with a stock repurchase program, during fiscal 1999 and
fiscal 1998 the Company sold put options for 600,000 shares and 700,000
shares of Common Stock, respectively. Pricing per share ranged from $22.30
to $27.50 in fiscal 1999 and from $29.50 to $38.81 in fiscal 1998. During
fiscal 1999 and 1998, the Company purchased put options for 50,000 and
300,000 shares, respectively. The net proceeds from the sale and repurchase
of these options, in the amount of $2,113,000 and $2,215,000 for fiscal
1999 and 1998 respectively has been credited to additional paid-in capital.
During the year ended March 31, 1999 put options for 250,000 shares were
purchased at the settlement dates at a total cost of $9,188,000. As of
March 31, 1999, the Company had outstanding put options for 700,000 shares
which have expiration dates ranging from July 29, 1999 to September 13,
1999 at prices ranging from $22.30 to $28.81 per share.
During the year ended March 31, 1999, the Company completed two
transactions in connection with the stock repurchase program. In April 1998
the Company completed a costless collar transaction for 500,000 calls
priced at $25.95 and 665,000 puts priced at $25.19. The expiration date of
the transaction was April 28, 1999, resulting in the Company receiving
$4,660,000 which will be credited to additional paid in capital. 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.
The Company expects from time to time to purchase shares of Common Stock in
connection with its authorized Common Stock repurchase plan.
F-15
<PAGE>
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,
1999 1998
-------- --------
United States $284,496 $306,142
Taiwan 125,768 136,128
Thailand 66,532 57,374
Other 28,434 25,099
-------- --------
Total Assets $505,230 $524,743
======== ========
Sales to unaffiliated customers located outside the United States,
primarily in Asia and Europe, aggregated approximately 69%, 68% and 66% of
consolidated net sales for the years ended March 31, 1999, 1998 and 1997,
respectively.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents approximates fair value because
their maturity is less than three months. The carrying amount of accounts
receivable, accounts payable and accrued liabilities approximates fair
value due to the short term maturity of the amounts. The fair value of
capital lease obligations, long-term debt and lines of credit approximate
their carrying value as they are estimated by discounting the future cash
flows at rates currently offered to the Company for similar debt
instruments.
The Company is party to financial instruments with off-balance-sheet risk
in the normal course of business to reduce its exposure to fluctuations in
foreign exchange rates. These financial instruments include standby letters
of credit and foreign currency forward contracts. When engaging in forward
contracts, risks arise from the possible inability of counterparties to
meet the terms of their contracts and from movements in securities values,
interest rates and foreign exchange rates. At March 31, 1999 and 1998, the
Company held contracts totaling $4,263,000 and $9,158,000, respectively,
which were entered into and hedged the Company's foreign currency risk. The
contracts matured May 4, 1999 and April 28, 1998. Unrealized gains and
losses as of the balance sheet dates and realized gains and losses for the
years ending March 31, 1999, 1998 and 1997 were not material.
F-16
<PAGE>
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,
1999 1998 1997
------- ------- -------
Net income $50,088 $64,368 $51,132
======= ======= =======
Weighted average common
shares outstanding 51,136 53,376 51,569
Dilutive effect of stock options 2,392 2,937 3,114
------- ------- -------
Weighted average common and common
equivalent shares outstanding 53,528 56,313 54,683
======= ======= =======
Basic net income per share $ 0.98 $ 1.21 $ 0.99
======= ======= =======
Diluted net income per share $ 0.94 $ 1.14 $ 0.94
======= ======= =======
17. QUARTERLY RESULTS (UNAUDITED)
The following table presents the Company's selected unaudited quarterly
operating results for eight quarters ended March 31, 1999. 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 1999
Net Sales $99,489 $103,780 $100,167 $103,024 $406,460
Gross profit 49,258 51,473 50,642 51,513 202,886
Operating income 17,488 24,664 25,120 2,884 70,156
Net income 12,774 17,563 17,854 1,897 50,088
Diluted net income per share .23 .33 .34 .04 .94
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
</TABLE>
F-17
<PAGE>
18. SUPPLEMENTAL FINANCIAL INFORMATION
Cash paid for income taxes amounted to $27,875,000, $19,857,000 and
$8,108,000 during the years ended March 31, 1999, 1998 and 1997,
respectively. Cash paid for interest amounted to $2,688,000, $796,000 and
$3,183,000 during the years ended March 31, 1999, 1998 and 1997,
respectively. Included in the special charge for the year ended March 31,
1999 was a non-cash amount of $8,920,000, of which $1,700,000 pertained to
the write off of products obsoleted by the introduction of newer products
and $7,220,000 pertained to the write down of fixed assets due to the
restructuring of wafer fabrication facilities.
A summary of additions and deductions related to the allowances for
accounts receivable and inventories for the years ended March 31, 1999,
1998 and 1997 follows:
<TABLE>
<CAPTION>
Balance at Charged to
beginning costs and Balance at
of year expenses Deductions end of year
------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
1999 $ 2,392 $ 335 $ (367) $2,360
1998 2,094 638 (340) 2,392
1997 1,834 452 (192) 2,094
Allowance for inventory valuation:
1999 $ 9,523 $3,464 $(2,993) $9,994
1998 8,331 2,126 (934) 9,523
1997 10,372 1,886 (3,927) 8,331
</TABLE>
F-18
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
3.1 Restated Certificate of Incorporation of
Registrant [Incorporated by reference to Exhibit
3.1 to Registration Statement No. 33-70608]
3.1.1 Certificate of Amendment to Registrant's Restated
Certificate of Incorporation [Incorporated by
reference to Exhibit 3.3.1 to the Registrant's
Annual Report on Form 10-K for the fiscal year
ended March 31, 1994]
3.1.2 Certificate of Designation of Rights, Preferences
and Privileges of Series A Participating Preferred
Stock of Registrant [Incorporated by reference to
Exhibit No. 3.1.2 to Registrant's Annual Report on
Form 10-K for the fiscal year ended March 31,
1995]
3.1.3 Certificate of Amendment to Registrant's Restated
Certificate of Incorporation [Incorporated by
reference to Exhibit No. 1 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995]
3.1.4 Certificate of Amendment to Registrant's
Certificate of Incorporation [Incorporated by
reference to Exhibit No. 3.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997]
3.2 Amended and Restated By-Laws of Registrant, as
amended through August 10, 1998 [Incorporated by
reference to Exhibit No. 3.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998]
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]
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]
E-1
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
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 [Incorporated by reference to
Exhibit No. 10.13 to Registrant's Annual Report on
Form 10-K for the fiscal year ended March 31,
1998]
10.14 Modification Agreement dated as of November 4,
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 [Incorporated by reference to
Exhibit No. 3.2 toRegistrant's Quarterly Report on
Form 10-Q for the Quarter Ended September 30,
1998]
10.15 Development Agreement dated as of August 29, 1997
by and between Registrant and the City of
Chandler, Arizona [Incorporated by reference to
Exhibit No. 10.1 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended December 31,
1997]
10.16 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]
E-2
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
10.17 1997 Nonstatutory Stock Option Plan [Incorporated
by reference to Exhibit No. 10.16 to Registrant's
Annual Report on Form 10-K for the fiscal year
ended March 31, 1998]
10.18 Form of Notice of Grant For 1997 Nonstatutory
Stock Option Plan, with Exhibit A thereto, Form of
Stock Option Agreement [Incorporated by reference
to Exhibit No. 10.17 to Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31,
1998]
10.19 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 LLP
24.1 Power of Attorney Re: Microchip Technology
Incorporated, the Registrant [Incorporated by
reference to Exhibit No. 24.1 to Registrant's
Annual Report on Form 10-K for the fiscal year
ended March 31, 1998]
27 Financial Data Schedule
E-3
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. 86-062904 and No.
333-40791) on Form S-8 of Microchip Technology Incorporated of our report dated
April 20, 1999, relating to the consolidated balance sheets of Microchip
Technology Incorporated and subsidiaries as of March 31, 1999 and 1998, 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, 1999, which
report appears in the March 31, 1999 annual report on Form 10-K of Microchip
Technology Incorporated.
Phoenix, Arizona
May 17, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 30,826
<SECURITIES> 0
<RECEIVABLES> 62,545
<ALLOWANCES> 0
<INVENTORY> 67,695
<CURRENT-ASSETS> 203,415
<PP&E> 293,663
<DEPRECIATION> 0
<TOTAL-ASSETS> 505,230
<CURRENT-LIABILITIES> 110,120
<BONDS> 0
0
0
<COMMON> 54
<OTHER-SE> 358,743
<TOTAL-LIABILITY-AND-EQUITY> 505,230
<SALES> 406,460
<TOTAL-REVENUES> 406,460
<CGS> 203,574
<TOTAL-COSTS> 152,063
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,964
<INCOME-PRETAX> 68,611
<INCOME-TAX> 18,523
<INCOME-CONTINUING> 50,088
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,088
<EPS-PRIMARY> 0.98
<EPS-DILUTED> 0.94
</TABLE>
