<PAGE>
UNITED STATES
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 FEBRUARY 1, 1998
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 1-6395
SEMTECH CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2119684
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
652 MITCHELL ROAD, NEWBURY PARK, CALIFORNIA, 91320
(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code: (805) 498-2111
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK PAR VALUE $.01 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for, such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
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 this form 10-K or any amendment to this
form 10-K. [ X ]
Aggregate market value of voting stock held by non affiliates of the registrant
as of April 17, 1998 was $321,783,900 and the market price of the Registrant's
stock was $22.44 per share. The number of shares outstanding of the
Registrant's common stock was 14,339,746 at April 17, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in Part III of
this report: Definitive Proxy Statement in connection with registrant's annual
meeting of shareholders on June 11, 1998.
This report on Form 10-K contains a total of 41 pages.
<PAGE>
SEMTECH CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED FEBRUARY 1, 1998
PART I
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Item 1 Business 2
Item 2 Properties 9
Item 3 Legal Proceedings 10
Item 4 Submission of Matters to a Vote of Security Holders 10
PART II
Item 5 Market for the Registrant's Common Equity and Related Shareholder Matters 11
Item 6 Selected Financial Data 11
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations 12
Item 8 Financial Statements and Supplementary Data 18
Item 9 Changes in or Disagreements with Accountants on Accounting and Financial
Disclosure 36
PART III
Item 10 Directors and Executive Officers of the Registrant 36
Item 11 Executive Compensation 37
Item 12 Security Ownership of Certain Beneficial Owners and Management 37
Item 13 Certain Relationships and Related Transactions 37
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 38
Signatures 41
</TABLE>
<PAGE>
PART I
------
ITEM 1. BUSINESS
GENERAL
Semtech Corporation (Semtech or the Company) was incorporated in 1960 in
Delaware and the Company's initial public offering was in 1967. The Company's
principal executive offices are located at 652 Mitchell Road, Newbury Park,
California.
Semtech designs, manufactures and markets a wide range of analog and mixed-
signal semiconductors, including integrated circuits (ICs), discrete circuits,
and assembly products. The Company's devices are used in a variety of
applications including computer, communications, industrial, military-aerospace
and automotive. The Company also provides wafer foundry services to other
electronic component manufacturers.
ACQUISITION
On October 2, 1997, Semtech acquired Edge Semiconductor Incorporated (Edge or
Edge Semiconductor). Edge is a leading supplier of analog and mixed-signal
circuits used in automated test equipment (ATE). Large semiconductor
manufacturers use automated test equipment systems in the production and testing
of their component products.
Semtech issued 1,499,954 shares (after the effect of a two-for-one stock split
that occurred on January 13, 1998) of its common stock to all the shareholders
of Edge. The acquisition of Edge was accounted for as a pooling of interests in
accordance with Accounting Principles Board (APB) Opinion No. 16 and related
Securities and Exchange Commission pronouncements. Edge had been incorporated
on March 21, 1994, however, its operations were immaterial in relation to the
Company's prior to fiscal year 1997. Therefore, the effect of the merger prior
to January 28, 1996 has been adjusted to retained earnings. The consolidated
balance sheets at January 26, 1997 and January 28, 1996 as well as the
consolidated statements of income, shareholders' equity and cash flows for the
year ended January 26, 1997 have been restated to include Edge as though it had
always been a part of Semtech. Net sales generated by Edge represented
approximately 13% of the Company's combined results in fiscal year 1998.
INDUSTRY
Analog semiconductors address "real world" functions, which is in contrast to
digital circuits that compute and process information. Mixed-signal devices
incorporate both analog and digital functions into a signal chip. Analog and
analog-rich mixed-signal circuits provide the ability for digital electronics to
interface with the outside world. Such real world functions as temperature,
speed, sound and electrical current all behave in a continuous manner, which is
in contrast to digital circuit's on's and off's (expressed in binary code as 1's
and 0's). Analog and mixed-signal devices play the important role of managing
these real world functions and bridging the gap with digital electronics.
Semtech has strategically focused on designing and manufacturing analog and
mixed-signal semiconductors for solving power management, protection,
2
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communications and interface issues. As digital-based electronic systems
continue to increase in performance, such systems require more complex analog
solutions. Several key industry trends that the Company has focused on include
the continued move to lower operating voltages, increased bandwidths and
communication interface speeds, portability, and the overall increase in the use
of personal computers, cellular phones, and consumer and commercial electronics.
The market for analog and mixed-signal semiconductor is unique in comparison to
the market for digital semiconductors. The analog and mixed-signal industries
are characterized by fragmented end-market segments, significantly less capital
intensive than the digital industry, longer product life cycles, and greater
dependence on design and applications talent. Analog semiconductor
manufacturers tend to be less dependent than digital producers on state of the
art production equipment. Analog, conversely, relies more heavily on design and
applications talent to distinguish its products.
While general trends within the commercial semiconductor industry have benefited
the Company, the focus on providing power management and protection solutions
for computer motherboards and the demand for ATE systems where the most
significant reasons for Semtech's growth in fiscal 1998. Despite the success
achieved, the market for the Company's products and the markets for the end-
systems they are sold into remain very competitive.
APPLICATIONS
End market applications for the Company's products sold during fiscal 1998 are
estimated to be 44% computer, 13% communications, 22% industrial (which includes
automated test equipment), 13% military/aerospace and 8% foundry sales. Use of
the Company's line of voltage regulators in powering desktop microprocessors
represents the largest end product application. Other specific product
applications include servers, computer add-on cards, printers, cellular phone
base stations, cellular phone handsets, portable devices, automated test
equipment, factory automation systems, medical equipment, automotive sub-
systems, and defense and aviation electronics.
PRODUCTS
The following is a description of the Company's main product lines:
Transient Voltage Suppressors. Transient voltage suppressors provide protection
- -----------------------------
for AC signals and DC signals and have many protection applications where large
voltage transients can permanently damage voltage-sensitive components.
Transient voltage suppressors prevent system degradation from electrostatic
discharge generated by the human body. Specific applications are found in
computer, data communications, telecommunications, industrial, military and
aerospace markets.
Linear and Switching Voltage Regulators. Switching regulators are designed for
- ---------------------------------------
use in step-down applications requiring accurate output voltages over combined
variations of line, load and temperature. These products greatly simplify
switching power supply design. Linear voltage regulators are monolithic
integrated circuits designed for use in applications requiring a well regulated
output voltage. The primary application of these products has been in power
regulation for computer motherboards.
Automated Test Equipment ICs. Semtech designs and markets a wide variety of pin
- ----------------------------
electronics, timing, clock distribution and parametric measurement products for
use in ATE instrumentation applications. These circuits utilize
3
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advanced analog and mixed-signal design and process techniques. In addition to a
large selection of standard products, the Company has the capability to develop
circuits customized to meet specific ATE applications. Automated test equipment
systems are used by electronic component manufacturers in the testing of their
finished devices.
Modular Assemblies. A power assembly is a package of rectifiers of one or more
- ------------------
types encased in epoxy or silicon by various molding techniques, constituting
one or more basic rectifier circuits. Also produced are power modules that
consist of one or more voltage regulators and other surrounding components which
are mounted on a printed circuit board and fitted with an application specific
socket. The Company manufactures assemblies as catalog items and for special
customer requirements. Modules are used for computer, industrial and other
market applications.
Other Standard and Custom ICs. Other standard and custom circuits include a wide
- ------------------------------
variety of industry standard and customer specific devices. Technical
applications for these products include power management and sensory functions.
The end markets for these products include industrial, consumer, automotive and
computer.
Foundry Wafers. Semtech supplies wafers that it founders for other
- --------------
semiconductor manufacturers. Much of the processed silicon currently sold goes
into applications in the computer, automotive and industrial markets.
Rectifiers. The Company has several different categories of silicon rectifiers,
- ----------
which are primarily used to convert alternating current to direct current.
General use silicon rectifiers are primarily used to convert alternating current
to direct current necessary for instruments, power supplies, small appliances
and control equipment. These products are sold to military, aerospace and
commercial customers.
MANUFACTURING CAPABILITIES
The Company has manufacturing facilities in California, Texas, Mexico and
Scotland. The Company's commercial IC production facilities are located in
Santa Clara, California and Corpus Christi, Texas. Discrete wafer fabrication,
testing, probe and some assembly activity are handled at the Newbury Park,
California location. The San Diego, California, location serves as the
headquarters for the Company's ATE Division, Edge Semiconductor. Design,
applications, sales, and other administrative activities related to the ATE
business segment are conducted at this location. The Company's Reynosa, Mexico
facility provides relatively low cost assembly and test capabilities for
supporting military and legacy business and the Glenrothes, Scotland facility
provides value-added manufacturing capabilities for serving the European
markets.
Semtech supports approximately 80% of its end products with wafers which are
fabricated internally. Outside foundries are used for the remaining 20% of
fabrication capacity. As of the end of fiscal year 1998, the Company estimates
that it is utilizing approximately 65% of its internal wafer fabrication
capacity. All of the Company's ATE circuits and a small percentage of power
management products are fabricated at outside foundries.
Contractual agreements exist with each of the three outside foundries used to
support the ATE market and the one foundry used for power management products.
With expansion into higher-end communication product lines and higher-
performance devices, it is expected that the Company will increase, as a
percentage of the total, the amount of outside foundries used to support
4
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certain product lines. While Semtech has good working relationships with the
foundries currently used, any involuntary termination of the relationships would
effect the Company's ability to produce certain products.
The Company fabricates and assembles a majority of its products from basic
materials (principally silicon, ceramic materials, metals and plastics), all of
which are available from a number of suppliers. The Company is not dependent on
any particular supplier of materials for its products. The Company utilizes
subcontractors in Taiwan, Malaysia and the Philippines to assemble certain high-
volume commercial product lines. While the Company currently has adequate
capacity with these subcontractors, a reduction in available capacity could
negatively impact operating results in the short-term.
A large part of the manufacturing operation is performed by operators working on
standard equipment in the Company's wafer fabrication lines (wafer fabs). New
designs or process modifications are tested by both product and process
engineering prior to being incorporated into the manufacturing process. The
Company's wafer fabrication facilities employ a variety of Bipolar processes and
a limited amount of CMOS processes. The facilities and related fabrication
processes used tend to be significantly less costly than state-of-the-art
digital fabrication facilities and likewise utilize equipment that is less
subject to obsolescence.
Silicon wafer yields and end-product conformance to targeted characteristics has
an important bearing on unit manufacturing costs. Therefore, testing
constitutes a significant element of total product cost. Yields within the
Company's wafer fabs are subject to fluctuations. A comprehensive quality
assurance and control program exists for materials extending from delivery to
the Company through the receipt and inspection of the Company's products by its
customers. As part of its manufacturing process, the Company conducts tests, in
part automatically controlled, which enable it to demonstrate to its customers
on a routine basis the extent to which its products meet required standards.
CUSTOMERS, SALES DATA AND BACKLOG
Approximately 1,400 customers purchased the Company's products during the fiscal
year ended February 1, 1998. No one customer accounted for 10% or more of the
Company's net sales in fiscal years 1998 and 1997. One customer did account for
12% of net sales in fiscal 1996. Customers that buy the Company's products
include major computer and peripheral manufacturers and their sub-contractors,
automated test system manufacturers, communications equipment producers (both
data communication and tele communication), and a variety of both large and
small companies serving the industrial, automotive, aerospace and military
markets. During fiscal year 1998, Semtech significantly diversified its
customer base and broadened end-product applications. The Company secured
significant orders and began delivery of product to several new high-profile
customers, including one of the top original equipment manufacturers (OEMs) in
the computer industry.
With a large portion of the Company's sales coming from retail computer and
computer related applications, the Company's past results have reflected some
seasonality, with demand levels being higher in computer segments during the
third and fourth quarters of the year in comparison to the first and second
quarters. While some seasonality was experienced during the last two fiscal
years, the Company's ability to gain market-share and diversify its customer
base largely offset any seasonal weakness. Going forward, overall industry
5
<PAGE>
trends and Company specific conditions will continue to have a greater effect on
quarterly sales levels than seasonal factors.
Foreign sales, defined as customers located outside of the United States, during
the fiscal year ended February 1, 1998 were approximately 45% of net sales.
During fiscal years 1997 and 1996, foreign sales were 42% and 36%, respectively,
of net sales. A significant portion of the sales in fiscal 1998 were to
customers located in the Asian-Pacific region. Sales to customers in this
region were approximately 32% of net sales and 30% of new orders in fiscal year
1998. While a large percentage of the Company's sales are made to Asian-based
customers, it is estimated that approximately two-thirds of those sales are to
customers that eventually export the finished product back to North American and
European markets. Sales to Japanese and Korean customers, which are included in
the Asian-Pacific regions sales figures, were both approximately 2% of net sales
in fiscal year 1998.
The Company's backlog of orders as of the end of the last three fiscal years
1998, 1997, and 1996 was approximately $32.5 million, $24.7 million and $19.5
million, respectively. A majority of the backlog is deliverable within six
months; experience has shown that short-delivery lead times are required by most
customers. A backlog analysis at any given time gives little indication of
future business except on a short-term basis, principally within the next three
months. The Company does not have any significant contracts with its customers
calling for shipments over a period of more than 18 months.
Sales to customers are made on the basis of individual customer purchase orders.
Many large commercial customers, particularly in the personal computer industry,
include terms in their purchase orders which provide liberal cancellation
provisions. Orders covered by only a letter of intent are not included in the
Company's backlog of orders. Recent trends within the industry towards shorter
and shorter lead-times and "just-in-time" deliveries has resulted in reduced
visibility for the Company. As a result, the Company expects the percentage of
turns-fill business (orders received and shipped within the same quarter) to
increase as a percentage of net sales.
SALES AND MARKETING FUNCTIONS
For performing the sales and marketing functions, the Company utilizes a direct
sales staff, applications engineers, independent sales representative firms and
independent distributors. The Company has direct sales offices located in
Southern California, Texas and Connecticut who manage the sales activities of
independent sales representative firms and independent distributors within the
United States and Canada. The Company also has sales offices in France, Germany
and Scotland as well as independent sales representative firms and independent
distributors to serve the European markets. The Company maintains a branch
sales office in Taipei, Taiwan along with independent representatives and
distributors for serving the Asian-Pacific territory. The Company is also
represented outside the United States, Europe and Asia by other independent
sales organizations.
Sales made directly to OEMs in fiscal year 1998 were approximately 80% of net
sales and the remaining 20% of net sales were made through independent
distributors. The percentage of sales made directly to OEMs has increased in
the last three fiscal years as the Company sells directly to large strategic
customers and as the contribution from the ATE Division, which only has direct
sales, has increased.
6
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PRODUCT DEVELOPMENT AND ENGINEERING
The Company currently performs product development and engineering work in its
Newbury Park, Santa Clara, Corpus Christi and San Diego facilities. Engineering
functions exist within each of these locations in the form of product
engineering, process engineering, and research and development. The employees
within these engineering functions devote the majority of their time to product
engineering, process engineering and product development functions. Product
development and engineering costs were recognized on expenditures for new
product and process development. Accordingly, such expenditures have been fully
charged to the earnings of the period in which they were incurred.
In fiscal year 1996, the Company began to invest heavily in design and
applications intended to aid the introduction of new products. The Company now
has dedicated design centers in Santa Clara, California, and Glasgow, Scotland.
In addition, dedicated ATE circuit design occurs at the San Diego location and
TVS product design occurs at the Company's Newbury Park headquarters. In
January of 1998, Semtech officially announced the opening of its newest design
center, located in Glasgow. This location was set-up to attract available
design talent from the surrounding region and to develop closer working
relationships with strategic European customers.
As of the end of fiscal year 1998, the Company employs 30 dedicated research and
design employees. A majority of these individuals have senior-level expertise
in the design and development of circuits targeted for use in power management,
protection and ATE applications. The Company intends to make further investment
in research and development functions during the coming fiscal years.
Additional headcount along with investment in design and development equipment
and overall support of development efforts is the focus of such investment.
COMPETITION
The semiconductor industry is highly competitive and the Company expects
competitive pressures to continue. The Company is in direct and active
competition, as to one or more of its product families, with at least thirty
manufacturers of such products, of varying financial size and strength. A
number of these competitors are dependent on semiconductor products as their
principal source of income, and some are much larger than the Company. The
number of competitors has grown due to expansion of the market segments in which
the Company participates. Semtech considers Linear Technology, Maxim Integrated
Products, Harris Electronics, Analog Devices, National Semiconductor and other
companies of varying size to be competitors. Due to the fragmented nature of
the analog semiconductor industry, the Company estimates that it has no more
than 30% product overlap with any single one of the competitors identified.
Product life cycles in the semiconductor industry are generally short and
characterized by decreasing unit selling prices over the life of a product. The
Company believes that the portion of the semiconductor industry which includes
its military product lines has matured and, accordingly, prices have begun to
fluctuate with market conditions as these products act more and more like
commodities. The Company has entered several growing commercial markets with
products, which include transient voltage suppressors, DC to DC converters,
voltage regulators and ATE circuits. While offering higher potential gross
margins, these markets are extremely competitive.
7
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The Company's ability to compete effectively and to expand its business will
depend not only on efficiencies and economies in production and sales, but also
on other factors such as whether it is successful in recruiting design and
applications talent and introducing new products. Over the past five years, the
Company has experienced improvements in productivity and product yields that
have reduced manufacturing costs. It has also increased the rate of new product
introductions. However, the Company still faces many potentially significant
business risks such as new sources of competition, obsolescence or the loss of a
major customer.
PATENTS AND LICENSES
Patents, licenses and other rights have not proven in the past to be significant
to the Company's business. However, competition in the commercial marketplace
has required that certain developed devices be protected by patents. The
Company has pursued patent protection for certain devices. The Company intends
to pursue such rights for future products that may require protection from use
by competitors. At this time, the Company does not license and is not the
licensee under any patents.
ENVIRONMENTAL MATTERS
The Company's manufacturing processes utilize several types of acids and, to a
much lesser degree, solvents. All concentrated neutralized acids and
precipitants are, to the best of the Company's knowledge, sent to appropriate
reprocessing facilities. Extensive soil sampling and groundwater testing is
performed to determine if any contamination exists on the Company's domestic
sites. No evidence of contamination from these manufacturing processes
requiring remedial action has been detected to date, except Santa Clara where
certain elements have been detected above the allowable levels. Monitoring
wells are installed to allow for continued testing of potential future
contamination, both on-site and from upstream sources.
In the past, the Company was involved in certain legal proceeding relating to
the Newbury Park facility that stemmed from allegations of groundwater
contamination by a neighboring company. To protect its interests, the Company
utilizes an environmental firm, specializing in hydrogeology, to perform
periodic monitoring. It is currently not possible to determine the ultimate
amount of possible future clean-up costs, if any, that may be required of the
Company at this site. Accordingly, no reserves for such clean-up activities
have been provided at this time.
EMPLOYEES
As of February 1, 1998 the Company had 586 full-time employees, compared to 523
full-time employees at January 26, 1997. The increase was due to additions in
the areas of design, applications, strategic marketing, and production.
There has been generally an ample supply of production labor in the areas of the
Company's manufacturing facilities. The Company has never had a work stoppage,
and its domestic and European employees are not unionized. The Company's
Mexican Maquiladora operation has unionized employees. Employee relations at
the Mexican plant have been, and are, satisfactory. Competition for key design
and applications talent is significant.
Government Regulations
The Company is required to comply with numerous government regulations that are
normal and customary to manufacturing businesses, which operate in the
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Company's markets and operating locations. In addition, a substantial portion of
the Company's sales that serve the military and aerospace markets consist of
products which have been qualified to be sold in these markets by the U.S.
Department of Defense (DOD). These products mainly consist of discrete
rectifiers and rectifier assemblies. In order to maintain these qualifications,
the Company must comply with certain specifications promulgated by the DOD. As
part of maintaining these qualifications the Company is routinely audited by DOD
personnel. Based on the specifications as they exist today, the Company believes
it can maintain its qualifications for the foreseeable future. However, these
specifications can be modified by the DOD in the future which may make the
manufacturing of these products either more difficult or more simple to produce
and thus would impact the Company's profitability.
ITEM 2. PROPERTIES
The Company's headquarters facility is located in Newbury Park, California,
approximately 50 miles from downtown Los Angeles. The facility contains
approximately 53,000 square feet of floor space. The current lease extends
through August 2003 at an annual rental of approximately $225,000, plus
applicable taxes and insurance. The current lease contains an early termination
provision that becomes available in 2001 and requires 12 months advance notice.
This facility supports the Company's military and commercial rectifier and
custom assembly manufacturing operations, as well as all of the Company's inside
sales, marketing and administrative offices. Test and probe functions for
certain commercial ICS are also performed at this location.
The Company's 20,000-square-foot manufacturing facility in Glenrothes, Fife,
Scotland was purchased in fiscal year 1988. A portion of the Company's products
are manufactured in this facility, and substantially all of the manufactured
output from the facility is sold in the European market. The facility includes
approximately one acre of land.
The Semtech Santa Clara subsidiary conducts its operations in two leased
facilities within a city block of each other. One facility, which houses the
wafer fab, contains 10,345 square feet of space. The lease on this facility
extends until December 1999 at an average annual rental of approximately
$249,000. Semtech Santa Clara's other facility, which houses design
engineering, test and administration, contains 13,250 square feet. The lease on
this facility extends until November 2000 at an average annual rental of
approximately $135,000.
The Semtech Corpus Christi subsidiary leases approximately 44,000 square feet of
floor space in Corpus Christi, Texas. The current lease extends through
December 2001 at an average annual rental of approximately $120,000, plus
applicable taxes and insurance. This facility contains the wafer fabrication,
hybrid product assembly and production testing, as well as all of the
subsidiary's engineering functions.
The Company owns an approximately 22,000-square-foot building on three and one-
half acres of land in Reynosa, Mexico. This space is used to operate the
Company's Mexican Maquiladora operation for assembly of certain of its rectifier
assemblies and DC to DC converter module products.
Through the October 1997 acquisition of Edge Semiconductor, the Company leases a
24,972 square foot building in San Diego, California. The lease extends through
March 2004 at an average annual rental of approximately $243,000, plus
applicable taxes and insurance. The location serves as the headquarters for
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Edge, the Company's ATE Division. In addition to office and meeting room space,
the location has evaluation laboratories and a dedicated area for the testing of
finished products.
The Company maintains a sales office in Connecticut on short-term lease.
Aggregate annual rentals under this lease during the most recently completed
fiscal year equaled approximately $10,000. The Company also maintains sales
offices in France and Germany and a branch office in Taiwan under short-term
leases with an aggregate annual rent expense during fiscal year 1998 of
approximately $53,000. The Company recently leased a portion of a building in
Glasgow, Scotland for a new design center at an annual expense of approximately
$67,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is the defendant in lawsuits involving matters which are routine to
the nature of its business. The Company believes that the ultimate resolution
of all such matters will not have a material adverse effect on its business, its
prospects, or its financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report no matter
was submitted to a vote of the security holders through the solicitation of
proxies or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information set forth at Page 31 of this report under the heading "Selected
Quarterly Data" is incorporated herein by reference.
As of April 17, 1998, there were approximately 714 recorded holders of the
Company's common stock. The last reported sales price for the Company's common
stock on the NASDAQ National Market System at April 17, 1998 was $22.44 per
share.
The Company discontinued its cash dividend in 1980 and does not anticipate
paying a cash dividend in the current year. On December 10, 1997, the Company
declared a two for one stock split in the form of a 100 percent stock dividend
to shareholders of record as of December 23, 1997. The Company does not
anticipate another stock dividend being declared in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth summary financial information. Amounts are in
thousands, except per share amounts. The acquisition of Edge Semiconductor in
October 1997 was accounted for as a pooling of interests. Edge had been
incorporated on March 21, 1994, however, its operations were immaterial in
relation to the Company's prior to fiscal year 1997. Therefore, the effect of
the merger prior to January 28, 1996 has been adjusted to retained earnings.
The consolidated balance sheets at January 26, 1997 and January 28, 1996 as well
as the consolidated statements of income, shareholders' equity and cash flows
for the year ended January 26, 1997 have been restated to include Edge as though
it had always been a part of Semtech. The information set forth below should be
read in conjunction with the Company's complete financial statements, appearing
elsewhere in this report.
<TABLE>
<CAPTION>
Year Ended January
------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales $102,808 $71,595 $61,684 $34,605 $29,353
Gross Profit 48,929 30,683 25,809 11,272 8,440
Operating Income 21,809 12,663 11,289 2,099 500
Income Before Taxes 22,159 12,714 11,343 2,028 300
Net Income $ 14,761 $ 8,487 $ 7,531 $ 1,502 $ 198
- -------------------------------------------------------------------------------------------------
Net Income per Share:
Basic $ 1.06 $0.62 $0.64 $0.14 $ 0.02
Diluted $ 0.98 $0.60 $0.61 $0.13 $ 0.02
- -------------------------------------------------------------------------------------------------
Weighted Average Number of Shares:
Basic 13,978 13,589 11,826 10,581 10,381
Diluted 15,118 14,050 12,388 11,858 11,401
- -------------------------------------------------------------------------------------------------
Total Assets $ 67,135 $45,688 $35,225 $21,377 $18,260
Long-Term Debt, Less Current
Maturities $ - $ 1,256 $ 1,157 $ 799 $ 963
Working Capital $ 41,312 $25,585 $19,378 $11,475 $ 9,623
Total Shareholders' Equity $ 54,661 $33,986 $24,937 $13,715 $11,697
</TABLE>
All periods presented reflect the adoption of SFAS No. 128, "Earnings per
Share."
11
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INDUSTRY TRENDS AND OUTLOOK
Semtech experienced favorable market conditions in fiscal year 1998 due in large
part to increased demand for products used in computer, communications and
automated test equipment applications. The Company has been successful in
capitalizing on favorable industry trends by introducing new products and
increasing its customer base. Demand from computer motherboard, peripheral add-
on card and lap-top manufacturers and demand for test systems were the most
significant factors contributing to sales and profitability growth in fiscal
1998. While the long-term outlook for these and other end-product applications
remains good, shorter-term trends fluctuate. Future growth by the Company will
remain dependent on market conditions, economic factors, the ability to
introduce new products and increased operating efficiencies.
Due to industry-wide trends to lower operating voltages and high bandwidths,
there has been growth in the need for complex power management, protection and
interface solutions. The Company has been successful in meeting the needs of
customers requiring these analog and mixed-signal based solutions. However,
with the increased demand for these solutions has come added competition.
The semiconductor equipment market, which includes automated test equipment, is
considered to be very cyclical. While trends within this market are expected to
effect the demand for ATE products, the Company believes that it continues to
gain market share from other competitors. The Company also views the worldwide
excess wafer fabrication capacity as a driver for test equipment needed to
accommodate the related increased unit through-put.
Increased competition and a continued move to short lead-times within the
components industry will continue to affect the Company's performance on a
quarterly bases. Over the last twelve months, the Company has experienced
declines in customer lead-times as many manufacturers move to "just-in-time"
inventory systems. Likewise, Semtech generally has only 60-90 days visibility
of future period shipments.
With the increased success and growth in demand for semiconductors, the Company
has seen new competitors enter the market. In addition, existing competitors
have become more aggressive in protecting market share and customer
relationships. Typical of the semiconductor industry, the Company has
experienced declines in average selling prices over the life of its product
lines. Efforts to offset this decline include increasing units shipped, finding
new applications for existing products and introduction of new products.
Management will continue to take steps to offset the impact of declines in
average selling prices, however, there is no assurance that these efforts will
be successful.
RESULT OF OPERATIONS
NET SALES
Net sales for fiscal year 1998 totaled $102.8 million, an increase of 44% over
fiscal year 1997 and a 67% increase over fiscal 1996. The growth in net sales
was primarily due to increased shipments of power management and ATE products.
The majority of power management product line sales are for applications in the
computer market. ATE products are sold to end-producers of automated test
12
<PAGE>
systems who then sell these finished systems to electronic component
manufacturers.
For the main-stream commercial product lines, the Company experienced both
increased unit volume demand and added acceptance of new products during fiscal
year 1998. Unit growth was driven by increased end-system volumes, further
market penetration and additional end-product applications. The Company's older
product lines that support the military, aerospace and certain industrial
markets remained relatively flat in terms of absolute dollar sales, but declined
as a percentage of total net sales. The Company continues to expect growth in
strategic commercial markets and declines in older, more mature market segments.
In addition, the Company continues to de-emphasize foundry services and certain
older products.
Geographically, sales for fiscal 1998 were approximately 55% domestic, 32% to
Asian-Pacific and 13% to European customers. Sales to customers located within
the Asian region showed little change in the second half of fiscal 1998, despite
the region's currency crisis. Sales from Korean and Japanese customers were
more effected by the financial conditions, but these markets combined
represented only about 4% of net sales for the year.
NEW ORDERS
New orders in the 12 months ended February 1, 1998 were above shipment levels in
the same period, resulting in a book-to-bill ratio in excess of 1:1. Order
activity was strong throughout all four quarters of the year. Order activity
for power management products and ATE circuits were especially strong in the
second half of fiscal year 1998.
Orders from computer and computer peripheral markets were strong for the year.
ATE related orders accelerated notably in the fourth quarter of fiscal year
1998, due in large part to design wins and ramp-ups in certain customer
projects. Orders for protection devices (TVS) showed stronger relative gains in
the first half of the year, due in large part to design wins in certain laptop
applications. Orders as a whole for military, aerospace, foundry and custom
circuits increased slightly during fiscal year 1998, as compared to fiscal year
1997.
While order rates are subject to seasonal factors, overall industry trends have
a more profound effect on orders for each respective quarter. Due to the
significance of computer and computer peripheral markets to the Company, order
rates have been stronger during the third and fourth quarters of the past three
fiscal years. While certain industry trends can potentially outweigh seasonal
factors, order rates are subject to fluctuations.
GROSS MARGIN
The gross margin for fiscal year 1998 was 48% of net sales; for fiscal years
1997 and 1996, gross margins were 43% and 42%, respectively. The Company's gross
margin is affected by average selling prices, the volume of product sales and
related effect on manufacturing utilization, and the overall mix of products
sold. Gross margin for fiscal year 1998 improved due to increased unit volumes
and a favorable shift towards higher-margin new products. The Company was
successful in reducing the manufacturing cost of many of its products by
performing die shrinks and transitioning certain fabrication wafers from 4 inch
size to 5 inch size. The increased manufacturing efficiencies were only
partially offset by normal declines in selling prices.
13
<PAGE>
Future trends that will effect the Company's gross margin include price changes
over the life of the products, higher gross margins expected from new products
and improved production efficiencies as a result of increased utilization. The
Company has focused its efforts on increasing the number of new products
introduced, particularly those which are proprietary or limited source in
nature. The Company expects that prices for existing products will continue to
decrease over their respective life cycles. The Company does believe it can
increase its gross margin to above 50% of net sales sometime within the next
twelve to eighteen months. Such an expansion in gross margin assumes continued
revenue growth, increased contribution from new products and additional
manufacturing efficiencies.
OPERATING EXPENSES
Total operating expenses for fiscal year 1998 were $27,120,000 or 26% of net
sales. Total operating expenses for fiscal years 1997 and 1996 were $18,020,000
or 25% and $14,520,000 or 24% of net sales, respectively. Operating expenses
consist of selling, general and administrative (SG&A), product development,
engineering expenditures and costs associated with acquisitions. Increases in
total operating expenses for fiscal 1998 were due primarily to additional
research and development, strategic marketing activities and cost associated
with the acquisition of Edge Semiconductor.
Spending on SG&A grew moderately in fiscal 1998. Increased headcount in key
sales and strategic marketing positions accounted for a large portion of the
increase. SG&A declined to 16% of net sales in fiscal 1998 from 18% in fiscal
1997 and 1996. SG&A as a percentage of net sales is expected to remain
relatively flat or decline slightly over the coming fiscal year as the Company
tries to grow net sales and achieve added efficiencies in the SG&A functions.
For the fiscal years 1998, 1997 and 1996, the Company has expended approximately
$9,195,000, $5,324,000 and $2,827,000, respectively, on product development and
engineering. The Company expects to continue to dedicate more resources towards
research and development (R&D). Fiscal 1998 R&D expense included the initial
costs associated with the establishment of the Company's Glasgow, Scotland
design center. The focus of the Company's investment in R&D is to increase the
rate of product introductions. New products are generally targeted at
broadening the organization's customer base, product lines and end-product
applications. The Company expects the amount spent on R&D activities to
increase in fiscal year 1999 as added investment is made on existing development
operations and the planned establishment of an additional design center in the
United Sates.
In fiscal years 1998 and 1996, the Company incurred costs of $1,000,000 and
$498,000 for expenses associated with the merger with Edge Semiconductor and ECI
Semiconductor, respectively. ECI Semiconductor was renamed Semtech Santa Clara
Corporation and provided the Company with additional manufacturing capacity and
a strategic location within the Silicon Valley. Edge provided an established
product line and design staff that serves the ATE market segment. A large
portion of the costs associated with these transactions were for legal,
accounting and investment banking fees.
INTEREST AND OTHER EXPENSE
For fiscal year 1998, the Company had interest expense of $36,000 compared to
$131,000 in 1997 and $99,000 in 1996. Semtech had other income of $386,000 for
fiscal year 1998 in comparison to $182,000 and $153,000 in 1997 and 1996.
14
<PAGE>
PROVISION FOR TAXES
Expense for income taxes was $7,398,000 in fiscal 1998 versus $4,227,000 in
fiscal 1997 and $3,812,000 in fiscal 1996. The effective tax rate for fiscal
1998 and 1997 remained at 33%, versus 34% for fiscal 1996
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements that are subject to
risks and uncertainties. These include statements regarding the Company's
ability to (i) maintain its relationships with key customers, (ii) stay abreast
of technological developments, (iii) increase its production efficiency and (iv)
penetrate and expand its served markets and the related demand from these
markets for existing and new products. Such statements are based on
management's current expectations and are subject to a number of factors and
uncertainties that could cause actual results to differ materially.
The Company cautions investors that there can be no assurance that actual
results or business conditions will not differ materially from those projected
or suggested in such forward-looking statements as a result of various factors,
including, but not limited to, the Company's ability to introduce new products,
support existing and new customers, achieve manufacturing efficiencies, and
penetrate new markets and additional end-product applications. As a result, the
Company's future development efforts involve a high degree of risk. For further
information, refer to the more specific risks and uncertainties discussed
throughout this annual report.
FINANCIAL CONDITION
Semtech's working capital ratios, which measure the ability to meet short-term
obligations are presented.
<TABLE>
<CAPTION>
Working Capital (in thousands $): 1998 1997 1996
- --------------------------------- ---- ---- ----
<S> <C> <C> <C>
Beginning of year $25,585 $19,378 $11,475
End of year $41,312 $25,585 $19,378
Increase in working capital $15,727 $ 6,207 $ 7,903
Working capital ratios 4.3 3.5 3.3
</TABLE>
For fiscal year 1998, the Company generated over $16 million of operating cash
flow as a result of income from operations. Investments in capital equipment
were $6,192,000 for the year and inventories increased by $2,566,000. Increases
in inventory, accounts receivable and other balance sheet items were in line
with the Company's growth.
The Company maintains a $7,500,000 credit facility with a financial institution
for working capital and equipment acquisition. This arrangement is
collateralized by the Company's domestic assets and contains provisions
regarding current ratios, debt to worth, and net worth. As of the end of fiscal
year 1998, the Company had no borrowings outstanding against this line. The
Company's foreign subsidiary also maintains an overdraft credit line in the
amount of 300,000 pounds sterling with a its local bank. No amounts were
outstanding under this line at February 1, 1998.
15
<PAGE>
During fiscal year 1998, the Company paid down the remaining principal balances
on the three term loans and a line of credit. Two of the three term loans were
used for the purchase of capital equipment and the other loan was for purchase
of the Company's Glenrothes, Scotland, facility. The total amount of principal
paid off on these three term loans during fiscal year 1998 was $1,430,000. The
$80,000 balance repaid under the line of credit was associated with Edge
Semiconductor.
Efforts by the Company over the past several years to increase commercial
semiconductor product sales have been effective. New products have been
introduced for such applications as computer, test systems and communications
equipment. In order to develop, design and manufacture new products, the Company
had to make significant investments over the past several years. Such
investments aimed at developing additional new products, including the addition
of many design and applications engineers and related equipment, will continue.
Semtech fully intends to continue to invest in those areas that have shown
potential for viable and profitable market opportunities. Certain of these
investments, particularly the addition of design engineers, will probably not
generate significant payback in the short-term. The Company plans to finance
these investments with cash generated by operations and cash on-hand.
In an on-going effort to grow the Company and improve its long-term financial
position, the Company has examined potential acquisitions. On April 27, 1998,
the Company signed a merger agreement with Acapella Limited (Acapella), a
company located in the United Kingdom, to be accounted for as a pooling of
interests. Under the terms of the agreement, Acapella shareholders received
approximately 176,000 shares of Semtech common stock for all outstanding shares
of Acapella stock. If the Company does choose to enter into addition
transactions, several forms of financing will be examined.
The leverage ratios presented below indicate the extent to which the Company has
been financed with debt.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Long-term debt as a % of total capitalization(1) 0.0% 3.6% 4.4%
Total debt as a % of total capitalization (1) 0.0% 4.3% 6.0%
</TABLE>
(1) Total capitalization is defined as the sum of long-term debt, less current
maturities and shareholders' equity.
Purchases of new capital equipment were made primarily to expand manufacturing
capacity and improve efficiency. Funding for these purchases was made from the
Company's operating cash flows and cash reserves.
Management plans to make capital expenditures in fiscal 1999 to increase test,
design and wafer fabrication capacity. The Company believes that current
internal cash flows together with cash reserves and existing credit facilities
are sufficient to support these capital expenditures.
Inventory turnover improved to 3.4 times per year for fiscal 1998 from 3.2 in
fiscal 1997. This was primarily due to the Company's ability to produce and
sell products that had increased demand in the marketplace. All inventory which
is considered obsolete or estimated to be in excess of 18 months demand has
generally been reserved. Accounts receivable days sales outstanding, calculated
by annualizing fourth quarter results for 1998 and 1997, improved to thirty-
seven days as of February 1, 1998 from thirty-eight days as of
16
<PAGE>
January 26, 1997. Days sales outstanding was impacted by increased sales to
larger OEMs that generally pay invoices closer to the stated terms of net 30
days.
PREPAREDNESS FOR YEAR 2000
The Company continues to take steps to ensure that it is year 2000 compliant.
The Company has begun to request assurances from all of its major material
suppliers, sub-contractors, equipment providers and information system suppliers
that their products and services are year 2000 compliant. The financial impact
to ensure that all systems are year 2000 compliant has not been and is not
anticipated to be material.
INFLATION
Inflationary factors have not had a significant effect on the Company's
performance over the past three fiscal years. A significant increase in
inflation would affect the Company's future performance.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF INCOME
THREE YEARS ENDED FEBRUARY 1, 1998
(In thousands-except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $102,808 $71,595 $61,684
Cost of Sales 53,879 40,912 35,875
-------- ------- -------
Gross Profit 48,929 30,683 25,809
-------- ------- -------
Operating costs and expenses:
Selling, general and administrative 16,925 12,696 11,195
Product development and engineering 9,195 5,324 2,827
Acquisition costs 1,000 - 498
-------- ------- -------
Total operating costs and expenses 27,120 18,020 14,520
-------- ------- -------
Operating Income 21,809 12,663 11,289
Interest expense (36) (131) (99)
Other income, net 386 182 153
-------- ------- -------
Income before taxes 22,159 12,714 11,343
Provision for taxes 7,398 4,227 3,812
-------- ------- -------
NET INCOME $ 14,761 $ 8,487 $ 7,531
======== ======= =======
Earnings per share:
Net income per share-
Basic $1.06 $0.62 $0.64
Diluted $0.98 $0.60 $0.61
Weighted average number of shares -
Basic 13,978 13,589 11,826
Diluted 15,118 14,050 12,388
</TABLE>
See accompanying notes.
18
<PAGE>
CONSOLIDATED BALANCE SHEETS
FEBRUARY 1, 1998 AND JANUARY 26, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $18,808 $ 9,439
Temporary investments 1,852 757
Receivables, less allowances of $797 in 1998 and $1,473 in 1997 13,722 9,470
Income taxes refundable - 68
Inventories 17,020 14,454
Other current assets 956 919
Deferred income taxes 1,395 637
------- -------
Total current assets 53,753 35,744
------- -------
Property, plant and equipment, net 12,805 9,416
Other assets 157 226
Deferred income taxes 420 302
------- -------
TOTAL ASSETS $67,135 $45,688
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit $ - $ 80
Current maturities of long-term debt - 174
Accounts payable 5,241 5,585
Accrued liabilities 4,459 2,646
Income taxes payable 1,020 664
Other current liabilities 1,721 1,010
------- -------
Total current liabilities 12,441 10,159
------- -------
Long-term debt, less current maturities - 1,256
------- -------
Other long-term liabilities 33 287
------- -------
Commitments and contingencies
Shareholders' equity:
Common Stock, $0.01 Par Value, 40,000,000 Authorized
Issued and outstanding 14,194,230 in 1998 and 13,682,520 in 1997
142 137
Additional paid-in capital 18,406 12,557
Retained earnings 36,332 21,571
Cumulative translation adjustment (219) (279)
------- -------
Total shareholders' equity 54,661 33,986
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $67,135 $45,688
======= =======
</TABLE>
See accompanying notes.
19
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED FEBRUARY 1, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Stock
----------------------------------
Additional Cumulative
Number Paid-in Retained Translation Shareholders'
of Shares Amount Capital Earnings Adjustment Equity
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 29, 1995 11,276,818 $113 $ 8,255 $ 5,565 $(218) $13,715
Effect of pooling with Edge
Semiconductor 1,499,954 15 1,591 62 - 1,668
Conversion of debentures 272,560 2 134 - - 136
Exercise of stock options 473,360 5 437 - - 442
Tax benefit from exercised
stock options - - 1,649 - - 1,649
Stock repurchases (34,000) - - (74) - (74)
Translation adjustment - - - - (130) (130)
Net income - - - 7,531 - 7,531
- -----------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 28, 1996 13,488,692 $135 $12,066 $13,084 $(348) $24,937
Exercise of stock options 193,828 2 228 - - 230
Tax benefit from exercised
stock options - - 263 - - 263
Translation adjustment - - - - 69 69
Net income - - - 8,487 - 8,487
- -----------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 26, 1997 13,682,520 $137 $12,557 $21,571 $(279) $33,986
Exercise of stock options 511,710 5 1,926 - - 1,931
Tax benefit from exercised
stock options - - 3,923 - - 3,923
Translation adjustment - - - - 60 60
Net income - - - 14,761 - 14,761
- -----------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 1, 1998 14,194,230 $142 $18,406 $36,332 $(219) $54,661
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
20
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED FEBRUARY 1, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $14,761 $ 8,487 $ 7,531
Adjustments to reconcile net income to
Net cash provided by operating activities:
Depreciation and amortization 2,775 1,929 1,139
Deferred income taxes (876) (147) (401)
(Gain) Loss on disposition of assets 20 (2) 1
Provision for doubtful accounts 480 493 755
Changes in assets and liabilities:
Receivables (4,732) (1,354) (3,375)
Income taxes refundable 68 4 (1)
Inventories (2,566) (4,248) (2,673)
Other assets 9 (249) (19)
Accounts payable (344) 1,446 1,311
Accrued liabilities 1,813 (469) 422
Income taxes payable 4,279 521 1,578
Other liabilities 457 231 (58)
------- ------- -------
Net cash provided by operating activities 16,144 6,642 6,210
------- ------- -------
Cash flows from investing activities:
Temporary investments, net (1,095) (346) 410
Proceeds from sale of property, plant and
equipment 31 75 30
Purchases of property, plant and equipment (6,192) (4,355) (4,427)
------- ------- -------
Net cash used in investing activities (7,256) (4,626) (3,987)
------- ------- -------
Cash flows from financing activities:
Net repayments under line of credit (80) - (175)
Proceeds of employee note - - 26
Additions to long-term debt - 2,319 822
Repayment of long-term debt (1,430) (2,370) (361)
Exercise of stock options 1,931 230 442
Purchase and retirement of common stock - - (74)
------- ------- -------
Net cash provided by financing activities 421 179 680
------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
60 69 (130)
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,369 2,264 2,773
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9,439 7,175 4,402
------- ------- -------
Cash and cash equivalents at end of year $18,808 $ 9,439 $ 7,175
======= ======= =======
</TABLE>
See accompanying notes.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------
BUSINESS Semtech Corporation and its wholly owned subsidiaries (Semtech Corpus
Christi, Semtech Limited, Semtech Santa Clara and Edge Semiconductor, together,
the "Company") design, develop and manufacture silicon rectifiers, integrated
circuits and related devices which are used in computer, communications,
military, aerospace, industrial, automotive and consumer applications. The
Company's primary facilities are in Newbury Park, Santa Clara and San Diego,
California, Corpus Christi, Texas, Reynosa, Mexico and Glenrothes, Scotland.
FISCAL YEAR The Company reports results on the basis of fifty-two and fifty-
three week periods. The fiscal year ended February 1, 1998 consisted of fifty-
three weeks and the fiscal years ended January 26, 1997 and January 28, 1996
each consisted of fifty-two weeks.
REVENUE RECOGNITION The Company recognizes product revenue upon shipment.
Product design and engineering revenue is recognized during the period in which
services are performed.
PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements
include the accounts of Semtech Corporation and its wholly owned subsidiaries.
All significant intercompany transactions and accounts have been eliminated.
RECLASSIFICATIONS Certain prior year balances have been reclassified to be
consistent with current year presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income". SFAS No. 130 is effective for
periods beginning after December 15, 1997. Therefore, the Company will
implement SFAS No. 130 in the first quarter of fiscal year 1999. The statement
requires that comprehensive income, which is the total of net income and all
other non-owner changes in equity, be displayed in a financial statement with
the same prominence as other financial statements. In addition, the standard
encourages companies to display the components of other comprehensive income
below the total for net income. The adoption of this standard in the first
quarter of fiscal 1999 will only effect the presentation of the financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information". The statement requires disclosures for
segments determined using the "management approach", which is based on the way
the chief operating decision-maker organizes segments within a company. This
statement is effective for the year ending January 31, 1999, and must be applied
on a limited basis to interim periods thereafter. The standard will have no
effect on the Company's financial position or statement of operations, but will
change the presentation of segment information in the financial statements.
INVENTORIES Inventories are stated at the lower of cost or market and consist
of materials, labor and overhead. Cost is determined by the first-in, first-out
method.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at
cost. Depreciation is computed primarily using the straight-line method over
22
<PAGE>
the following estimated useful lives: buildings for fifty years; leasehold
improvements for the lesser of estimated useful life or lease term; machinery
and equipment for two to five years; and furniture and office equipment for
three to five years. Maintenance and repairs are charged to expense as incurred
and the costs of additions and betterments that increase the useful lives of the
assets are capitalized.
INCOME TAXES The Company accounts for income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred income tax assets or liabilities are computed based on the temporary
differences between the financial statement and income tax bases of assets and
liabilities using the statutory marginal income tax rate in effect for the years
in which the differences are expected to reverse. Deferred income tax expenses
or credits are based on the changes in the deferred income tax assets or
liabilities from period to period.
As of February 1, 1998 and January 26, 1997, approximately $2,817,000 and
$2,040,000, respectively, of unremitted income related to the Company's wholly
owned European subsidiary is not subject to federal and state income taxes
except when such income is paid to the parent company. Federal and state income
taxes have not been provided on this income, as it is management's intention
that these amounts will not be distributed in a taxable transaction.
EARNINGS PER SHARE The consolidated financial statements are presented in
accordance with SFAS No. 128, "Earnings per Share." Basic earnings per common
share are computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per common share incorporate the
incremental shares issuable upon the assumed exercise of stock options. The
weighted average number of shares used to compute basic earnings per share in
fiscal years 1998, 1997 and 1996 were 13,978,000, 13,589,000, and 11,826,000,
respectively. For computation of diluted earnings per share, the weighted
average number of shares used in fiscal years 1998, 1997 and 1996 were
15,118,000, 14,050,000, and 12,388,000, respectively.
Options to purchase approximately 188,000, 168,000 and 218,000 shares were not
included in the computation of 1998, 1997 and 1996 diluted net income per share
because such options were considered anti-dilutive.
STOCK DISTRIBUTION On January 13, 1998, the Company effected a two-for-one stock
split in the form of a 100% stock dividend which was payable to shareholders of
record as of December 23, 1997. All shares, per share data, common stock, and
stock option amounts herein have been restated to reflect the effect of this
split.
TRANSLATION The assets and liabilities of the Company's foreign subsidiary are
translated using currency exchange rates at fiscal year end. Income statement
items are translated at average exchange rates prevailing during the period.
The translation gains or losses are included in the cumulative translation
adjustment in the accompanying financial statements.
ESTIMATES USED BY MANAGEMENT The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
23
<PAGE>
2. BUSINESS COMBINATIONS
- ------------------------
On October 2, 1997, Semtech Corporation entered into an Agreement and Plan of
Merger among the Company, ESI Acquisition Corp., a wholly owned subsidiary of
the Company, and Edge Semiconductor Incorporated (Edge). Pursuant to the Merger
Agreement, Semtech issued 1,499,954 shares of its common stock to all
shareholders of Edge and the holders of options and warrants to purchase shares
of common stock of Edge. The Company acquired Edge to integrate and complement
its existing businesses and technology.
The acquisition of Edge was accounted for as a pooling of interests in
accordance with APB Opinion No. 16 and related Securities and Exchange
Commission pronouncements. Edge had been incorporated on March 21, 1994,
however, its operations were immaterial in relation to the Company's prior to
fiscal year 1997. Therefore, the effect of the merger prior to January 28, 1996
has been adjusted to retained earnings. The consolidated balance sheets at
January 26, 1997 and January 28, 1996 as well as the consolidated statements of
income, shareholders' equity and cash flows for the year ended January 26, 1997
have been restated to include Edge as though it had always been a part of
Semtech.
The following table shows the effect of Edge's results of operations on the
combined companies for the nine months ended November 2, 1997 (which was the
quarter end closest to the date of the combination) and for the twelve months
ended January 26, 1997. Costs of $1,000,000 associated with the Company's
acquisition of Edge are reflected in Semtech's fiscal 1998 net income.
<TABLE>
<CAPTION>
Semtech Edge Combined
------------------ ------------------ ------------------
<S> <C> <C> <C>
For the nine months ended November 2,
1997:
Revenues $65,142 $9,124 $74,266
Net Income 8,810 1,413 10,223
For the twelve months ended January
26, 1997:
Revenues $65,383 $6,212 $71,595
Net Income 7,651 836 8,487
</TABLE>
In fiscal year 1996, the Company acquired ECI Semiconductor, which was accounted
for as a pooling of interests. ECI Semiconductor was renamed Semtech Santa Clara
Corporation and provides the Company with additional manufacturing capacity and
a strategic location within the Silicon Valley. At the time of the transaction,
the financial statements of the Company were restated to include the results of
operations, financial position and cash flows of ECI Semiconductor, as though it
had always been a part of Semtech.
3. TEMPORARY INVESTMENTS
- ---------------------------
Temporary investments consist of commercial paper and government obligations
with original maturities in excess of three months. At February 1, 1998,
January 26, 1997, and January 28, 1996, the fair market value of temporary
investments, classified as "available for sale securities", approximated cost,
thus no unrealized holding gains or losses were reported in the accompanying
balance sheets. During fiscal year 1998, the Company had no sales of available
for sale securities and likewise no realized gain or loss. As of February 1,
1998, the Company holds corporate bonds and government securities
24
<PAGE>
of approximately $30,000 and $822,000, respectively, maturing at various dates
through the year 2000.
4. INVENTORIES
- --------------
The commercial semiconductor industry and the markets in which the Company's
products are used are characterized by rapid changes and short product life
cycles. Consistent with the industry, the Company has experienced declines in
average selling prices over the life of its product lines. The Company has
generally reserved inventory which is considered obsolete or estimated to be in
excess of 18 months demand, and has provided reserves for declines in selling
price below cost. Inventories consisted of the following:
<TABLE>
<CAPTION>
Raw Materials Work in Process Finished Goods Total
(thousands)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Gross inventories $2,639 $11,261 $ 6,894 $20,794
Total reserves (329) (1,069) (2,376) (3,774)
------ ------- ------- -------
Net inventories $2,310 $10,192 $ 4,518 $17,020
====== ======= ======= =======
1997
Gross inventories $2,955 $ 9,737 $ 4,292 $16,984
Total reserves (726) (572) (1,232) (2,530)
------ ------- ------- -------
Net inventories $2,229 $ 9,165 $ 3,060 $14,454
====== ======= ======= =======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
- --------------------------------
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
(thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 164 $ 164
Building 1,083 1,069
Leasehold improvements 2,301 1,623
Machinery and equipment 19,707 15,776
Furniture and office equipment 3,161 2,155
Construction in progress 341 -
-------- --------
26,757 20,787
Less accumulated depreciation and amortization (13,952) (11,371)
-------- --------
Total $ 12,805 $ 9,416
======== ========
</TABLE>
25
<PAGE>
6. LONG-TERM DEBT AND LINES OF CREDIT
- -------------------------------------
Long-Term debt consisted of the following:
<TABLE>
<CAPTION>
(thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Note payable, interest at 8.62%, due in monthly installments to 1998,
collateralized by capital equipment $ - $ 223
Note payable, interest at 11.875%, due in semi-annual installments to 2003,
collaterized by a building - 237
Notes payable bearing interest at 30 day commercial paper
rate plus 2.5% due in monthly installments to 1999,
collateralized by domestic assets - 970
---------- ------
- 1,430
Less current maturities - (174)
---------- ------
Total $ - $1,256
========== ======
</TABLE>
The Company maintains a credit arrangement with a financial institution for a
line of credit for up to $7,500,000 at an interest rate of 30 day commercial
paper plus 2.5 percent (5.50% at February 1, 1998) that extends through
September 1998. The line of credit is made up of two parts, the first part
being a $4,000,000 line for working capital needs and the second part being a
$3,500,000 line for equipment acquisitions. The arrangement is collateralized
by the Company's domestic assets and contains provisions regarding current
ratios, debt to worth, and net worth. As of February 1, 1998, the Company had
no borrowings outstanding under this credit facility. Through its foreign
subsidiary, the Company also maintains an overdraft credit line in the amount of
300,000 pounds sterling. In fiscal 1998, the remaining balance of $80,000 was
repaid under a line of credit associated with Edge Semiconductor.
7. ACCRUED LIABILITIES
- ----------------------
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
(thousands) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Payroll and related $2,902 $1,798
Commissions 275 239
Non-income related taxes 784 72
Accrued professional fees 211 5
Other 287 532
------ ------
Total $4,459 $2,646
====== ======
</TABLE>
8. DEFERRED COMPENSATION
- ------------------------
In September 1989, the Company entered into an employment contract with a
shareholder that guaranteed continuing salary payments upon termination of
employment equal to his compensation at the point of termination, plus certain
benefits, for a period of three years. The liability was originally recorded by
the Company in 1989 and increased based on salary adjustments. The present
value of this commitment at February 1, 1998 is $603,000, which is reflected in
the accrued liabilities section of the accompanying financial statements. The
Company expects to settle this liability within the coming fiscal year.
26
<PAGE>
9. INCOME TAXES
- ---------------
The provision for taxes consisted of the following:
<TABLE>
<CAPTION>
(thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $6,963 $3,629 $3,339
State 918 617 724
Foreign 393 128 150
------ ------ ------
8,274 4,374 4,213
Deferred:
Federal (800) (107) (337)
State (76) (42) (62)
Foreign 0 2 (2)
------ ------ ------
Total $7,398 $4,227 $3,812
====== ====== ======
</TABLE>
The components of the net deferred income tax assets at February 1, 1998 and
January 26, 1997 are as follows:
Net short-term deferred income taxes:
<TABLE>
<CAPTION>
(thousands) 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Payroll and related $ 330 $ 287
Environmental 15 20
Reserve for credit memos 4 246
Deferred revenue 653 143
Bad debt reserve 237 226
State income taxes 312 158
Other deferred assets 35 71
------ ------
Total short-term deferred assets 1,586 1,151
Valuation reserve (191) (514)
------ ------
Net short-term deferred income taxes $1,395 $ 637
====== ======
</TABLE>
Net long-term deferred income taxes:
<TABLE>
<CAPTION>
(thousands) 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Inventory valuation $1,236 $ 914
Accrued compensation 114 123
Research and development charges 236 -
------ ------
Total long-term deferred assets 1,586 1,037
------ ------
Deferred tax liabilities:
Depreciation and amortization (901) (530)
Foreign deferred taxes (37) (37)
------ ------
Total long-term deferred liabilities (938) (567)
------ ------
Subtotal 648 470
Valuation reserve (228) (168)
------ ------
Net long-term deferred income taxes $ 420 $ 302
====== ======
</TABLE>
27
<PAGE>
The provision for taxes reconciles to the amount computed by applying the
statutory federal rate to income before taxes as follows:
<TABLE>
<CAPTION>
(thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed expected tax $7,534 $4,323 $3,857
State income taxes, net of federal benefit 640 302 662
Foreign sales corporation at rates less than statutory rates (346) (246) (255)
Foreign taxes at rates less than domestic rates (5) (4) (17)
Utilization of net operating loss and tax credit carryforwards (546) - (106)
Changes in valuation reserve (263) (377) (435)
Permanent differences 83 (24) -
Other 301 253 106
------ ------ ------
Provision for taxes $7,398 $4,227 $3,812
====== ====== ======
</TABLE>
Realization of the net deferred tax assets is dependent on generating sufficient
taxable income during the periods in which temporary differences will reverse.
Although realization is not assured, management believes it is more likely than
not that the net deferred tax assets will be realized. The amount of the net
deferred tax assets considered realizable, however, could be adjusted in the
near term if estimates of future taxable income during the reversal periods are
revised.
10. COMMITMENTS AND CONTINGENCIES
- ---------------------------------
The Company leases facilities and certain equipment under operating lease
arrangements expiring in various years through 2004. The aggregate minimum
annual lease payments under leases in effect on February 1, 1998 were as
follows:
<TABLE>
<CAPTION>
(thousands) Operating
Fiscal Year Ending Leases
- -------------------------------------------------------------------------
<S> <C>
1999 $1,066
2000 977
2001 730
2002 507
2003 424
Thereafter 355
------
Total minimum lease commitments $4,059
======
</TABLE>
Annual rent expense was $1,000,000, $745,000, and $667,000, for fiscal years
1998, 1997, and 1996, respectively.
Certain contaminants from an adjacent manufacturing site have been found in the
ground water at the Company's Newbury Park facility. The Company has data
showing that the contaminants are from an adjacent facility. The contaminants
in question have never been used by the Company at the Newbury Park facility.
To protect its interests the Company utilizes an environmental firm,
specializing in hydrogeology, to perform periodic monitoring. It is currently
not possible to determine the ultimate amount of possible future clean-up
28
<PAGE>
costs, if any, that may be required of the Company at this site. Accordingly, no
reserves for such clean-up activities have been provided by the Company at this
time.
From time to time, the Company is a defendant in lawsuits involving matters
which are routine to the nature of its business. Management is of the opinion
that the ultimate resolution of all such matters will not have a material
adverse effect on the accompanying consolidated financial statements.
11. SHAREHOLDERS' EQUITY
- ------------------------
In February 1986, the Company established the 1986 Stock Option Plan which
provides for granting options to purchase up to 500,000 shares of the Company's
common stock to employees, directors and consultants of the Company. The 1986
plan provides for the granting of options which meet the Internal Revenue Code
requirements for qualification as incentive stock options, as well as
nonstatutory options. Under this Plan, the option price must be at least equal
to the fair market value of the Company's common stock at the date of the grant
for incentive stock options and must equal or exceed the lesser of (i) 85% of
fair market value on the date of grant, or (ii) 85% of fair market value on the
date of exercise for nonstatutory options. Most incentive stock options expire
within ten years from the date of grant. Generally, the options vest in equal
annual increments over three to four years from the date of grant.
In February 1987, the Company adopted the 1987 Stock Option Plan covering
700,000 shares of the Company's common stock. The 1987 Plan provides for the
granting of incentive stock options, as well as nonstatutory options. The terms
and conditions of options granted under the 1987 Stock Option Plan are
substantially the same as those granted under the Company's 1986 Stock Option
Plan.
In 1994, the Company adopted the 1994 Long-Term Stock Incentive Plan and the
1994 Non-Employee Directors Stock Option Plan. These plans have been amended to
cover 4,600,000 shares and 500,000 shares of the Company's common stock,
respectively. Both 1994 plans provide for the granting of incentive stock
options, as well as nonstatutory options. The terms and conditions of options
granted under the 1994 Plans are substantially similar to those granted under
the Company's 1987 and 1986 Plans.
29
<PAGE>
Stock option information with respect to the Company's stock option plans is as
follows:
<TABLE>
<CAPTION>
Weighted
Common Average Aggregate
Shares Available Exercise Option Price
Reserved for Grant Options Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 29, 1995 1,682,852 540,352 1,142,500 $ 1.03 $ 1,177,711
Granted - (940,600) 940,600 10.14 9,537,363
Canceled - 23,000 (23,000) 0.99 (22,691)
Exercised (473,360) - (473,360) 0.94 (442,701)
Additions 1,100,000 1,100,000 - - -
--------- ---------- --------- ------ ------------
Balance at January 28, 1996 2,309,492 722,752 1,586,740 $ 6.46 $10,249,682
Granted - (1,892,600) 1,892,600 6.07 11,495,919
Canceled - 921,936 (921,936) 10.77 (9,930,915)
Exercised (193,828) - (193,828) 1.19 (229,800)
Additions 1,600,000 1,600,000 - - -
--------- ---------- --------- ------ ------------
Balance at January 26, 1997 3,715,664 1,352,088 2,363,576 $ 4.90 $11,584,886
Granted - (2,316,200) 2,316,200 16.33 37,822,300
Canceled - 249,002 (249,002) 6.39 (1,590,119)
Exercised (511,710) - (511,710) 3.77 (1,930,821)
Plan expiration (90,020) (90,020) - - -
Additions 1,600,000 1,600,000 - - -
--------- ---------- --------- ------ ------------
Balance at February 1, 1998 4,713,934 794,870 3,919,064 $11.71 $45,886,246
========= ========== ========= ====== ===========
</TABLE>
Information about stock options outstanding at February 1, 1998 is summarized as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------- ----------------------------------------
Range of Exercise Number Outstanding Weighted Average Weighted Average Number Exercisable Weighted Average
Prices at 2/1/98 Remaining Contract Life Exercise Price at 2/1/98 Exercise Price
- ------------------------------------------------------------------------------------ ----------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.88 - $ 1.33 217,568 2.9 Years $ 1.13 193,566 $ 1.12
$ 3.88 - $ 5.44 1,086,391 8.2 Years $ 5.14 235,944 $ 4.93
$ 6.75 - $ 9.75 1,054,436 8.8 Years $ 8.71 154,230 $ 7.91
$11.53 - $15.75 304,000 9.2 Years $12.67 6,000 $12.88
$17.97 - $26.63 1,256,669 9.8 Years $21.30 - -
- --------------------------------------------------------------------------------------------------------------------------
$ 0.88 - $26.63 3,919,064 8.6 Years $11.71 589,740 $ 4.54
=============== ========= ========= ====== ======= ======
</TABLE>
In December 1997, the Company granted 50,000 stock options at an exercise price
of $26.63 per share, with a vesting period of three years and a life of ten
years, to the non-employee directors of the Company. These options were granted
under no established stock option plan and do not reduce the number of shares
available for grant under the Company's established stock option plans.
30
<PAGE>
In fiscal year 1997, 667,600 options were repriced from a weighted average
exercise price of $11.42 to $5.44. During fiscal 1996, the remaining $136,280
of debentures issued under the Key Management Convertible Subordinated Debenture
Purchase Plan were converted into 272,560 shares of common stock.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" under which no compensation cost has
been recognized. If the Company had elected to recognize compensation costs
based on the fair value at the date of grant for awards in 1998, 1997 and 1996,
consistent with the provisions of SFAS No. 123, net income and net income per
share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
(in thousands, except per 1998 1997 1996
share amounts) ---- ---- ----
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 9,609 $ 6,407 $ 6,851
- ---------------------------------------------------------------------------------------------------------------
Net Income per Share:
Basic $ 0.69 $ 0.47 $ 0.58
Diluted $ 0.64 $ 0.46 $ 0.55
- ---------------------------------------------------------------------------------------------------------------
Weighted Average Number of Shares:
Basic 13,978 13,589 11,826
Diluted 15,118 14,050 12,388
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The pro forma effect on net income for fiscal years 1998, 1997 and 1996 may not
be representative of the pro forma effect on net income of future years because
the SFAS No. 123 method of accounting for pro forma compensation expense has not
been applied to options granted prior to January 30, 1995.
The weighted-average fair values at date of grant for options granted during
fiscal 1998, 1997 and 1996 were $11.11, $5.39 and $3.48, respectively, and were
estimated using the Black-Scholes option-pricing model. The following
assumptions were applied: (i) expected dividend yields of 0% for all periods,
(ii) expected volatility rates of 0.828 for 1998, 0.894 for 1997 and 1996, (iii)
expected lives of 4 to 5 years for all years, and (iv) risk-free interest rates
ranging from 5.24% to 7.01% for all years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. Option valuation models also require the input of highly
subjective assumptions such as expected option life and expected stock price
volatility. Because the Company's employee stock-based compensation plans have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, the Company believes that the existing option valuation models do not
necessarily provide a reliable single measure of the fair value of awards from
those plans.
12. OTHER INCOME AND EXPENSE
- ----------------------------
Other income (expense) consisted of the following:
<TABLE>
<CAPTION>
(thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 469 $ 205 $ 156
Gain (loss) on disposition of assets (20) 2 (1)
Foreign currency transaction gains (losses) (63) (25) -
Miscellaneous expense - - (2)
----- ----- -----
Total $ 386 $ 182 $ 153
===== ===== =====
</TABLE>
31
<PAGE>
13. STATEMENTS OF CASH FLOWS
- ----------------------------
The Company had the following non-cash activities for each year:
<TABLE>
<CAPTION>
(thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-cash activities -
Debentures converted to stock $ - $ - $ 136
Tax benefits related to
stock options 3,923 263 1,649
------ ----- ------
Total $3,923 $ 263 $1,785
====== ===== ======
</TABLE>
Income taxes paid in fiscal years 1998, 1997, and 1996, were $3,534,000,
$3,491,000 and $2,251,000, respectively. For those same periods, the Company
paid interest in the amounts of $36,000, $131,000, and $97,000, respectively.
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
14. BUSINESS SEGMENTS AND CONCENTRATIONS OF RISK
- ------------------------------------------------
The business of the Company consists of the manufacture and sale of silicon
rectifiers, integrated circuits and related devices which falls within a single
segment. Foreign sales are primarily to European and Asian customers. No
customer accounted for greater than 10% of net sales during fiscal 1998 and
1997. In fiscal 1996, one customer did account for 12% of the Company's net
sales.
A summary of net sales, pre-tax income and identifiable assets for the Company's
domestic and European operations follows:
<TABLE>
<CAPTION>
(thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales:
Domestic $ 89,653 $62,708 $53,906
European 13,155 8,887 7,778
-------- ------- -------
Total $102,808 $71,595 $61,684
======== ======= =======
Income Before Taxes:
Domestic $ 20,989 $12,327 $10,870
European 1,170 387 473
-------- ------- -------
Total $ 22,159 $12,714 $11,343
======== ======= =======
Identifiable Assets:
Domestic $ 62,928 $42,226 $32,242
European 4,207 3,462 2,983
-------- ------- -------
Total $ 67,135 $45,688 $35,225
======== ======= =======
</TABLE>
Sales to customers in Asia-Pacific are included in domestic totals as they are
all export sales. Sales to customers in the Asia-Pacific region totaled $32.9
million in fiscal year 1998, $21.6 million in fiscal 1997, and $14.1 million in
fiscal 1996.
32
<PAGE>
15. SELECTED QUARTERLY DATA (UNAUDITED)
- ---------------------------------------
Unaudited quarterly data for fiscal 1998 and 1997 is presented below.
<TABLE>
<CAPTION>
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Net sales $23,175 $24,558 $26,533 $28,542 $102,808
Gross Profit 10,697 11,570 12,790 13,872 48,929
Net Income 3,230 3,603 3,390 4,538 14,761
Net Income per Share:
Basic 0.24 0.26 0.24 0.32 1.06
Diluted 0.22 0.24 0.22 0.30 0.98
1997
Net sales $16,682 $15,477 $18,370 $21,066 $ 71,595
Gross Profit 7,130 6,466 7,749 9,338 30,683
Net Income 1,972 1,641 2,096 2,778 8,487
Net Income per Share:
Basic 0.15 0.12 0.15 0.20 0.62
Diluted 0.14 0.12 0.15 0.19 0.60
</TABLE>
16. SUBSEQUENT EVENT
- --------------------
On April 27, 1998, the Company signed a merger agreement with Acapella Limited
(Acapella), a company located in the United Kingdom, to be accounted for as a
pooling of interests. Under the terms of the agreement, Acapella shareholders
received approximately 176,000 shares of Semtech common stock for all
outstanding shares of Acapella stock.
33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Semtech Corporation:
We have audited the accompanying consolidated balance sheets of Semtech
Corporation (a Delaware Corporation) and subsidiaries as of February 1, 1998 and
January 26, 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended February 1, 1998. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule 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 financial statements referred to above present fairly, in
all material respects, the financial position of Semtech Corporation and
subsidiaries as of February 1, 1998 and January 26, 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended February 1, 1998, in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. Schedule II - Valuation and Qualifying Accounts is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/S/ Arthur Andersen LLP
---------------------------------
ARTHUR ANDERSEN LLP
Los Angeles, California
April 27, 1998
34
<PAGE>
SCHEDULE II
SEMTECH CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JANUARY 28, 1996, JANUARY 26, 1997, AND FEBRUARY 1, 1998
<TABLE>
<CAPTION>
Balance at Charged to Costs Balance at
Beginning and End
of Year Other Expenses Deductions of Year
---------- ----- ----------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended January 28, 1996
- ---------------------------
Allowance for doubtful
accounts $ 501,000 $ - $755,000 $ (215,000) $1,041,000
Year Ended January 26, 1997
- ---------------------------
Allowance for doubtful
Accounts $1,041,000 $ - $493,000 $ (61,000) $1,473,000
Year Ended February 1, 1998
- ---------------------------
Allowance for doubtful
accounts $1,473,000 $ - $480,000 $(1,156,000) $ 797,000
</TABLE>
35
<PAGE>
ITEM 9. CHANGES IN OR DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained at Pages 2 through 6 in Management's Proxy Statement
(the "Proxy Statement"), to be filed within 120 days of the Company's fiscal
year end, under the heading "Election of Directors" and the information
contained on Page 22 of the Proxy Statement regarding appointment of independent
accounts is incorporated by reference herein.
Executive Officers and Certain Other Significant Employees of Registrant
------------------------------------------------------------------------
<TABLE>
<CAPTION>
Name Age Office
---- --- ------
<S> <C> <C>
John D. Poe 46 President and Chief Executive Officer
Raymond E. Bregar 50 Executive Vice President, Corporate Operations
David G. Franz, Jr. 36 Vice President, Finance and Chief Financial
Officer, and Secretary
David I. Anderson 51 Vice President, IC Design and Development
Jean-Claude Zambelli 54 Vice President, Sales and Marketing
</TABLE>
Mr. Poe became President and Chief Executive Officer of the Company in October
1985. He is a director of the Company. Before serving in this capacity at the
Company, Mr. Poe served as Vice President, Operations, for Silicon General, Inc.
from August 1984 through September 1985. Prior to that position, Mr. Poe was
Military Operations Manager in the Discrete Division at Fairchild Camera and
Instrument, Inc. where he managed the manufacture, design and marketing of
military discrete semiconductors for more than four years.
Mr. Bregar joined the Company in February 1988 and was appointed Vice President,
Engineering. From fiscal 1989 through fiscal 1993, Mr. Bregar served as Vice
President of Discrete Products. Currently Mr. Bregar serves as Executive Vice
President, Corporate Operations, a position he has held since February 1993.
Prior to joining the Company, Mr. Bregar served as business manager of Power
Discretes with Fairchild Semiconductor where he directed the research and
development and manufacturing of the power mosfet and power rectifier product
lines.
Mr. Franz became Vice President, Finance, Chief Financial Officer, and Secretary
in August of 1993. Prior to joining the Company, Mr. Franz was Director of
Finance of the Large Computer Systems Division (formerly Teradata Corporation)
of AT&T from May 1990 through August 1993. Prior to that position Mr. Franz was
employed by the Wickes Companies and Arthur Andersen LLP. Mr. Franz is a
Certified Public Accountant.
Mr. Anderson joined the Company as Vice President of IC Design and Development
in June of 1996. Prior to taking this position, Mr. Anderson was the worldwide
design manager for National Semiconductor's Automotive Systems Group. Mr.
Anderson has over 20 years experience in analog design.
36
<PAGE>
Mr. Zambelli was named Vice President of Sales and Marketing in December of
1996. Mr. Zambelli has more than 25 years of experience in the semiconductor
industry and has held senior management positions with several companies. Most
recently, Mr. Zambelli was vice president of sales for Exar Corporation.
None of the officers has any family relationship to any other officer. The
officers are elected annually by the Board of directors and serve at the
discretion of the Board.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement at Pages 6 through 10 under the
heading "Executive Compensation" is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in the Proxy Statement at Page 2 under the heading
"Principal Shareholders" and Pages 2 and 5 under the heading "Election of
Directors" is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Proxy Statement at Pages 6 through 10 under the
heading "Executive Compensation" is incorporated by reference herein.
37
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The financial statements and the Report of Arthur Andersen LLP are
included in Part II of this Report on the pages indicated.
<TABLE>
<CAPTION>
Page
----
Index of Financial Statements:
<S> <C>
Consolidated statements of income, three years ended February 1, 1998 18
Consolidated balance sheets, February 1, 1998 and January 26, 1997 19
Consolidated statements of shareholders' equity, three years ended February 1, 1998 20
Consolidated statements of cash flows, three years ended February 1, 1998 21
Notes to consolidated financial statements 22
Report of Independent Public Accountants 34
</TABLE>
(2) The following financial statements schedule of the Company for the
years ended February 1, 1998, January 26, 1997, and January 28, 1996, is filed
as part of this Report and should be read in conjunction with the financial
statements:
Page
----
Schedule II - Valuation and Qualifying Accounts 35
Schedules other than those listed above are omitted since they are not
applicable, not required, or the information required to be set forth herein is
included in the consolidated financial statements or notes thereto.
Supplementary Financial Information - Quarterly Financial Data
-----------------------------------
(unaudited) for the years ended February 1, 1998 and January 26, 1997 is
included in Part II of this Report at page 33.
38
<PAGE>
(3) Exhibits - Incorporated by reference from the Company's previous 10-K
--------
filings unless otherwise indicated
<TABLE>
<C> <S>
3.1 - Certificate of Incorporation, as amended
3.2 - Bylaws
4.1 - Indenture between Semtech Corporation and Trust Services
of America, Inc.
4.2 - Form of Debenture (contained in 4.1 above)
4.3 - First Supplemental Indenture between Semtech Corporation
and Trust Services of America, dated May 11, 1988
10.1 - Security Agreement and Collateral Installment Note
between the Company and Merrill Lynch in the aggregate
amount of $7,500,000, dated August 24, 1992, as amended
on August 15, 1996 for establishing a WCMA line of credit
and an equipment acquisition line
10.4 - Agreement of sublease executed on December 23, 1991,
effective January 1, 1991, by the Company and the Corpus
Christi Airport Development Corporation for a portion of
the Company's plant and facilities
10.6 - Overdraft facility agreement executed on May 26, 1987
between the Company and the Bank of Scotland in the
amount of 300,000 pounds sterling
10.7 - Lease executed on May 1, 1988 and amended on November 1,
1991 by the Company for a portion of its plant and
facilities
10.8 - Lease executed on September 12, 1988 by the Company for a
portion of its plant and facilities
10.10 - The Company's 1986 Stock Option Plan and the related Form
of Option Agreement
10.11 - The Company's 1987 Stock Option Plan and the related Form
of Option Agreement
10.12 - The Company's 1994 Long-term Stock Incentive Plan and the
related Form of Option Agreement, as amended.
10.11 - The Company's 1994 Non-Employee Directors Stock Option Plan
and the related Form of Option Agreement, as amended.
13.1 - Annual Report to Shareholders
22.1 - Subsidiaries of the Company
27 - Financial Data Schedule, Article 5, attached
</TABLE>
39
<PAGE>
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.
SEMTECH CORPORATION
By /S/ John D. Poe
---------------------------
John D. Poe, President
and Chief Executive Officer
Date April 30, 1998
------------------------
40
<PAGE>
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.
Date: April 30, 1998 /S/ John D. Poe
-------------------- -----------------------------
John D. Poe, President
and Chief Executive Officer,
Director
Date: April 30, 1998 /S/ David G. Franz, Jr.
-------------------- ------------------------------
David G. Franz, Jr.
Vice President, Finance
and Chief Financial Officer,
and Secretary
(Principal Accounting
and Financial Officer)
Date: April 30, 1998 /S/ James P. Burra
-------------------- ------------------------------
James P. Burra
Director
Date: April 30, 1998 /S/ Rock N. Hankin
-------------------- -----------------------------
Rock N. Hankin
Director
Date: April 30, 1998 /S/ Allen H. Orbuch
-------------------- ------------------------------
Allen H. Orbuch
Director
Date: April 30, 1998 /S/ James T. Schraith
-------------------- ------------------------------
James T. Schraith
Director
Date: April 30, 1998 /S/ Jack O. Vance
-------------------- ------------------------------
Jack O. Vance
Director
The information contained in the Proxy Statement at Pages 7 and 11 under
the heading "Executive Compensation" is incorporated by reference herein.
41
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESULTS OF OPERATIONS FOR THE 12 MONTHS ENDED FEBRUARY 1,
1998, WHICH ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE FORM 10-K FOR
THE YEAR ENDED FEBRUARY 1, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-01-1998
<PERIOD-START> JAN-27-1997
<PERIOD-END> FEB-01-1998
<CASH> 18,808
<SECURITIES> 1,852
<RECEIVABLES> 13,722
<ALLOWANCES> 797
<INVENTORY> 17,020
<CURRENT-ASSETS> 53,753
<PP&E> 26,757
<DEPRECIATION> 13,952
<TOTAL-ASSETS> 67,135
<CURRENT-LIABILITIES> 12,441
<BONDS> 0
0
0
<COMMON> 142
<OTHER-SE> 54,519
<TOTAL-LIABILITY-AND-EQUITY> 67,135
<SALES> 102,808
<TOTAL-REVENUES> 102,808
<CGS> 53,879
<TOTAL-COSTS> 53,879
<OTHER-EXPENSES> 27,120
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36
<INCOME-PRETAX> 22,159
<INCOME-TAX> 7,398
<INCOME-CONTINUING> 14,761
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,761
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 0.98
</TABLE>
