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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 September 27,
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 000-26690
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ELANTEC SEMICONDUCTOR, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0408929
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
675 Trade Zone Boulevard, Milpitas, California 95035
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (408) 945-1323
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Securities registered pursuant to Section 12(b) of the Act:
None None
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 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
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Indicate by check mark if disclosure of delinquent filer 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. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the common stock on October 30,
1998 as reported on the Nasdaq National Market: $25,295,677. This calculation
does not include a determination that persons are affiliates for any other
purpose.
Number of shares outstanding of the registrant's common stock as of October 30,
1998: 9,198,428
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Documents Incorporated By Reference
Items 10, 11, 12 and 13 of Part III incorporate information by reference to
portions of the registrant's definitive proxy statement to be delivered to
stockholders in connection with the annual meeting of stockholders to be held
January 22, 1999.
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ELANTEC SEMICONDUCTOR, INC.
FORM 10-K
For the Fiscal Year Ended September 30, 1998
Table of Contents
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PART I
Page
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Item 1. Business........................................................................... 3
Item 2. Properties......................................................................... 13
Item 3. Legal Proceedings.................................................................. 13
Item 4. Submission of Matters to a Vote of Security Holders................................ 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............. 14
Item 6. Selected Financial Data............................................................ 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations...................................................................... 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk......................... 22
Item 8. Financial Statements and Supplementary Data........................................ 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure......................................................................... 25
PART III
Item 10. Directors and Executive Officers of the Registrant................................. 26
Item 11. Executive Compensation............................................................. 26
Item 12. Security Ownership of Certain Beneficial Owners and Management..................... 26
Item 13. Certain Relationships and Related Transactions..................................... 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................... 27
Signatures ................................................................................... 48
</TABLE>
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PART I
The following discussion contains forward looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the section entitled
"Business" and in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
ITEM 1: BUSINESS
Elantec Semiconductor, Inc. ("Elantec" or the "Company") designs, manufactures
and markets high performance analog integrated circuits primarily for the
video/multimedia, data processing, instrumentation and communications markets.
The Company targets high growth commercial markets in which advances in digital
technology are driving increasing demand for high speed, high precision and low
power consumption analog circuits. Electronic systems manufacturers in these
markets typically have requirements for analog circuits with particular
precision, linearity, speed, power and signal amplification capabilities. The
Company addresses these requirements with standard products that serve several
markets or application specific standard products ("ASSPs") designed for
specific markets and applications. By offering both standard products and ASSPs,
the Company seeks to broaden its customer base with standard products and to
expand product sales to new and existing customers with ASSPs that meet their
specific requirements. The Company offers approximately 150 high performance
analog products, such as amplifiers, drivers, faders, transceivers and
multiplexers, most of which are available in multiple packaging configurations.
The Company's products are manufactured at the Company's internal manufacturing
facility in Milpitas, California as well as third party wafer foundries.
Industry Overview
Analog circuits operate over a wide range of voltages, which limits the minimum
dimensions that can be used in the device structures of analog integrated
circuits. Thus, the development of successful analog integrated circuits is
generally more dependent on innovative design within technological constraints
rather than on achieving small feature sizes and high densities. Typically,
designers of analog circuits must take into account complex interrelationships
between the manufacturing process, the physical layout of the circuit elements
and the packaging of the end product, all of which can significantly affect
performance. Moreover, the high performance characteristics required by new and
emerging applications for analog circuits involve increasingly advanced designs,
which will in turn require more skilled analog designers, innovative design
strategies and rigorous design methodologies. The number of design engineers who
have the training, creativity and experience to design complex analog circuits
is very limited, and the available computer-aided design ("CAD") tools for
analog circuit design typically require substantial customization by the user in
order to provide adequate utility for complex analog circuit design.
In order to meet the needs of electronic systems manufacturers, analog
integrated circuit companies offer a wide range of both high performance
standard products and market specific ASSPs. Standard products can serve as
basic building blocks to assist system designers in bringing new products to
market rapidly. ASSPs enhance performance and combine functions to reduce system
size and cost as end-user needs become better defined and system unit volumes
increase. The critical point of competition for analog integrated circuit
companies is at the "design-in" stage when the system designer evaluates various
alternative components for implementing the system architecture. Companies that
offer families of analog standard products and ASSPs that perform a number of
the functions required by the systems design will typically have an advantage at
the design-in stage because systems designers often prefer to choose products
from the same vendor once the vendor has been qualified as a producer of
reliable products.
The Company believes that the pervasive use of digital integrated circuits in
electronic systems and the rapid advances in digital technology are driving
increasing demand for high performance analog
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products, particularly in the video/multimedia, data processing, instrumentation
and communications markets.
Product Markets and Applications
Elantec targets four high growth commercial markets where it believes there is
an increasing demand for analog solutions: video/multimedia, data processing,
instrumentation and communications. In each of its target markets, the Company
offers a family of standard products and ASSPs that are designed to be used as
building blocks by addressing a number of common component requirements, thereby
providing more effective solutions for electronic systems designers. Most of the
Company's standard products are used in more than one of these markets, while in
general each ASSP is used in only one specific market.
The following table sets forth examples of typical applications of the Company's
products in each of the four target commercial markets and a representative
application:
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Market Typical Applications
=============================== ========================================
Video/Multimedia Overhead Displays
Set Top Converters
Special Effects Generators
Switchers/Routers
Video Cameras
Video Distribution Networks
Video Signal Processing
Workstations
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Data Processing Copiers
Document Scanners
Optical Storage
Personal Computers
Power Supplies
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Instrumentation Analyzers
Automatic Testers
Measuring Instruments
Medical Instrumentation
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Communications ADSL Transceivers
HDSL Transceivers
Video Teleconferencing
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Primary Markets
Video/Multimedia. Video images are increasingly being incorporated into
electronic applications such as multimedia computing and communications. This
trend is creating increasing demand for high speed amplifiers and specialty
analog circuits for the processing and display of video signals. The Company
focuses on several segments of the video/multimedia market, including displays,
set top converters, special effects generators, studio equipment and video
distribution networks.
Data Processing. The growth of data processing, particularly in personal
computers, has been driven by advances in digital technology, which have in turn
created new applications for analog functions. In this market, the Company's
products include amplifiers for document scanners, copiers and power management
circuits targeted for new generations of microprocessors that operate at low
voltages. An emerging area targeted by the Company is the optical storage
market. The Company is currently providing products that control the laser diode
driver for optical disk drives and products for CD read/write and DVD read/write
applications.
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Instrumentation. The detection and measurement of analog information such as
light, sound, temperature, pressure and speed in industrial, medical and other
measurement systems have been a traditional focus of analog circuits. As systems
grow more complex and information is processed at higher rates, there is a
concomitant requirement for higher speed analog circuits to process the
information in analog format. The Company supplies products for high speed
instrumentation, automatic testers and medical instrumentation, such as
ultrasound scanners.
Communications. The convergence of communications and computers has also created
opportunities for high performance analog circuits. For example, electronic
communications through telephone lines increasingly include both digital and
analog information such as audio, video and data and require digital and analog
circuits to transmit and process them. In this market, the Company supplies
transceivers and high speed amplifiers for Asymmetrical Digital Subscriber Line
("ADSL") and High Bit Rate Digital Subscriber Line ("HDSL") techniques for
increasing the rate at which data is transmitted over twisted-pair wires such as
conventional telephone lines, which is important for emerging communications
applications related to Internet access.
Other Markets
In addition to its primary markets, the Company provides its products to
electronic systems manufacturers in the military and automotive markets.
Military. The Company has historically offered products for a variety of
military applications and continues to offer certain products to meet the needs
of customers of these products. However, on July 1, 1997 the Company announced
that it would discontinue its military hybrid products. This product line
accounted for 8.4% and 7.9% of product revenues in 1998 and 1997, respectively.
Orders for these discontinued products were accepted through the middle of 1998
with last shipments from the factory extending throughout fiscal 1999. The
Company expects higher gross margins from last-buy orders during fiscal 1999.
However, the Company does not expect the discontinuance of this product line to
have a material impact on the Company's fiscal 1999 results from operations.
Automotive. In February 1993, the Company entered into an exclusive agreement
with Aisin Seiki Co., Ltd. ("Aisin"), a manufacturer of automotive parts in
Japan and a member of the Toyota group of companies. Under the terms of the
agreement, Elantec licensed to Aisin certain proprietary Elantec technology to
design and manufacture analog integrated circuits for the automotive market. In
return, the Company received technology license fees and royalty payments upon
the sale of products derived therefrom. The agreement terminated in February
1998 and provided for payments to Elantec totaling $7.0 million. Payments were
received ratably during fiscal 1993-1998 and as of September 30, 1998, all
revenues under agreement had been received. The Company did not renew the
license agreement and no manufacturing relationship with Aisin currently exists.
Products
The Company offers approximately 150 high performance analog products, most of
which are available in multiple packaging configurations.
Standard Products. Amplifiers and buffers are used to amplify or reproduce
analog electrical signals (either voltage or current) without distortion. High
power amplifiers provide a large electrical output current or voltage and are
particularly useful in video transmission and communications applications. High
speed amplifiers and buffers are designed specifically to process high frequency
signals such as video information without distortion. Comparators are circuits
that accurately measure an electrical signal level in comparison with a
predetermined value and indicate the result. Mosfet drivers are circuits that
control the switching functions of mosfet (metal-oxide-semiconductor field
effect transistor) power transistors used in power control applications.
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Application Specific Standard Products. For the video/multimedia market the
Company offers a variety of ASSPs that can be used as standard building blocks
to provide solutions to the video system designer for many common video circuit
designs. Sync separators are timing circuits that control the position and
stability of the video image on a video display. D.C. restoration circuits
restore to the correct voltage level a video signal that has been amplified and
processed in order to ensure accurate transfer of video information. Video
multiplexers allow multiple video inputs to be connected to a single output in a
selected manner. Faders combine separate signals in different ratios for special
effects such as the fading of one video image into another. Power management
circuits convert supply voltages from 5 volts to a lower voltage required by
modern microprocessors. Laser diode drivers control the performance of the laser
diode used in the read/write mode in optical storage pick-up heads. In the
instrumentation market, pin drivers and receivers are used in automatic test
equipment to generate and detect electrical signals to test electronic
components. In the communications market, transceivers are used to transmit and
receive high speed analog signals containing encoded digital information over
twisted pair telephone lines.
Sales and Distribution
The Company sells its products both directly to customers, with the assistance
of independent sales representatives, and indirectly through independent
distributors. The Company's direct sales force consists of sales managers and
field application engineers who support customers, sales representatives and
distributors in each major geographic market. The sales staff and field
application engineers are located at the Company's Milpitas, California
headquarters and in field sales offices in Massachusetts, England and Japan.
In North America, the Company sells its products through 21 independent sales
representative organizations having a total of more than 38 offices and five
distributors having a total of more than 90 locations. These distributors are
entitled to price rebates on unsold inventory if the Company lowers the prices
of its products. In addition, on a semi-annual basis, these distributors are
permitted to return for credit against purchases of an equivalent dollar value
of products up to 5% of their total product purchases during the most recent
six-month period.
In fiscal 1998 and 1997, sales to Insight Electronics, Inc. represented
approximately 11% and 12% of the Company's net revenues, respectively. In fiscal
1996, no single domestic representative or distributor accounted for sales in
excess of 10% of the Company's net revenues. See Note 1 of Notes to Consolidated
Financial Statements.
Outside North America, the Company sells its products through a network of
international distributors. Such international sales represented approximately
53%, 54% and 48% of the Company's net product revenues, excluding Aisin contract
revenues, in fiscal 1998, 1997, and 1996, respectively.
Sales to Microtek International, Inc. in Japan represented approximately 23%,
14% and 15% of net product revenues in fiscal 1998, 1997 and 1996, respectively.
See Note 1 of Notes to Consolidated Financial Statements.
In connection with its international sales, the Company is subject to the normal
risks of conducting business internationally. These risks include unexpected
changes in regulatory requirements, changes in legislation or regulations
relating to the import or export of semiconductor products, delays resulting
from difficulty in obtaining export licenses for certain technology, tariffs,
quotas and other barriers and restrictions, and the burdens of complying with a
variety of foreign laws. The Company is also subject to general geopolitical
risks, such as political and economic instability and changes in diplomatic and
trade relationships, in connection with its international operations. Because
sales of the Company's products are denominated in United States dollars,
fluctuations in the value of the dollar could increase the prices in local
currencies of the Company's products in foreign markets and make the Company's
products relatively more expensive than competitors' products that are
denominated in local currencies. Additionally, currency exchange fluctuations
could reduce the cost of products from the Company's foreign competitors.
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A substantial portion of the Company's revenues are realized through independent
distributors and independent sales representatives that are not under the direct
control of the Company. These independent sales organizations generally carry
the product lines of a number of companies, are not subject to any minimum
purchase requirements and can discontinue selling the Company's products at any
time. Accordingly, the Company must compete for the focus and sales efforts of
its distributors and independent sales representatives. In addition, the
Company's distributors are permitted to return to the Company a portion of the
products purchased by them, and the Company's business and results of operations
could be materially adversely affected if the amount of returns exceeds the
Company's reserves. There can be no assurance that the Company will be able to
retain the loyalty and attention of its distributors and representatives. The
loss of one or more of the Company's distributors or representatives could have
a material adverse effect on the Company's business and results of operations.
Backlog
At September 30, 1998, the Company's product backlog was approximately $12.9
million, compared to $12.7 million at September 30, 1997. The Company includes
all orders scheduled for delivery within six months in backlog. The Company's
business, and to a large extent the entire semiconductor industry, is
characterized by short-term orders and shipment schedules. These orders can
generally be cancelled or rescheduled without significant penalty to the
customers. As a result, the quantities of the Company's products to be delivered
and their delivery schedules are frequently revised by customers to reflect
changes in their needs. Since backlog can be cancelled or rescheduled, the
Company's backlog at any time is not necessarily indicative of future revenues.
Design Methodology and Process Technology
Design Methodology. The Company's designers apply a rigorous, standardized
design methodology intended to accelerate the development and introduction of
new products, maintain consistent quality and promote the development and
sharing of design expertise among the engineering staff. Each designer utilizes
a common set of customized CAD tools on a network of computer workstations and
applies standardized design rules in order to facilitate the integration of
different designs or design elements. The Company promotes design integrity and
sharing of expertise by requiring each designer to subject designs to a series
of peer reviews and simulation and verification tests at different stages of
design development. The Company has developed proprietary computer models of
circuit elements to assist in the modeling, simulation, layout and verification
of circuit designs.
The Company's approach to new product development is driven by specific market
requirements in addition to advances in technology and design methodology. The
Company has adopted a systematic approach of using its field application
engineers to identify market opportunities for new high performance products,
contacting other customers to determine whether there is an opportunity to
develop products that will be applicable to a broad range of customers in the
Company's target markets and consulting with the Company's analog designers and
marketing personnel to define ASSPs for the target markets.
Process Technology. The Company uses a variety of semiconductor process
technologies for its products in order to meet the particular requirements of
different customers and applications. The Company's process technologies include
dielectric isolation and junction isolation complementary bipolar, junction
isolation bipolar, and CMOS technologies.
Complementary Bipolar Technology. The Company uses complementary bipolar
technologies primarily for high speed applications such as video amplifiers and
video ASSPs. Complementary bipolar technology uses two different types of
transistors (referred to as "pnp" and "npn") to process high speed analog
signals efficiently in either positive or negative polarity, which substantially
simplifies the design process by allowing symmetrical design architectures,
permits improved speed and requires less power. For high speed, high voltage
applications, Elantec uses dielectric isolation complementary bipolar
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technology. For low voltage, high speed applications such as certain amplifiers
and video ASSPs, the Company uses junction isolation complementary bipolar
technologies provided by an outside foundry.
Dielectric Isolation Technology. Dielectric isolation is a silicon-on-insulator
(SOI) manufacturing technique that uses insulating oxide to isolate transistors
from each other electrically. This technique has the inherent advantages of low
electrical capacitance, which allows high speed signal processing and minimizes
cross-talk or unwanted interference from other signals, and higher voltage
operation, which is useful for instrumentation and many other analog
applications.
Complementary Metal-Oxide-Semiconductor Technology. Since 1992, Elantec has
pursued a strategy to provide a wider range of products using CMOS technology.
CMOS technology enables the design of circuits with lower power consumption than
bipolar circuits, but with relatively lower speed, and is well suited for analog
switching and mixed signal applications. The Company uses several third-party
foundries to supply wafers for its CMOS products.
The markets for the Company's products are characterized by rapid technological
change and frequent new product introductions. There can be no assurance that
the Company's analog products or the process technologies utilized by the
Company will not become obsolete. In addition, as digital integrated circuits
have become faster and their processing capacity has expanded, digital circuits
have increasingly been used to perform functions in electronic systems that were
previously performed with analog technologies. There can be no assurance that
further advances in digital processing power will not eventually supplant analog
technologies in those new applications, which could have a material adverse
effect on the Company's business and results of operations.
Manufacturing
The Company manufactures semiconductor wafers for its dielectric isolation
complementary bipolar products in its own facility to optimize the performance
of these products and maintain a high degree of manufacturing control. The
Company's manufacturing facilities in Milpitas, California include a four-inch
wafer fabrication facility and a 7,840 square foot clean room. The Company
broadens its manufacturing capabilities by using third-party foundries to
produce junction isolation bipolar wafers and CMOS wafers. The use of
third-party foundries enables the Company to focus on its design strengths and
minimize fixed costs and capital expenditures while providing access to diverse
manufacturing technologies without bearing the full risk of obsolescence.
Sales of dieletric isolation products represented approximately 47% of the
Company's net product revenues in fiscal 1998 and 67% in 1997. The process for
manufacturing dielectrically isolated integrated circuits is more complex than
processes for junction isolation bipolar manufacturing, and the number of
foundries that have the capability to produce dielectrically isolated
semiconductor wafers is limited. The Company was informed that the current
dielectric isolation foundry would discontinue supplying this technology in the
fourth fiscal quarter of 1998. As a result of this information, the Company
converted production to its in-house capability during the fourth fiscal quarter
of 1998 and secured a supplier for one key process step.
The Company uses different third-party foundries to supply semiconductor wafers
for its complementary bipolar and its CMOS products. Sales of these products
collectively represented approximately 44% and 23% of the Company's net product
revenues in fiscal 1998 and fiscal 1997, respectively. Because of delays in
developing bonded wafer technology, the Company is planning to increase the
percentage of products built by third party foundries and is strengthening
long-term manufacturing contracts to facilitate this strategy. The Company
believes that it has had good long-term relationships with its foundries.
However, any interruption in the supply of wafers from the Company's foundries
would have a negative impact on the Company's business and results of operations
until an alternate source could be established. Although the Company believes
that it could develop alternative sources of supply, there can be no assurance
that the Company could do so in a timely manner to prevent such a material
adverse impact.
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The Company's commercial products are assembled by a variety of subcontractors
in Asia. These subcontractors may be subject to adverse political and economic
conditions, capacity, yield and quality problems or have difficulty obtaining
critical raw materials, which could result in disruptions in the supply of
assembled products. Any delay or disruption in the supply of assembled products,
whether by reason of manufacturing or assembly delays or other problems, might
result in the loss of customers, limitations or reductions in the Company's
revenue or other material adverse effects on the Company's business and results
of operations.
The Company tests each integrated circuit or "die" on the wafers produced by the
Company and its foundries for compliance with performance specifications before
assembly. Following assembly, the packaged units are returned to the Company for
final testing and inspection prior to shipment to customers. The Company then
performs extensive testing on all circuits using advanced automated test
equipment to ensure that the circuits satisfy specified performance levels.
Environmental Laws
The Company is subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in its manufacturing process.
Although the Company believes that its activities conform to presently
applicable environmental regulations, the failure to comply with present or
future regulations could result in fines being imposed on the Company,
suspension of production or a cessation of operations. There can be no assurance
that regulatory changes or changes in regulatory interpretation or enforcement
will not render compliance more difficult and costly. Any failure of the Company
to control the use of, or adequately restrict the discharge of, hazardous
substances, or otherwise comply with environmental regulations, could subject it
to significant future liabilities.
Research and Development
The Company's ability to compete depends, in part, upon its continued
introduction of technologically innovative products on a timely basis. Elantec's
product development strategy emphasizes a broad line of products to address a
diversity of customer applications. The Company's research and development
efforts are directed primarily at designing and introducing new products and
technologies and, to a lesser extent, developing new testing and packaging
techniques. The Company continually upgrades its internal technology while also
working with foundries to develop new technologies for new generations of
products. In addition, the Company continually refines its manufacturing
practices and technology to improve the yields of its products.
The Company has assembled a team of highly skilled analog design engineers. As
performance demands have increased the complexity of analog circuits, the design
and development process has become a multi-disciplinary effort, requiring
expertise ranging from detailed knowledge of device physics to expertise in
device placement and packaging to avoid unwanted cross-talk and signal
interference. The Company supports its key designers with an infrastructure of
device physicists, product engineers and test engineers who perform various
support functions and allow the designers to focus on the core elements of the
design.
As part of its future bipolar product development strategy, the Company is
developing a form of silicon on insulator (SOI) technology called bonded wafers.
Bonded wafer technology uses two flat oxidized silicon wafers that are thermally
bonded to one another, after which one wafer is precisely ground and polished to
form a thin silicon layer supported by the insulating oxide and the remaining
silicon wafer. This thin silicon layer is suitable for making individual
elements of the semiconductor circuits that are electrically isolated from each
other by insulating oxide to provide performance characteristics superior to
those achievable with other technologies such as dielectric isolation and
junction isolation. The Company believes that, if successful, the bonded wafer
technology could provide many of the same benefits as dielectric isolation but
with lower wafer cost and improved performance due to higher speed and smaller
device size. This technology could provide the Company with the capability to
provide
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products with higher levels of integration and performance to the Company's
target markets. However, there can be no assurance that the development of the
bonded wafer technology can be successfully accomplished in a timely manner or
that it will provide the desired improvements over the Company's current
technology or that the bonded wafer technology being developed by the Company
will not be supplanted by alternative new technologies. Significant delays or
cancellation of the development of the bonded wafer technology or manufacturing
problems associated with transferring the Company's current product line to this
technology would have a material adverse effect on the Company's business and
results of operations.
In fiscal 1998, 1997 and 1996, the Company spent $7.2 million, $6.2 million and
$6.4 million, respectively, on research and development. The Company expects
that it will continue to spend substantial funds on research and development
activities.
Patents and Licenses
The Company seeks to protect its proprietary technology through patents and
trade secret protection. Currently, the Company holds 35 United States patents
and four foreign patents, expiring on various dates between the years 2005 and
2015 and has additional pending United States patent applications, although
there can be no assurance that any patents will result from these applications.
While the Company intends to continue to seek patent coverage for its products
and manufacturing technology where appropriate, the Company believes that its
success depends more heavily on the technical expertise and innovative abilities
of its personnel than on its patent position. Accordingly, the Company also
relies on trade secrets and confidential technological know-how in the conduct
of its business. There can be no assurance that the Company's patents or
applicable trade secret laws provide adequate protection for the Company's
technology against competitors who may develop or patent similar technology or
reverse engineer the Company's products. In addition, the laws of certain
territories in which the Company's products are or may be developed,
manufactured or sold, including Asia, Europe and Latin America, may not protect
the Company's products and intellectual property rights to the same extent as
the laws of the United States.
The semiconductor industry is characterized by frequent litigation regarding
patent and other intellectual property rights. There can be no assurance that
third parties will not assert claims against the Company with respect to
existing or future products or technologies. In the event of litigation to
determine the validity of any third-party claims, such litigation, whether or
not determined in favor of the Company, could result in significant expense to
the Company and divert the efforts of the Company's technical and management
personnel from productive tasks. In the event of an adverse ruling in such
litigation, the Company might be required to discontinue the use of certain
processes, cease the manufacture, use and sale of infringing products, expend
significant resources to develop non-infringing technology or obtain licenses to
the infringing technology. There can be no assurance that licenses will be
available with reasonable commercial terms, or at all, with respect to disputed
third-party technology. In the event of a successful claim against the Company
and the Company's failure to develop or license a substitute technology at a
reasonable cost, the Company's business and results of operations would be
materially and adversely affected.
Competition
The semiconductor industry is intensely competitive and is characterized by
rapid technological change, product obsolescence and price erosion in many
markets. The analog integrated circuit segment of the semiconductor industry is
also intensely competitive, and many major semiconductor companies presently
compete or could compete in some segment of the Company's market. Most of these
competitors have substantially greater financial, technical, manufacturing,
marketing, distribution and other resources and broader product lines than
Elantec. The Company also competes indirectly with the in-house design staffs of
certain of its customers, which often provide alternative solutions to
individual analog systems requirements. The Company's current primary
competitors are Analog Devices, Inc.,
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Linear Technology Corporation, Maxim Integrated Products, Inc., and National
Semiconductor Corporation. As the Company expands its product line, it expects
that competition will increase with these and other domestic and foreign
companies. Although foreign companies have not traditionally focused on the high
performance analog market, many foreign companies, particularly certain Asian
companies, have the financial and other resources to participate successfully in
these markets, and there can be no assurance that they will not become
formidable competitors in the future.
The Company believes that its ability to compete successfully depends on a
number of factors, including the breadth of its product line, the ability to
develop and introduce new products rapidly, product innovation, product quality
and reliability, product performance, price, technical service and support,
adequacy of manufacturing, the ability to introduce new process technologies,
capacity and sources of raw materials, efficiency of production, delivery
capabilities and protection of the Company's products by intellectual property
laws. The Company believes that product innovation, quality, reliability,
performance and the ability to introduce products and process technologies
rapidly are more important competitive factors than price in its target markets
because the Company competes primarily at the stage when system manufacturers
design analog products into their systems. At the design-in stage, there is less
price competition, particularly where there is only one source of an application
specific product. The Company believes that, by virtue of its analog expertise
and rigorous design methodology, it competes favorably in the areas of rapid
product introduction, product innovation, quality, reliability and performance,
but it may be at a disadvantage in comparison to larger companies with broader
product lines, greater technical and financial resources and greater service and
support capabilities. There can be no assurance that the Company will be able to
compete successfully in the future.
Employees
At September 30, 1998, the Company had 182 full time employees. The Company
believes that its future success will depend, in part, on its ability to attract
and retain qualified technical and manufacturing personnel. This is particularly
important in the areas of product design and development, where competition for
skilled personnel, particularly those with analog experience, is intense. None
of the Company's employees is subject to a collective bargaining agreement, and
the Company has never experienced a work stoppage. The Company believes that its
relations with its employees are good.
In November 1998, David O'Brien, the Company's President and Chief Executive
Officer resigned from the Company. The Company is currently searching for a
replacement. However there can be no assurance that a qualified candidate will
be hired in the near future. James V. Diller, Director and Chairman of the
Board, is acting as President and Chief Executive Officer in the interim.
Executive Officers and Directors of the Company
The executive officers and directors of the Company are as follows:
Name Age Positions
---- --- ---------
James V. Diller (1) 63 Chairman of the Board, acting
President and Chief Executive
Officer
Ephraim Kwok 44 Vice President of Finance &
Administration and Chief
Financial Officer
Richard E. Corbin 63 Vice President of Technology
Ralph S. Granchelli, Jr. 43 Vice President of Marketing
Chuck K. Chan (2) 48 Director
B. Yeshwant Kamath (2) 50 Director
Alan V. King (1) 63 Director
11
<PAGE>
- ----------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
James V. Diller has been acting President and Chief Executive Officer since
November 1998 and Chairman of the Board since 1997. Mr. Diller was previously a
Director of the Company since 1986. Mr. Diller was a Founder of PMC-Sierra,
Inc., a communications semiconductor company, was its President and Chief
Executive Officer from 1983 to 1997 and is currently its Chairman of the Board.
Mr. Diller holds a B.S. degree in physics from the University of Rhode Island.
Ephraim Kwok joined Elantec in January 1998 as Vice President of Finance &
Administration and Chief Financial Officer. From June 1996 through December
1997, Mr. Kwok served as Vice President of Finance & Administration and Chief
Financial Officer of Ascent Logic Corporation. From September 1989 through June
1996, Mr. Kwok served as Chief Operating Officer and Chief Financial Officer of
KMOS Semiconductor. Mr. Kwok holds a B.S. degree from the University of
California, Davis and a M.B.A. degree from the University of California,
Berkeley.
Richard E. Corbin has served as Vice President of Technology since June 1997 and
previously served as Vice President of Bipolar Design Engineering from September
1992 to May 1997. From October 1987 to August 1992, he served as the Company's
Vice President of Operations. From 1981 to 1987, Mr. Corbin was employed at
Precision Monolithics, in a variety of management positions, including Director
of CMOS Operations and Vice President of New Product Development. From 1976 to
1980, Mr. Corbin held various positions at Fairchild Semiconductor including
Division Operations Manager of CMOS. Mr. Corbin holds a B.S. degree in
mathematics and physics from Arizona State University.
Ralph S. Granchelli, Jr. has served as Vice President of Marketing since
September 1994 and previously served as Vice President of Marketing and Sales of
the Company from November 1990 to August 1994. From 1985 to October 1990 he
served as the Company's Vice President of Sales. From 1983 to 1985, Mr.
Granchelli was National Sales Manager of Teledyne Semiconductor, Inc., a
division of Teledyne Industries, Inc. Previously, Mr. Granchelli held senior
sales positions with Micro Power Systems, Inc., an analog semiconductor company,
and the Advanced Analog Division of Intech, Inc., an analog hybrid semiconductor
company, and an engineering position at Teledyne Philbrick, a division of
Teledyne Industries, Inc. Mr. Granchelli holds an A.S. degree in Electronics
Engineering from Wentworth Institute of Technology and attended the University
of Massachusetts, Amherst from 1976 to 1979, where he studied electrical
engineering and marketing.
Chuck K. Chan has been a director of the Company since January 1992 and also
served as a director from 1983 to 1984. Dr. Chan has been a partner in Alpine
Technology Ventures, a venture capital firm, since December 1994 and was a
partner in Associated Venture Investors, a venture capital firm from 1982 to
1996. Dr. Chan holds B.S., M.S. and Ph.D. degrees in physics from the
Massachusetts Institute of Technology and a M.B.A. degree from Harvard
University.
B. Yeshwant Kamath has been a director of the Company since July 1993. Dr.
Kamath is the Division President of the KUB division of Videonics Inc.. KUB
Systems, a company that manufactures video special effects equipment, was
founded by Dr. Kamath in February 1992 and acquired by Videonics in May 1996.
Previously, Dr. Kamath was a founder of Abekas Video Systems, Inc., a subsidiary
of Carlton Communications PLC, where he was President from 1982 to August 1990.
Dr. Kamath is also a director of Euphonix, Inc., a company that manufactures
digitally controlled analog audio consoles for the music industry. Dr. Kamath
holds a B.Tech. degree in electrical engineering from the Indian Institute of
Technology, and M.S. and Ph.D. degrees in electrical engineering from the
University of California, Berkeley.
Alan V. King was appointed a Director of the Company in December 1997. Mr. King
has been Chairman of the Board and Chief Executive Officer of Volterra
Semiconductor Corporation, a start-up
12
<PAGE>
company developing battery management integrated circuits, since September 1996.
Mr. King has also been a Director of Smartflex Systems, Inc., a turnkey contract
assembler, since October 1993 and Information Storage Devices, Inc., a specialty
semiconductor company, since May 1997. Mr. King was President and Chief
Executive Officer of Silicon Systems, Inc., a semiconductor company, from
September 1991 to November 1994 and was President and Chief Executive Officer of
Precision Monolithics, Inc., a semiconductor company, from September 1987 to
September 1991, and from September 1986 to September 1987 he was its Executive
Vice President. Mr. King holds a BS degree in ceramic engineering from the
University of Washington.
Each director holds office until the next annual meeting of stockholders and
until his successor has been elected and qualified or until his earlier
resignation or removal. Each officer was chosen by the Board of Directors and
serves at the pleasure of the Board of Directors until his successor is
appointed or until his earlier resignation or removal.
ITEM 2: PROPERTIES
The Company leases approximately 39,000 square feet of space located in
Milpitas, California for its manufacturing and engineering functions pursuant to
a lease that expires on June 30, 2005. In addition, the Company has a seven year
lease expiring on October 1, 2003 for a total of approximately 24,000 square
feet of space located adjacent to the Milpitas manufacturing facility for
administrative functions. The Company also leases approximately 1,331 square
feet of space for its sales offices in Boston, Massachusetts, approximately
1,112 square feet for its sales office in Wokingham, England, approximately
1,457 square feet for its technical center in Yokohama, Japan, and approximately
4,137 square feet of warehouse space in Milpitas, California. The Company
believes that its current facilities are adequate to meet its current
requirements for the near term. See Notes to Consolidated Financial Statements.
ITEM 3: LEGAL PROCEEDINGS
The Company is a party to a number of legal proceedings arising in the ordinary
course of its business. These actions include patent liability and warranty of
merchantability issues. While it is not feasible to predict or determine the
outcome of these maters, the Company believes that the ultimate resolution of
these claims will not have a material adverse effect on its financial position
or results of operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
September 30, 1998.
13
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range Of Common Stock
<TABLE>
Elantec's Common Stock has been traded on the Nasdaq National Market under the
Nasdaq symbol "ELNT" since the Company's initial public offering on October 11,
1995. The high and low closing sales prices indicated below are as reported on
the Nasdaq National Market. As of September 30, 1998, there were approximately
240 stockholders of record, and the Company believes there are in excess of
3,400 beneficial stockholders of its Common Stock.
<CAPTION>
Common Stock Prices
------------------------------------------------------ --------------- ---------------
HIGH LOW
--------------- ---------------
<S> <C> <C>
Quarter ended September 30, 1998 $ 5.750 $ 3.000
Quarter ended June 30, 1998 $ 10.750 $ 5.000
Quarter ended March 31, 1998 $ 9.750 $ 5.375
Quarter ended December 31, 1997 $ 7.875 $ 5.250
Quarter ended September 30, 1997 $ 7.250 $ 4.000
Quarter ended June 30, 1997 $ 4.625 $ 3.125
Quarter ended March 31, 1997 $ 6.125 $ 3.125
Quarter ended December 31, 1996 $ 7.000 $ 4.750
Quarter ended September 30,1996 $ 9.125 $ 5.500
Quarter ended June 30,1996 $ 13.250 $ 6.750
Quarter ended March 31,1996 $ 10.250 $ 7.125
Quarter ended December 31,1995 (Starting on 10/11/95) $ 11.875 $ 7.000
</TABLE>
Dividend Policy
The Company has never paid cash or declared dividends on its stock. Elantec
anticipates that it will continue to retain its earnings to finance the growth
of its business.
14
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
<TABLE>
The following selected consolidated financial data is qualified by reference to
and should be read in conjunction with the consolidated financial statements and
related notes thereto and the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other financial
information included elsewhere in this Annual Report on Form 10-K.
<CAPTION>
September 30 (1)
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net revenues $46,210 $35,388 $36,806 $26,884 $22,937
Gross profit 21,379 15,277 18,798 13,928 10,819
Income from operations 4,261 177 4,300 2,887 1,859
Income before taxes 4,522 647 4,761 2,951 1,568
Net income (3) $ 7,205 $ 566 $ 4,389 $ 2,713 $ 1,125
Net income per basic share (2) $ 0.79 $ 0.06 $ 0.52 $ 1.46 $ 0.63
Net income per diluted share (2) $ 0.75 $ 0.06 $ 0.47 $ 0.34 $ 0.15
Number of shares used in computing diluted per
share amounts (2) 9,636 9,323 9,332 7,874 7,736
September 30, (1)
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(in thousands)
Balance Sheet Data:
Working capital $16,786 $18,287 $17,638 $ 6,854 $ 6,018
Total assets 47,544 37,091 35,246 20,910 14,919
Long-term debt and capital lease
obligations 4,354 3,336 1,566 1,313 517
Total stockholders' equity 32,277 24,803 24,074 11,142 8,318
<FN>
- -----------------
(1) The Company's fiscal periods end on the Sunday closest to the end of the
calendar period. For ease of presentation, each fiscal period has been
presented as though it ended on the final day of the calendar period.
(2) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of shares used in
computing net income per share.
(3) During the fourth fiscal quarter of 1998, the Company reversed its
valuation allowance for certain deferred tax assets in accordance with
Statement of Financial Accounting Standards 109, "Accounting for Income
Taxes." This resulted in a non-recurring income tax benefit for fiscal
1998 of $3,930, 000 or $0.32 per diluted share.
</FN>
</TABLE>
15
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the section entitled "Business".
Results of Operations
<TABLE>
The following table sets forth, as a percentage of net revenues, certain
consolidated statement of operations data for the periods indicated.
<CAPTION>
September 30,
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Gross profit 46.3 43.2 51.1
Operating expenses:
Research and development 15.6 17.6 17.4
Marketing, sales, general and administrative 21.4 25.1 22.0
Income from operations 9.2 0.5 11.7
Income before income taxes 9.8 1.8 12.9
Net income 15.6 1.6 11.9
</TABLE>
Net Revenues. Net revenues were $46.2 million in fiscal 1998, an increase of 31%
over net revenues of $35.4 million in fiscal 1997. The increase in net revenues
was due to an increase in unit shipments, while the average selling price for
the Company's products remained relatively constant during the year. The Company
experienced strong revenue growth in each of its major end markets and
particularly in the data processing area which represented 20% of net revenues,
up from approximately 14% of net revenues in fiscal 1997. Geographically, the
Company experienced broad revenue growth with U.S. revenues up 38% and
international revenues up 25% over fiscal 1997.
International revenues represented 53% of net revenues, down slightly from 56%
of net revenues in fiscal 1997. Revenues from Japan and other Pacific Rim
countries increased 25% over fiscal 1997 despite the economic and financial
difficulties experienced by Japan and other countries in this region. However,
as discussed more fully under "Factors Affecting Future Operating Results"
below, in late fiscal 1998 the Company's incoming order rate began to slow,
reflecting lower end-customer demand. The Company currently anticipates that
continued lower product demand will cause fiscal 1999 to begin with lower unit
volume and revenues than the fourth quarter of fiscal 1998.
Domestic revenues represented 47% of net revenues, an increase from 44% of net
revenues in fiscal 1997, primarily due to strong domestic shipments during the
last two quarters of fiscal 1998.
Net revenues of $35.4 million in fiscal 1997 were down 3.9% as compared to net
revenues of $36.8 million in fiscal 1996. Increase in unit volumes primarily in
the video/multimedia, communications and data processing markets were more than
offset by a 14.4% decrease in average selling prices. Net revenues in fiscal
1996 reflected a period of significant revenue growth that began to decelerate
for the Company and much of the semiconductor industry during the fourth quarter
of fiscal 1996. Excess inventory levels in end customer channels entering fiscal
1997 lead to generally flat quarterly sequential revenue growth until the second
half of the fiscal year when end customer channel inventory levels declined.
16
<PAGE>
International revenues represented 56% and 52% of net revenues in fiscal 1997
and 1996, respectively. International revenues increased in fiscal 1997 due
primarily to increased revenues from Japan and other Pacific Rim countries. This
increase was also partially due to a slight increase in revenues from the
European market.
In July 1997, the Company announced that it would discontinue its military and
commercial hybrid product. This product line accounted for 8.6%, 7.9% and 8.9%
of product revenues in fiscal 1998, 1997 and 1996, respectively. Orders for
these discontinued products were accepted through the middle of 1998 and last
shipments from the factory will extend throughout fiscal 1999. The Company
expects higher gross margins from last-buy orders during fiscal 1999. However,
the Company does not expect the discontinuance of this product line to have a
material impact on the Company's fiscal 1999 results from operations.
Gross Margin. Gross margin was $21.4 million or 46.3% of net revenues in fiscal
1998. The increase in gross margin as a percentage of revenues, as compared to
43.2% in fiscal 1997, was due primarily to the absorption of fixed costs over a
larger revenue base and improved manufacturing yields and pricing at third-party
foundries. This was partially offset by higher unfavorable overhead variances
relating to internal production as product mix shifted towards products
manufactured by third party foundries during the second half of fiscal 1998, and
increased provisions for inventory excess and obsolescence. However, as
discussed more fully under "Factors Affecting Future Operating Results" below,
the Company expects to complete an extensive production expansion at its primary
manufacturing facility during the second fiscal quarter of 1999. This expansion
is expected to significantly increase manufacturing expenses, which could reduce
gross margins. While the Company is working on programs to continue to improve
manufacturing efficiencies, there can be no assurance that the Company will not
encounter difficulties due to delays with technology introduction, over capacity
caused by expanding the Company's Milpitas wafer fabrication facility, changes
in product mix, unfavorable manufacturing yields or other manufacturing
difficulties in the future. Gross margin may continue to fluctuate from quarter
to quarter.
Gross margin as a percentage of revenues of 43.2% in fiscal 1997 fell from 51.1%
of net revenues in fiscal 1996. The decrease in gross margin from fiscal 1996 to
1997 resulted from continued reductions in average selling prices combined with
increasingly unfavorable manufacturing yield and overhead variances and
increased provisions for excess and obsolete inventory.
Research and Development Expenses. Research and development (R&D) expenses were
$7.2 million, $6.2 million and $6.4 million in fiscal 1998, 1997 and 1996 or
15.6%, 17.6% and 17.4% of net revenues, respectively. The increase in R&D
expenses in fiscal 1998 as compared to 1997 was due primarily to an increase in
staffing, particularly design engineering personnel and higher spending for test
and prototype. The decrease in R&D expenses in fiscal 1997 over 1996 was due to
lower spending on prototype materials, consulting services and contract
services.
Marketing, Sales, General and Administrative Expenses. Marketing, sales, general
and administrative (SG&A) expenses were $9.9 million, $8.9 million and $8.1
million or 21.4%, 25.1% and 22.0% of net revenues in fiscal 1998, 1997 and 1996,
respectively. The increase in SG&A expenses in fiscal 1998 over 1997 was due
primarily to an increase in staffing and related payroll and benefit costs,
increased legal expenses and higher consulting costs. As a percentage of net
sales, SG&A decreased in fiscal 1998 as such costs increased at a lower rate
than net revenue growth. The increase in SG&A expenses in fiscal 1997 as
compared to 1996 was due primarily to added costs related to the Company's new
administrative offices.
17
<PAGE>
Interest and Other Income. Interest and other income was $0.7 million, $0.8
million and $0.7 million in 1998, 1997 and 1996, respectively. The decrease from
fiscal 1997 to 1998 was due to lower cash equivalents and short-term investments
resulting primarily from cash disbursed and lease payments made in conjunction
with the Company's fabrication facility expansion. The increase in interest
income from fiscal 1996 to 1997 resulted from investing proceeds from the
Company's initial public offering in October 1995 in cash equivalents and
short-term investments.
Provision for Taxes on Income. Results for the fourth fiscal quarter of 1998
included a $3.1 million favorable tax adjustment resulting primarily from the
reversal of the Company's valuation allowance for certain deferred tax assets at
September 30, 1998. This accounting adjustment was made in accordance with
Statement of Financial Accounting Standards 109, "Accounting for Income Taxes."
Provisions for taxes on income for fiscal 1997 and 1996 were lower than the
statutory rate principally due to the benefit of net operating loss
carryforwards offset by alternative minimum taxes, state taxes and foreign
withholding taxes. See Note 6 of Notes to Consolidated Financial Statements.
Net Income. Net income was $7.2 million, $0.6 million and $4.4 million in 1998,
1997 and 1996, respectively, due to the factors described above.
Factors Affecting Future Operating Results
Except for historical information contained herein, the matters set forth in the
Annual Report, including the statements in the following paragraphs, are
forward-looking statements that are dependent on certain risks and uncertainties
including such factors as, among others, delays in new product and process
technology announcements and product introductions by the Company or its
competitors, competitive pricing pressures, fluctuations in manufacturing
yields, changes in the mix or markets in which products are sold, availability
and costs of raw materials, reliance on subcontractors, the cyclical nature of
the semiconductor industry, industry-wide wafer processing capacity, political
and economic conditions in various geographic areas, and costs associated with
other events, such as under-utilization or expansion of production capacity,
intellectual property disputes, litigation, or environmental regulation and
other factors described below.
The Company achieved record revenues and earnings in fiscal 1998. However,
during the fourth quarter demand weakened for the Company's products resulting
in a decrease in the Company's order backlog as compared with the third quarter
of fiscal 1998. The lower order activity appears to be industry-wide and has
resulted from several factors including prolonged weakness in the Asian markets.
Looking forward to the fiscal first quarter 1999, management expects revenues to
be impacted by an overall weak demand for analog semiconductor products. The
Company believes weaker demand for the Company's core products will be partially
offset by increases in the Company's optical storage products. In addition,
management expects overall margins to decline due to changing product mix,
pricing pressures and under-utilization of manufacturing capacity as the Company
adjusts production to meet weakened product demands.
During the first fiscal quarter of 1999, prior to the filing of this report, the
Company was notified that one of its suppliers of CMOS wafers located in San
Jose, California was abruptly closed. Management is moving quickly to secure an
alternative manufacturing source and is confident that it will be able to
transition affected CMOS products to another foundry quickly. However, in the
event that the transition takes longer than anticipated, the Company's revenue
could be negatively impacted by as much as $1.0 million per quarter for the
second and third quarters of fiscal 1999.
In November 1998, David O'Brien, the Company's President and Chief Executive
Officer resigned from the Company. The Company is currently searching for a
replacement. However there can be no
18
<PAGE>
assurance that a qualified candidate will be hired in the near future. James V.
Diller, Director and Chairman of the Board, is acting as President and Chief
Executive Officer in the interim.
The Company sells its products to distributors and manufacturers in Asian
countries that are currently experiencing an economic recession. Additionally,
23% of 1998 net revenues were to Microtek International, Inc. in Japan. See Note
1 of Notes to Consolidated Financial Statements. The Company experienced a
slight decrease in revenues from these countries during the fourth quarter of
fiscal 1998, but the Company does not expect that the financial difficulties
experienced in Asia will have a material adverse impact on the Company's results
of operations in the near term. However, should the financial conditions in this
region worsen, become prolonged, or affect other countries where the Company
generates significant revenues, there can be no assurance that the Company's
results of operations will not be adversely impacted in the future.
The Company utilizes various external foundries for the production of CMOS and
bipolar wafers as well as certain process steps in the manufacturing of
dielectric isolation wafers. The number of foundries that have the capability to
process dielectrically isolated semiconductor wafers is limited. The Company has
developed internal capability for a number of these dielectric isolation process
steps and has secured an alternate vendor for one key process step. The Company
was informed that the current dielectric isolation foundry would discontinue
supplying this technology in the fourth fiscal quarter of 1998. The Company
converted production of most process steps and secured a vendor for an
additional key process step during the fiscal fourth quarter of 1998.
To mitigate potential problems during the transition, the company increased its
inventory of processed DI wafers during the second half of fiscal 1998. However,
there can be no assurance that this manufacturing change can be successfully
made in a timely manner or that the increased levels of dielectrically isolated
wafers will be sufficient to meet the Company's requirements. Significant delays
in the transition to the new supply of dielectric isolated wafers or
manufacturing problems encountered with either the internal process or the new
supplier would have a material adverse effect on the Company's business and
results of operations.
In early fiscal 1999, due to significant over-capacity caused by continuing
decreased demand in the semiconductor industry and changes in product mix
towards products manufactured by third party foundries, the Company evaluated
its long-term manufacturing and process technology strategies. Based on this
evaluation, the Company concluded that projected production volumes and related
cash flows from the fabrication facility are not sufficient to recover its
carrying value. Consequently, the Company announced it will write-down the
carrying value related to its wafer fabrication facility located in Milpitas,
California in accordance with Statement of Financial Accounting Standards
("FAS") No.121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." FAS 121 adjustments, in conjunction with
other non-recurring charges related to restructuring initiatives aimed at
improving profitability, will result in a non-recurring charge estimated at
between $13 to $15 million (on a pretax basis) in the first quarter of fiscal
1999.
The semiconductor industry is extremely capital intensive. To remain
competitive, the Company may have to continue investing in advanced
manufacturing equipment and process technologies. While the Company does not
expect capital expenditures to be material during the fiscal 1999, the Company
anticipates significant continuing capital expenditures during the following
several years. There can be no assurance that the Company will not be required
to seek debt or equity financing to satisfy its cash and capital needs or that
such financing will be available on terms satisfactory to the Company. If such
financing is required and if such financing were not available on terms
satisfactory to the Company, its operations would be materially adversely
affected.
19
<PAGE>
New products, process technology and start-up costs associated with the
Company's new Milpitas wafer fabrication facility will require significant
research and development expenditures. However, there can be no assurance that
the Company will be able to develop and introduce new products in a timely
manner, that new products will gain market acceptance or that new process
technologies can be successfully implemented. If the Company is unable to
develop new products in a timely manner, and to sell them at gross margins
comparable to the Company's current products, the future results of operations
could be adversely impacted.
Part of the Company's future bipolar product development strategy includes the
development of an alternative form of silicon-on-insulator ("SOI") technology
called bonded wafers. The Company currently believes that, if successful, the
bonded wafer technology could provide technologically advanced products at a
lower cost than the current dielectric isolation complementary bipolar
technology. There can be no assurance that bonded wafer technology can be
successfully implemented in a timely manner or that it will provide the desired
improvements over the Company's current technology.
Significant delays or cancellation of the development of the bonded wafer
technology and/or manufacturing problems associated with transferring the
Company's current product line to this technology would have a material adverse
affect on the Company's business and results of operations. In addition, delays
or cancellation of the development of this technology could adversely affect the
Company's new product development program. From time to time, the Company has
experienced production difficulties that have caused delivery delays and quality
problems. There can be no assurance that the Company will not experience
manufacturing problems and product delivery delays in the future as a result of,
among other things, changes to its process technologies, ramping production,
installing new equipment at its facilities and constructing new facilities in
Milpitas, California.
During the fourth fiscal quarter of 1998, the Company reversed its valuation
allowance for certain deferred tax assets in accordance with Statement of
Financial Accounting Standards 109, "Accounting for Income Taxes." This resulted
in a non-recurring income tax benefit for fiscal 1998 of $3.93 million or $0.32
per diluted share. The Company expects the effective tax rate to range from 36%
to 39% for fiscal 1999.
The semiconductor industry is characterized by vigorous protection and pursuit
of intellectual property rights or positions which have resulted in significant
and often protracted and expensive litigation. In recent years, there has been a
growing trend of companies to resort to litigation to protect their
semiconductor technology from unauthorized use by others. The Company believes
its products do not infringe upon any valid patents. However, there can be no
assurance that the Company's position in these matters will prevail. There can
be no assurance that additional future claims alleging infringement of
intellectual property rights will not be asserted against the Company. The
intellectual property claims that have been made, or may be asserted against the
Company in the future, could require that the Company discontinue the use of
certain processes or cease the manufacture, use and sale of infringing products.
Additionally, the Company may incur significant litigation costs and damages to
develop noninfringing technology. There can be no assurance that the Company
would be able to obtain such licenses on acceptable terms or to develop
noninfringing technology without a material adverse effect on the Company.
The Company is subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in its manufacturing process.
Although the Company believes that its activities conform to presently
applicable environmental regulations, the failure to comply with present or
future regulations could result in fines being imposed on the Company,
suspension of production or a cessation of operations. There can be no assurance
that regulatory changes or changes in regulatory interpretation or enforcement
will
20
<PAGE>
not render compliance more difficult and costly. Any failure of the Company to
control the use of, or adequately restrict the discharge of, hazardous
substances, or otherwise comply with environmental regulations, could subject it
to significant future liabilities.
The Company's Common Stock has experienced substantial price volatility and such
volatility may occur in the future, particularly as a result of
quarter-to-quarter variations in the actual or anticipated financial results of
the Company, the companies in the semiconductor industry or in the markets
served by the Company, or announcements by the Company or its competitors
regarding new product introductions. In addition, the stock market has
experienced extreme price and volume fluctuations that have affected the market
price of many technology companies' stock in particular. These factors may
adversely affect the price of the Common Stock.
Past performance of the Company may not be a good indicator of future
performance due to factors affecting the Company, its competitors, the
semiconductor industry and the overall economy. The semiconductor industry is
characterized by rapid technological change, price erosion, cyclical markets,
periodic oversupply, occasional shortages of materials, capacity constraints,
variation in manufacturing efficiencies and significant expenditures for capital
equipment and product development. Furthermore, new product introductions and
patent protection of existing products are critical factors for future sales
growth and sustained profitability.
Year 2000 Readiness
The Company utilizes numerous software programs throughout its operations that
include dates and make date-sensitive calculations based on two-digit fields
that are assumed to begin with the year 1900. Software programs written based on
this assumption are vulnerable, as the year 2000 approaches, to miscalculations
and other operational errors that may be significant to their overall
effectiveness. In addition, the Company relies upon products and information
from critical suppliers, large customers and other outside parties, in the
normal course of business, whose software programs are also subject to the same
problem. Should miscalculations or other operational errors occur as a result of
the year 2000 issue, the Company or the parties on which it depends may be
unable to produce reliable information or process routine transactions.
Furthermore, in the worse case, the Company or the parties on which it depends
may, for an extended period of time, be incapable of conducting critical
business activities, which include but are not limited to, manufacturing and
shipping products, invoicing customers and paying vendors.
The Company initiated a year 2000 remediation plan during fiscal 1997 to make
the Company's primary and ancillary information systems year 2000 compliant.
This plan included the implementation of Year 2000 compliant financial
application and manufacturing-execution software. The new financial applications
software has been implemented and the Company is in the process of installing a
manufacturing-execution software upgrade. Based on current information, the
Company believes that its internal computer systems will be year 2000 compliant
and that the risk of major disruption from these systems due to year 2000 issues
is minimal.
The Company's current revenue is generated from products that will not generate
any product warranty or product defect liability issues related to the year 2000
compliance. However, the Company could be negatively affected to the extent its
major suppliers, vendors and customers have not successfully addressed year 2000
issues and the Company has initiated formal communications with all its
significant suppliers, vendors and customers to assess this exposure.
The cost of implementing such a plan is being funded by income from operations
and capital leases has not been and is not expected to be material to the
Company's operating results. The cost to address and
21
<PAGE>
remedy the Company's remaining year 2000 issues is estimated to be $0.3 million
in fiscal 1999. The cost of the year 2000 project and the date on which the
Company believes it will complete the year 2000 modification are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash and short-term investments
of $9.5 million at September 30, 1998. At September 30, 1998, the Company also
had a non-revolving lease line of credit for up to $6.5 million which can be
utilized for up to 100% of the value of financed equipment. Amounts drawn under
this line represent five-year capital leases. The non-revolving lease line of
credit expires February 28, 1999. At September 30, 1998, $4.1 million was
outstanding, and approximately $2.4 million remained available under the line.
See Note 3 of Notes to Consolidated Financial Statements.
The Company believes that its existing cash and cash equivalents, its current
lease line of credit and cash from operations will be sufficient to support its
operating and capital needs for at least the next twelve months. Any major
change in the nature of the Company's business, such as the acquisition of
products, the design of products not currently under development or the need for
significant unplanned capital expenditures, could change the Company's capital
requirements. To the extent the Company requires additional cash, there can be
no assurance that the Company will be able to obtain such financing on terms
favorable to the Company, or at all.
Cash and equivalents at September 30, 1998 decreased by $4.0 million or 41% from
September 30, 1997. Net cash provided by operations was $4.7 million during
fiscal 1998. Investing activities used $7.4 million primarily due to the
acquisition of $9.8 million in property and equipment (net of proceeds from
disposition of property and equipment and capital lease financing) which was
partially offset by net sales of short-term investments of $2.4 million.
Financing activities used $1.3 million primarily for payments on long-term debt
of $0.7 million and payments on capital lease financing of $0.9 million which
was partially offset by proceeds from exercise of employee stock options of $0.3
million.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Except for the historical information contained herein, the following discussion
contains forward- looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this section, as well as in the section entitled
"Factors Affecting Future Results". The Company is exposed to market risk
related to changes in interest rates and foreign currency exchange rates. The
Company does not use derivative financial instruments for speculative or trading
purposes.
Interest Rate Sensitivity. The Company maintains a short-term investment
portfolio consisting mainly of income securities with an average maturity of
less than one year. These available-for-sale securities are subject to interest
rate risk and will fall in value if market interest rates increase. If market
interest rates were to increase immediately and uniformly by 10 percent from
levels at September 30, 1998, the fair value of the approximately $3.7 million
portfolio would decline by an immaterial amount. The Company presently intends
to hold its fixed income investments until maturity, and therefore the Company
would not expect its operating results or cash flows to be affected to any
significant degree by the effect of a sudden short-term change in market
interest rates on its securities portfolio.
22
<PAGE>
At September 30, 1998, the Company had approximately $5.8 million of outstanding
obligations under capital lease arrangements and long-term debt. If short-term
interest rates were to increase 10 percent, the increased lease payments
associated with these arrangements would not have a material impact on the
Company's net income or cash flows as these borrowings do not carry variable
interest rates. The Company does not hedge any interest rate exposures.
Foreign Currency Exchange Risk. Yen is the functional currency of the Company's
subsidiary in Japan. The Company does not currently enter into foreign exchange
forward contracts to hedge certain balance sheet exposures and intercompany
balances against future movements in foreign exchange rates. However, the
company does maintain cash balances denominated in Yen. If foreign exchange
rates were to weaken against the U.S. dollar immediately and uniformly by 10
percent from the exchange rate at September 30, 1998, the fair value of these
foreign currency amounts would decline by an immaterial amount.
23
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
The following Financial Statements are filed as part of this Report.
<CAPTION>
Page No.
<S> <C>
Report of Deloitte & Touche LLP, Independent Auditors.............................. 29
Report of Ernst & Young LLP, Independent Auditors.................................. 30
Consolidated Balance Sheets as of September 30, 1998 and 1997...................... 31
Consolidated Statements of Income for each of the three fiscal years
in the period ended September 30, 1998............................................. 32
Consolidated Statements of Stockholders' Equity for each of the three
fiscal years in the period ended September 30, 1998................................ 33
Consolidated Statements of Cash Flows for each of the three fiscal
years in the period ended September 30, 1998....................................... 34
Notes to Consolidated Financial Statements......................................... 35
2. INDEX TO SUPPLEMENTAL FINANCIAL INFORMATION
Unaudited Interim Financial Information............................................ 46
3. INDEX TO FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule of Elantec Semiconductor, Inc. for the
years ended September 30, 1998, 1997 and 1996 is filed as part of this report and
should be read in conjunction with the Consolidated Financial Statements of Elantec
Semiconductor, Inc.
Schedule II - Valuation and Qualifying Accounts for each of the
three fiscal years in the period ended September 30, 1998...................... 47
Schedules other than that listed above have been omitted since they are either not
required, not applicable, or the information is otherwise included.
</TABLE>
24
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 29, 1998, the Board of Directors of the Company approved the dismissal of
the Company's independent accountants, Ernst & Young LLP, and the appointment of
Deloitte & Touche LLP ("Deloitte & Touche") for the fiscal year ended 1998. The
report of Ernst & Young LLP for the fiscal years ended 1996 and 1997 contained
no adverse opinion, disclaimer of opinion or qualification or modification as to
uncertainty, audit scope or accounting principles. During the fiscal years ended
1996 and 1997, and the interim period from October 1, 1997 through May 29, 1998,
there were no disagreements between the Company and Ernst & Young LLP on any
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which, if not resolved to the satisfaction of Ernst & Young
LLP would have caused it to make reference to the subject matter of the
disagreement in connection with its report. No "reportable events" as described
in paragraph (a) (1) (v) of Item 304 of Regulation S-K have occurred within the
Company's fiscal years ending 1996 and 1997, or the period from October 1, 1997
through May 29, 1998.
The Company did not consult with Deloitte & Touche during the fiscal years ended
1996 and 1997, and the interim period from October 1, 1997 through May 29, 1998,
on any matter which was the subject of any disagreement or any reportable event
or on the application of accounting principles to a specified transaction,
either completed or proposed.
25
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item with respect to Directors of the Company may
be found in the section captioned "Election of Elantec Directors" appearing in
the definitive Proxy Statement to be delivered to stockholders in connection
with the Annual Meeting of Stockholders to be held on January 22, 1999. Such
information is incorporated herein by reference. Information required by this
Item with respect to executive officers may be found in Part I hereof in the
section captioned "Executive Officers of the Company." Such information is
incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
Information with respect to this Item may be found in the section captioned
"Executive Compensation" appearing in the definitive Proxy Statement to be
delivered to stockholders in connection with the Annual Meeting of Stockholders
to be held on January 22, 1999. Such information is incorporated herein by
reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this Item may be found in the section captioned
"Security Ownership of Certain Beneficial Owners and Management" appearing in
the definitive Proxy Statement to be delivered to stockholders in connection
with the Annual Meeting of Stockholders to be held on January 22, 1999. Such
information is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this Item may be found in the section captioned
"Certain Transactions" appearing in the definitive Proxy Statement to be
delivered to stockholders in connection with the Annual Meeting of Stockholders
to be held on January 22, 1999. Such information is incorporated herein by
reference.
26
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements and Financial Statement Schedule -- See Index to
Consolidated Financial Statements and Financial Statement Schedule at
Item 8 on page 24 of this Report.
2. Exhibits. The following exhibits are filed as part of, or incorporated
by reference into, this Report:
Exhibit
Number Exhibit Title
- ------ -------------
3.01 -- Company's Certificate of Incorporation. (1)
3.02 -- Certificate of Designations specifying the terms of the Series A
Junior Participating Preferred Stock of Registrant, as filed with
the Secretary of State of Delaware o September 15, 1998. (2)
3.03 -- Company's Bylaws. (1)
4.01 -- Registration Rights Agreement dated August 12, 1988 by and among the
Company and certain Stockholders and Warrantholders, as amended
January 12, 1990 and as of August 4, 1995. (1)
4.02 -- Rights Agreement dated September 14, 1998 between Registrant, Bank
Boston, N.A., as Rights Agent, which includes as Exhibit A the from
of Certificate of Designations of Series A Junior Participating
Preferred Stock, as Exhibit B the Form of Rights Certificate and as
Exhibit C the Summary of Rights to Purchase Preferred Shares. (2)
10.01 -- Company's 1983 Stock Option Plan, as amended, and related documents.
(1)/+
10.02 -- Company's 1994 Equity Incentive Plan, as amended, and related
documents. (1)/+
10.03 -- Form of Company's 1995 Equity Incentive Plan and related documents.
(3)/+
10.04 -- Form of Company's 1995 Directors Stock Option Plan and related
documents. (1)/+
10.05 -- Form of Company's 1995 Employee Stock Purchase Plan and related
documents. (1)/+
10.06 -- Form of Indemnification Agreement entered into by the Company with
each of its directors and executive officers. (1)
10.07 -- Form of Executive Compensation Agreement dated as of March 22, 1991,
by and between the Company and David O'Brien. (1)/+
10.08 -- Form of Executive Compensation Agreement dated as of March 22, 1991,
by and between the Company and each of Ralph Granchelli, Richard
Corbin, and Barry Siegel. (1)/+
10.09 -- Standard Industrial/Commercial Single-Tenant Lease dated June 23,
1993, by and between the Company and Robert Ruggles, including
amendments one through five thereto. (1)
10.10 -- Technology Transfer Agreement dated February 24, 1993, between the
Company and Aisin Seiki Co., Ltd. ("Aisin"). (1)
10.11 -- Product Development Agreement No. 1 dated March 24, 1993, between
the Company and Aisin. (1)
10.12 -- Product Development Agreement No. 2 dated March 24, 1995, between
the Company and Aisin. (1)
10.13 -- Distributor Agreement dated December 8, 1986, between the Company
and Insight Electronics, Inc. ("Insight"). (1)
10.14 -- Distributor Agreement dated October 1, 1989, between the Company and
Insight. (1)
10.15 -- Distributor Agreement dated November 1, 1987, between the Company
and Marshall Industries. (1)
10.16 -- Distributor Agreement dated March 7, 1994, between the Company and
Internix, Inc. (1)
27
<PAGE>
10.17 -- Amendment to Standard Industrial/Commercial Single-Tenant Lease
dated June 23, 1993. (4)
10.18 -- Standard Industrial/Commercial Single-Tenant Lease dated February
20, 1996. (4)
10.19 -- Amendment to Standard Industrial/Commercial Single-Tenant Lease
dated February 20, 1996. (4)
10.20 -- Distributor Agreement dated August 1, 1996, between the Company and
Microtek Inc. (5)
16.01 -- Letter regarding change of certifying accountants (6)
21.01 -- Subsidiary of the Company. (1)
23.01 -- Consent of Deloitte & Touche LLP, Independent Auditors (see page 51
of this Report).
23.02 -- Consent of Ernst & Young LLP, Independent Auditors (see page 52 of
this Report).
24.01 -- Powers of Attorney (see page 48 of this Report).
27.01 -- Financial Data Schedule.
- ---------------
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1, filed August 24, 1995, as amended (File No. 33-96136).
(2) Incorporated by reference to the Company's Registration Statement on
Form 8-A, filed September 16, 1998.
(3) Incorporated by reference to the Company's Registration Statement on
Form S-8, filed March 17, 1998 (File No. 333-48101).
(4) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for the quarter ended September 30, 1996.
(6) Incorporated by reference to the Company's Current Report on Form 8-K
filed on June 5, 1998.
+ Represents a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K on September 16, 1998, making an Item 5
disclosure related to the adoption of a Shareholder Rights Plan.
(c) Exhibits:
The Registrant hereby files as part of this Report the exhibits listed
in Item 14(a)(2), as set forth above.
(d) Financial Statement Schedules:
The Registrant hereby files as part of this Report the financial
statement schedules listed in Item 14(a)(1), as set forth above.
28
<PAGE>
Independent Auditor's Report
To the Board of Directors and Stockholders of
Elantec Semiconductor, Inc.
Milpitas, California:
We have audited the accompanying consolidated balance sheet of Elantec
Semiconductor, Inc. and subsidiaries ("Company") as of September 30, 1998 and
the related consolidated statements of income, stockholders' equity, and cash
flows for the year then ended. Our audit also included the financial statement
schedule listed in the index at Item 8(3). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements present fairly, in
all material respects, the financial position of Elantec Semiconductor, Inc. at
September 30, 1998, and the results of its operations and its cash flows for
each of the year then ended in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
October 22, 1998
(December 3, 1998 as to Note 10.)
29
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Elantec Semiconductor, Inc.
We have audited the accompanying consolidated balance sheet of Elantec
Semiconductor, Inc. as of September 30, 1997 and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the two
years in the period ended September 30, 1997. Our audits also included the
financial statement schedule for the two years in the period ended September 30,
1997 listed in the index at Item 14(a)(1). These financial statements and
schedule 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Elantec
Semiconductor, Inc. at September 30, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the two years in the period
ended September 30, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
San Jose, California
October 22, 1997
30
<PAGE>
Elantec Semiconductor, Inc.
and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
September 30,
1998 1997
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 5,815 $ 9,839
Short-term investments 3,651 6,089
Accounts receivable, net of allowances
of $1,076 in 1998 and $840 in 1997 5,207 3,315
Inventories 9,059 7,369
Deferred income taxes 3,367 --
Prepaid expenses and other current assets 600 627
-------- --------
Total current assets 27,699 27,239
Property and equipment:
Machinery and equipment 16,672 16,085
Furniture and fixtures 652 563
Leasehold improvements 1,494 2,970
Construction-in-process 10,637 --
-------- --------
29,455 19,618
Accumulated depreciation and amortization (10,830) (10,388)
-------- --------
18,625 9,230
Other assets, net 657 622
Non-current deferred income taxes 563 --
-------- --------
Total assets $ 47,544 $ 37,091
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 4,108 $ 3,368
Income taxes payable 779 339
Accrued salaries and benefits 1,462 1,231
Other accrued liabilities 458 429
Deferred revenue 2,626 2,094
Current portion of long-term debt and capital lease
obligations 1,480 1,491
-------- --------
Total current liabilities 10,913 8,952
Long-term debt and capital lease obligations 4,354 3,336
Commitments and contingencies (Note 3) -- --
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 5,000,000 in 1998 and 1997 -- --
Issued and outstanding shares - none
Common stock, $.01 par value: Authorized shares -
25,000,000 in 1998 and 1997 Issued and
outstanding shares - 9,188,000 in 1998 and
9,019,000 in 1997 92 90
Additional paid-in capital 33,902 33,635
Accumulated deficit (1,717) (8,922)
-------- --------
Total stockholders' equity 32,277 24,803
-------- --------
Total liabilities and stockholders' equity $ 47,544 $ 37,091
======== ========
See accompanying notes.
31
<PAGE>
<TABLE>
Elantec Semiconductor, Inc.
and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share amounts)
<CAPTION>
September 30,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net revenues $ 46,210 $ 35,388 $ 36,806
Cost of revenues 24,831 20,111 18,008
-------- -------- --------
Gross profit 21,379 15,277 18,798
Operating expenses:
Research and development 7,228 6,234 6,413
Marketing, sales, general, and administrative 9,890 8,866 8,085
-------- -------- --------
Total operating expenses 17,118 15,100 14,498
-------- -------- --------
Income from operations 4,261 177 4,300
Interest and other income, net 674 759 687
Interest expense (413) (289) (226)
-------- -------- --------
Income before taxes 4,522 647 4,761
Provision for (benefit from) taxes on income (2,683) 81 372
-------- -------- --------
Net income $ 7,205 $ 566 $ 4,389
======== ======== ========
Earnings per share:
Basic $ 0.79 $ 0.06 $ 0.52
Diluted $ 0.75 $ 0.06 $ 0.47
Shares used in computing per share amounts:
Basic 9,135 8,881 8,505
Diluted 9,636 9,323 9,332
<FN>
See accompanying notes.
</FN>
</TABLE>
32
<PAGE>
<TABLE>
Elantec Semiconductor, Inc.
and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands)
<CAPTION>
Convertible
Preferred Stock Common Stock Additional Total
-------------------- ------------------- Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 4,937 $ 24,543 2,017 $ 20 $ 456 $(13,877) $ 11,142
Conversion of preferred stock (4,937) (24,543) 4,937 49 24,494 -- --
Proceeds from IPO, net of -- -- 1,400 14 8,189 -- 8,203
offering expenses of $911
Exercise of stock options -- -- 369 4 293 -- 297
Exercise of warrants -- -- 22 -- 43 -- 43
Net income -- -- -- -- -- 4,389 4,389
-------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1996 -- -- 8,745 87 33,475 (9,488) 24,074
Exercise of stock options -- -- 274 3 160 -- 163
Net income -- -- -- -- -- 566 566
-------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1997 -- -- 9,019 90 33,635 (8,922) 24,803
Exercise of stock options -- -- 169 2 267 -- 269
Net income -- -- -- -- -- 7,205 7,205
-------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1998 -- $ -- 9,188 $ 92 $ 33,902 $ (1,717) $ 32,277
======== ======== ======== ======== ======== ======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
33
<PAGE>
<TABLE>
Elantec Semiconductor, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<CAPTION>
September 30,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net income $ 7,205 $ 566 $ 4,389
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,610 2,022 1,677
Deferred tax benefit (3,930) -- --
Loss on disposition of property and equipment 389
Changes in operating assets and liabilities:
Accounts receivable (1,892) 860 (50)
Inventories (1,690) (894) (1,885)
Prepaid expenses and other current assets 27 (73) 31
Payables and accrued liabilities 1,440 32 1,217
Deferred revenue 532 (1,049) (273)
--------- --------- ---------
Net cash provided by operating activities 4,691 1,464 5,106
Investing activities
Purchase of available for sale investments (79,487) (114,576) (108,457)
Sale and maturity of available for sale investments 81,925 115,150 101,794
Purchase of property and equipment (9,756) (425) (2,144)
Decrease (increase) in other assets (73) 20 238
--------- --------- ---------
Net cash provided by (used in) investing activities (7,391) 169 (8,569)
Financing activities
Payments on capital lease obligations (936) (426) (145)
Payments on long-term debt (657) (908) (1,567)
Issuance of common stock 269 163 8,543
--------- --------- ---------
Net cash provided by (used in) financing activities (1,324) (1,171) 6,831
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (4,024) 462 3,368
Cash and cash equivalents at beginning of period 9,839 9,377 6,009
--------- --------- ---------
Cash and cash equivalents at end of period $ 5,815 $ 9,839 $ 9,377
========= ========= =========
Supplemental disclosures of cash flow information
Lease and installment financing for capital equipment $ 2,600 $ 3,467 $ 2,172
========= ========= =========
Interest paid $ 378 $ 285 $ 202
========= ========= =========
Taxes paid $ 808 $ 57 $ 236
========= ========= =========
<FN>
See accompanying notes.
</FN>
</TABLE>
34
<PAGE>
1. Business and Significant Accounting Policies
Nature of Business. Elantec Semiconductor, Inc. (the "Company") designs,
manufactures and markets high performance analog integrated circuits used in the
video/multimedia, data processing, instrumentation and communications markets.
Principal markets include sales in North America, Asia, Europe and other
countries.
Fiscal Year. The Company's fiscal year ends on the Sunday closest to September
30. Fiscal years 1998, 1997, and 1996 ended on September 27, September 28, and
September 29, respectively. For convenience, the accompanying consolidated
financial statements have been shown as ending on September 30 for each fiscal
year. Fiscal years 1998, 1997, and 1996 included 52 weeks per year.
Use of Estimates. 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, liabilities,
revenues and expenses during the reporting period. Such estimates include
allowance for potentially uncollectible accounts receivable, lower of cost or
market inventory valuation reserves, warranty costs, sales returns, accrued
liabilities and a valuation allowance against net deferred tax assets. Actual
results could differ from those estimates.
Consolidation. The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents. The Company considers all highly liquid investments
with an original maturity (at the date of purchase) of three months or less to
be the equivalent of cash for the purposes of the balance sheet and statement of
cash flows presentation. Cash and cash equivalents are carried at cost which
approximates market value.
Short-Term Investments. The Company's policy is to invest in various short-term
instruments with investment grade credit ratings. Generally such investments
have contractual maturities of less than one year. All of the Company's
marketable investments are classified as "available-for-sale" and the Company
views its available-for-sale portfolio as available for use in its current
operations. At September 30, 1998, short-term investments consisted of corporate
debt of $1,901,000, auction-rate securities of $450,000, and US Treasury bills
of $1,300,000. At September 30, 1997, short-term investments consisted of
corporate debt of $3,888,000, auction-rate securities of $901,000, and US
Treasury bills of $1,300,000. The following table is a summary of debt and money
market auction preferred securities by contractual maturity at September 30,
1998 (in thousands):
Amortized
Cost
-------------
Maturing within one year $ 552
Maturing after one year and before three years 2,649
Money market auction preferred securities 450
-------------
Total $ 3,651
=============
In accordance with Statement of Financial Accounting Standards (FAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
classifies its short-term investments as "available-for-sale" securities and the
cost of securities sold is based on the specific identification method. At
September 30, 1998 there was no significant difference between the fair market
value, determined by quoted market prices, and the underlying cost of such
investments. Realized gains and losses were immaterial.
35
<PAGE>
Significant Risks and Concentration of Credit. The Company participates in a
dynamic high technology industry and believes that changes in any of the
following areas could have a material adverse effect on the Company's future
financial position or results of operations: delays in new product and process
technology announcements and product introductions by the Company or its
competitors, competitive pricing pressures, fluctuations in manufacturing
yields, changes in the mix or markets in which products are sold, availability
and costs of raw materials, reliance on subcontractors, the cyclical nature of
the semiconductor industry, industry-wide wafer processing capacity, political
and economic conditions in various geographic areas, and costs associated with
other events, such as under-utilization or expansion of production capacity,
intellectual property disputes, litigation, or environmental regulation among
other factors.
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash investments and trade receivables.
The Company's policy is to place its cash and short-term investments with high
credit quality institutions and limit the amount invested with any one
institution or in any type of financial instrument. The Company does not hold or
issue financial instruments for trading purposes.
The Company's products are sold to a wide variety of original equipment
manufacturers through a direct sales force and to a network of distributors. The
Company generally does not require collateral from its trade creditors. However,
the Company performs ongoing credit evaluations of its customer's financial
condition and requires collateral, primarily letters of credit, as required. The
concentration of credit risk in the Company's trade receivables is substantially
mitigated by the Company's credit evaluation process combined with
geographically dispersed sales transactions.
Customers comprising 10% or greater of the Company's net revenues are summarized
as follows:
September 30,
1998 1997 1996
--------- --------- ---------
Microtek International, Inc. - Japan 23% 14% 15%
Insight Electronics, Inc. - United States 11% 12% -
Inventories. Inventories are stated at the lower of cost or market which
approximates actual cost using the first-in, first-out method.
Property and Equipment. Machinery and equipment as well as furniture and
fixtures are stated at cost and depreciated over the estimated useful lives of
the assets (three to ten years) using the straight-line method. Leasehold
improvements are stated at cost and amortized on a straight-line basis over the
shorter of the useful lives of the assets or the remaining lease term. Assets
under capital leases are recorded at the present value of the related lease
obligations and amortized on a straight-line basis over the lease term.
Long-Lived Assets. The Company accounts for long-lived assets in accordance with
Statement of Financial Accounting Standards ("FAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
FAS No. 121 requires long-lived assets to be evaluated for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Adoption of FAS No. 121 did not have a material effect
on the Company's financial position, results of operation or cash flows during
each of the three years ended September 30, 1998.
36
<PAGE>
Stock-Based Compensation. The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees."
Revenue Recognition. Net revenues are stated net of estimated discounts and
allowances. Revenue from product sales direct to customers and foreign
distributors is generally recognized upon shipment. However, the Company defers
the recognition of revenue and the related cost of revenue on shipments to
domestic distributors that have certain rights of return and price protection
privileges on unsold merchandise until the merchandise is sold by the
distributor.
Foreign Currency. The functional currency of the Company's foreign subsidiaries
is the local currency of that country. Gains and losses resulting from foreign
currency translations and net foreign currency transactions were immaterial in
1998. There were no gains or losses resulting from foreign currency translations
or net foreign currency transaction in 1997 and 1996.
Advertising Expense. The Company expenses the costs of advertising as incurred.
Advertising expense was approximately $555,000, $552,000, and $617,000 for the
fiscal years ended September 30, 1998, 1997, and 1996, respectively.
Net Income Per Share. Net income per share is computed using the weighted
average number of shares of common stock and dilutive common equivalent shares
from convertible preferred stock (using the if-converted method) and from stock
options (using the treasury stock method).
Recent Accounting Pronouncements
Comprehensive Income. In June 1997, the Financial Accounting Standards Board
("FASB") released Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards for
the reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Components of comprehensive income
include net income and certain transactions that have generally been reported in
the consolidated statement of shareholders' equity. FAS 130 requires that these
transactions be included with net income and presented separately as
comprehensive income in the financial statements. The Company is required to
adopt FAS 130 during fiscal 1999. At the time of adoption, the Company expects
that comprehensive income will not be materially different from net income.
Segment Information. In June 1997, the FASB released Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (FAS 131). FAS 131 will change the way companies report
selected segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
reports to stockholders. The Company is required to adopt FAS 131 during fiscal
1999. The Company has not completed the determination of the impact of the new
standard on the Company's consolidated financial statements.
Derivative Investments and Hedging Activities. In June 1998, the FASB issued
Statement of Financial Accounting Standards No.133, "Accounting for Derivative
Investments and Hedging Activities" (FAS 133). FAS 133 provides a comprehensive
and consistent standard for the recognition and measurements of derivatives and
hedging activities. The Company is required to adopt FAS 133 during fiscal 2000
and does not expect the statement to have a significant effect on the Company's
operating results.
2. Inventories
Inventories consisted of the following (in thousands):
September 30,
1998 1997
--------------- ---------------
Raw materials $ 498 $ 431
Work-in-process 6,481 5,039
37
<PAGE>
Finished goods 2,080 1,899
--------------- ---------------
$9,059 $7,369
=============== ===============
3. Commitments and Contingencies
The Company leases its principal facilities under operating leases that expire
at various dates through the year 2005. The Company is generally responsible for
taxes, assessments, maintenance and insurance under its leases. In addition,
machinery and equipment included approximately $7,064,000 and $4,491,000 of
equipment acquired under capital leases and approximately $1,662,000 and
$705,000 of related accumulated amortization at September 30, 1998 and 1997,
respectively. Amortization of capital leases is included in depreciation and
amortization expense.
The following is a schedule by year of future minimum lease payments under
capital and operating leases as of September 30, 1998 (in thousands):
Capital Leases Operating
1999 $ 1,750 $ 752
2000 1,726 710
2001 1,611 714
2002 1,103 733
2003 478 740
Thereafter - 834
Total minimum lease payments 6,668 $ 4,483
Amount representing interest (961) -
------------- ----------
Present value of net minimum lease payments $ 5,707 $ 4,483
Note Payable $ 127
-------------
Total debt and capital lease obligations 5,834
Current portion (1,480)
=============
Long-term debt and capital lease obligations $ 4,354
=============
Total rental expense on all operating leases was approximately $812,000,
$689,000, and $339,000 for the fiscal years ended September 30, 1998, 1997 and
1996, respectively. At September 30 1998, outstanding cancelable commitments to
purchase capital equipment totaled approximately $1.3 million. The Company has
$2.4 million remaining available under a non-revolving lease line of credit.
Note payable as of September 30, 1998, consists of a three-year note which bears
interest at prime plus 0.25% (8.50% at September 30, 1998) and is due in fiscal
1999. This note originated from previously expired nonrevolving equipment lines
of credit. This note contains financial covenants that were fully complied with
at September 30, 1998.
The Company is a party to a number of legal proceedings arising in the course of
its business. These actions include patent liability, warranty of
merchantability and employee-related issues. While it is not feasible to predict
or determine the outcome of these matters, the Company believes that the
ultimate resolution of these claims will not have a material adverse effect on
its financial position or results of operations.
4. Stockholders' Equity
38
<PAGE>
Initial Public Offering. On October 11, 1995, the Company effected an initial
public offering of its shares pursuant to which it issued 1,400,000 common
shares for net proceeds of approximately $8,203,000. Upon the closing of the
initial public offering, each outstanding share of Series 1 preferred stock was
converted to common stock on a share-for-share basis.
Employee Stock Plans. The Company accounts for stock-based awards to employees
using the intrinsic value method in accordance with Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees."
Stockholder Rights Plan. In September 1998, the Company's Board of Directors
adopted a Stockholder Rights Plan under which the Board of Directors declared a
dividend of one preferred share purchase right for each outstanding share of
common stock, par value $0.01 per share, of Elantec stock held as of September
21, 1998. Each preferred share purchase right entitles the registered holder to
purchase one two-hundredth of the Company's Series A Junior Participating
Preferred Stock, par value $0.01 per share, at a price of $25.00. The rights
become exercisable ten days following the announcement that an entity or person
has commenced a tender offer to acquire or has acquired 20% or more of the
Company's outstanding common stock ("the Distribution Date").
After the Distribution Date, the Board may exchange the rights at an exchange
ratio of one common share or one two-hundredth of a preferred share per right.
Otherwise, each holder of a right, other than rights beneficially owned by the
acquiring entity or person (which will thereafter be void), will have the right
to receive upon exercise that number of common shares having a market value of
two times the exercise price of the right. The rights will expire on September
14, 2008.
Employee Stock Purchase Plan. The Company has reserved and the stockholders
approved 225,000 shares of common stock for issuance to eligible employees under
the 1995 Purchase Plan (the Purchase Plan). Under the Purchase Plan, eligible
employees, subject to certain restrictions, may purchase shares of common stock
at a price equal to the lesser of 85% of the fair market value at either the
beginning of each six-month offering period or the end of each six-month
offering period. As of September 30, 1998, no shares have been issued under the
Purchase Plan.
Stock Option Plans. In August 1995, the Board of Directors approved and in
September 1995, the stockholders approved (i) the adoption of the 1995 Equity
Incentive Plan (the 1995 Equity Plan) as the successor to the 1994 Incentive
Plan (the Predecessor Plan), pursuant to which 550,000 shares of the Company's
common stock, plus the number of shares remaining unissued and not subject to
outstanding options under the Predecessor Plan and any shares issuable upon
exercise of options granted under the Predecessor Plan that expire or become
unexercisable for any reason without having been exercised in full, have been
reserved for future issuance, and (ii) the adoption of the 1995 Directors' Stock
Option Plan (the 1995 Directors' Plan) pursuant to which 150,000 shares of the
Company's common stock have been reserved for future issuance. Each outstanding
option under the Predecessor Plan will continue to be governed by the terms and
conditions of such plan; no additional options will be granted under the
Predecessor Plan. In December 1996, the Board of Directors approved and in
February 1997, the stockholders approved the adoption of an amendment to the
1995 Equity Plan pursuant to which an additional 400,000 shares of the Company's
Common Stock have been reserved for future issuance. In December 1997, the Board
of Directors approved and in February 1998, the stockholders approved the
adoption of an amendment to the 1995 Equity Plan pursuant to which an additional
400,000 shares of the Company's Common Stock have been reserved for future
issuance.
39
<PAGE>
Under the 1995 Equity Plan, incentive stock options may be granted to employees
only at the price per share that is not less than the fair market value of
common stock on the date of grant. Nonqualified options may be granted to
employees or others at a price per share not less than 85% of fair market value
of the common stock on the date of grant. Options are exercisable to the extent
vested. Vesting, as established by the Board of Directors, generally accrues
monthly over four years from the date of grant. The Company may also grant stock
bonuses and issue restricted stock to employees and others. The Company has made
no such grants since the 1995 Equity Plan's inception. The 1995 Equity Plan
expires ten years after adoption.
Under the 1995 Directors' Plan, nonqualified options may be granted to
nonemployee directors only at the price per share that is not less than the fair
market value of common stock on the date of grant. Vesting under the 1995
Directors' Plan accrues monthly over four years from the date of grant. The 1995
Directors' Plan expires ten years after adoption.
Option Repricing Programs. Competition for skilled engineers and other key
employees in the semiconductor industry is intense and the use of significant
stock options for retention and motivation of such personnel is widespread in
the high technology industries. The Compensation Committee of the Board of
Directors believes that stock options are a critical component of the
compensation offered by the Company to promote long-term retention of key
employees, motivate high levels of performance and recognize employee
contributions in the success of the Company. In light of substantial declines in
the market price of the Company's common stock in 1997 and 1998, the
Compensation Committee believed that the large numbers of outstanding stock
options with an exercise price in excess of the actual market price were no
longer an effective tool to encourage employee retention or to motivate high
levels of performance.
1998 Employees and Consultants. In August 1998, the Compensation Committee
approved an option-repricing program for all employees and consultants to the
Company who were not executive officers of the Company. Under this program, the
eligible optionees were permitted to exchange their then outstanding stock
options for new stock options having an exercise price of $3.625 per share
(equal to the fair market value on August 28, 1998), with vesting annually
during the subsequent four years. Approximately 453,900 options were repriced by
employees (excluding executive officers) and consultants.
1997 Employees and Consultants. In April 1997 the Compensation Committee
approved an option repricing program for all employees and consultants to the
Company who were not executive officers of the Company. Under this program, the
eligible optionees were permitted to exchange their then outstanding stock
options for new stock options having an exercise price of $4.25 per share (equal
to the fair market value on May 7, 1997), with vesting ratably each month during
the subsequent four years. Approximately 543,000 options were repriced by
employees (excluding executive officers) and consultants.
1997 Executive Officers. The Compensation Committee approved, in June 1997, an
option repricing program for executive officers of the Company. Under this
program, the executive officers were permitted to exchange their then
outstanding stock options for new stock options having an exercise price of
$4.25 per share (equal to the fair market value on July 1, 1997), with vesting
ratably each month during the subsequent four years. Approximately 186,000
options were repriced by executive officers.
40
<PAGE>
Additional information with respect to the Company's stock option plans follows:
Options Outstanding
---------------------------
Weighted
Shares Number Average Price
Available of Shares Per Share
-----------------------------------------
Balance at September 30, 1995 523,143 1,684,857
Options granted (204,000) 204,000
Options exercised -- (369,240)
Options canceled 147,465 (147,465)
Options expired (23,865) -- --
-----------------------------------------
Balance at September 30, 1996 442,743 1,372,152 $ 4.60
Additional share reservation 400,000 -- $ --
Options granted (1,422,457) 1,422,457 $ 4.76
Options exercised -- (273,772) $ 0.58
Options canceled 936,251 (936,251) $ 6.90
Options expired (882) -- $ --
----------------------------------------
Balance at September 30, 1997 355,655 1,584,586 $ 4.09
Additional share reservation 400,000 -- $ --
Options granted (1,195,856) 1,195,856 $ 5.86
Options exercised -- (169,475) $ 1.62
Options canceled 655,494 (655,494) $ 7.07
Options expired (375) -- $ --
----------------------------------------
Balance at September 30, 1998 214,918 1,955,473 $ 4.39
========================================
<TABLE>
The following table summarizes information about stock options outstanding at
September 30, 1998:
<CAPTION>
- --------------------------------------------------------------------------------- -----------------------------------
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------- -----------------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
- --------------------- ----------------- ---------------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 0.20 - $ 1.00 119,372 1.79 $ 0.59 119,372 $ 0.59
$ 1.50 - $ 3.75 648,961 8.94 $ 3.50 138,518 $ 3.10
$ 4.00 - $ 4.88 723,783 8.70 $ 4.26 218,080 $ 4.27
$ 5.00 - $ 7.75 371,741 8.59 $ 6.32 91,404 $ 5.91
$ 8.00 - $ 9.00 91,616 9.06 $ 8.80 16,128 $ 8.78
----------------- ---------------------- ------------------ ----------------- -----------------
$ 0.20 - $ 9.00 1,955,473 8.35 $ 4.39 583,502 $ 3.62
- --------------------- ================= ====================== ================== ================= =================
</TABLE>
At September 30, 1997 525,807 options were exercisable at a weighted average
exercise price of $2.58.
41
<PAGE>
Stock-Based Compensation. Under APB 25, the Company generally recognizes no
compensation expense with respect to stock-based awards to employees. Pro forma
information regarding net income and earnings per share is required by FAS 123,
"Accounting for Stock-Based Compensation", for awards granted in fiscal years
that begin after December 31, 1994, as if the Company had accounted for its
stock-based awards to employees under the fair value method of FAS 123. The fair
value of the Company's stock-based awards to employees was estimated using a
Black-Scholes option pricing model. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. The Black-Scholes model
requires the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's stock-based awards to employees have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees. The fair value of the Company's stock-based
awards to employees was estimated assuming no expected dividends and the
following weighted-average assumptions:
Options
1998 1997 1996
----------------- ---------------- ---------------
Expected life (years) 6.7 5.0 5.0
Expected volatility 80.0% 75.3% 75.3%
Risk-free interest rate 6.0% 6.0% 6.0%
The weighted-average fair value of stock options granted during 1998, 1997 and
1996 was $3.72, $3.44 and $5.68, respectively. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to pro forma
net income (loss) over the options' vesting period. The Company's historical and
pro forma information follows (in thousands, except for per share information):
September 30,
1998 1997 1996
------------- ------------- --------------
Net income (loss):
Historical $ 7,205 $ 566 $ 4,389
Pro Forma $ 4,980 $ (283) $ 4,111
Net income (loss) per share:
Historical $ 0.75 $ 0.06 $ 0.47
Pro Forma $ 0.52 $ (0.03) $ 0.44
Because FAS 123 is applicable to awards granted in fiscal years that begin
subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until approximately fiscal year 2000.
5. Earnings Per Share
In fiscal 1998 the Company adopted Statement of Financial Accounting Standards
No. 128 "Earnings Per Share" (FAS 128.) In accordance with FAS 128, basic
earnings per share and diluted earnings per share have replaced primary earnings
per share and fully diluted earnings per share previously reported by the
Company. Basic earnings per share is based upon the weighted average number of
shares of common shares outstanding during the period. Diluted earnings per
share includes the dilutive effect of employee stock options using the treasury
stock method and outstanding convertible preferred stock (using the if-converted
method). All earnings per share amounts for the periods presented have been
restated to conform to the requirements of FAS 128.
42
<PAGE>
<TABLE>
The following table sets forth the reconciliation of weighted average common
shares outstanding used in the computation of basic and diluted earnings per
share computations for the years ended September 30:
<CAPTION>
September 30,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net income (Numerator):
Net income basic and diluted $7,205 $ 566 $4,389
====== ====== ======
Shares (Denominator):
Weighted average shares of common stock outstanding
used in computation of basic net income per share 9,135 8,881 8,505
Dilutive effect of stock options 501 442 827
------ ------ ------
Shares used in computation of diluted net income per share 9,636 9,323 9,332
====== ====== ======
Basic net income per share $ 0.79 $ 0.06 $ 0.52
====== ====== ======
Diluted net income per share $ 0.75 $ 0.06 $ 0.47
====== ====== ======
</TABLE>
6. Taxes on Income
The provision (benefit) for taxes on income consisted of the following (in
thousands):
September 30,
1998 1997 1996
------- ------- -------
Current:
Federal $ 815 $ 24 $ 207
State 383 7 90
Foreign 50 50 75
------- ------- -------
Total Current 1,248 81 372
Deferred:
Federal (3,685) -- --
State (245) -- --
Foreign -- -- --
------- ------- -------
Total Deferred (3,930) -- --
------- ------- -------
Total Provision $(2,682) $ 81 $ 372
======= ======= =======
Foreign income taxes are incurred on technology transfer fees received from a
foreign third party.
43
<PAGE>
Significant components of the Company's net deferred tax assets for federal and
state income taxes were as follows (in thousands):
September 30,
1998 1997
------- -------
Net deferred tax asset
Net operating loss carryforwards $ -- $ 1,253
Tax credit carryforwards 1,085 1,581
Distributor reserves 1,067 776
Deferred revenue 248 107
Depreciation (133) (257)
Capitalized research and development cost 195 223
Other accruals and reserves not currently 1,978 1,176
deductible
------- -------
Total net deferred tax assets 4,430 4,859
Less valuation allowance (500) (4,859)
------- -------
Net deferred tax asset $ 3,930 $ --
======= =======
The valuation allowance decreased by approximately $4,389,000 in 1998 and
increased by approximately $609,000 in 1997. Management determined that a full
valuation allowance is not necessary at September 30, 1998 as it was concluded
that it was more likely than not that certain deferred tax assets will be
recovered in the future. Accordingly, the Company reversed the valuation
allowance for those deferred tax assets at September 30, 1998. The effect of
such reversal resulted in the recognition in fiscal 1998 of a non-recurring
income tax benefit of $3,930,000, or $0.32 per diluted share.
The provisions (benefit) for taxes on income differed from the provisions
calculated by applying the federal statutory rate to income before taxes as
follows (in thousands):
September 30,
1998 1997 1996
------- ------- -------
Expected provisions at statutory rates $ 1,538 $ 220 $ 1,619
State taxes, net of federal benefit 262 4 59
Foreign taxes 50 33 75
Benefit of net operating loss
Carryforwards -- (190) (1,418)
Other (143) 14 37
Reversal of valuation allowance (4,389) -- --
------- ------- -------
$(2,682) $ 81 $ 372
======= ======= =======
In addition, the Company had federal general business credit carryforwards of
approximately $199,000 that expire in the years 1999 through 2011, foreign tax
credit carryforwards of $625,000 that expire in 1998 through 2001, and
alternative minimum tax credit carryforwards of $260,000 with no expiration
date.
44
<PAGE>
7. Employee Benefit Plan
The Company has a 401(k) savings plan that covers substantially all full-time
employees. Eligible employees are permitted to make fully vested tax deferred
contributions of up to 15% of their annual gross compensation, subject to
certain Internal Revenue Service limitations. The plan provides for employer
contributions at the discretion of the Board of Directors. Contributions made by
the Company for the years ended September 30, 1998, 1997, and 1996 were
approximately $133,000, $18,000, and $20,000, respectively.
8. Industry and Geographic Information
The Company operates in a single industry segment. The Company markets its
products in the United States and in foreign countries through its sales
personnel, independent sales representatives, and distributors. The Company's
geographic sales, as a percentage of net revenues, were as follows:
September 30,
1998 1997 1996
-----------------------------------------
Domestic 47% 44% 48%
Export:
Europe 13% 14% 13%
Asia 40% 42% 39%
-----------------------------------------
100% 100% 100%
=========================================
9. Fair Value of Financial Instruments
The Company has evaluated the estimated fair value of its financial instruments
which consist primarily of cash and cash equivalents, short-term investments and
note payable and determined that the carrying amounts approximate fair value due
to their short-term maturities.
10. Subsequent Events
In early fiscal 1999, due to significant over-capacity caused by continuing
decreased demand in the semiconductor industry and changes in product mix
towards products manufactured by third party foundries, the Company evaluated
its long-term manufacturing and process technology strategies. Based on this
evaluation, the Company concluded that projected production volumes and related
cash flows from the fabrication facility are not sufficient to recover its
carrying value. Consequently, the Company announced on December 3, 1998 that it
will write-down the carrying value related to its wafer fabrication facility
located in Milpitas, California in accordance with Statement of Financial
Accounting Standards ("FAS") No.121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." FAS 121
adjustments, in conjunction with other non-recurring charges related to
restructuring initiatives aimed at improving profitability, will result in a
non-recurring charge estimated at between $13 to $15 million (on a pretax basis)
in the first quarter of fiscal 1999.
45
<PAGE>
<TABLE>
Elantec Semiconductor, Inc.
Unaudited Interim Financial Information
<CAPTION>
Selected Quarterly Financial Data:
1998 1st 2nd 3rd 4th
---------------------------------------------------------
(Unaudited, in thousands except per share data)
<S> <C> <C> <C> <C>
Revenue $11,234 $11,660 $11,815 $11,501
Gross profit 5,376 5,661 5,692 4,650
Income from operations 1,147 1,343 1,255 516
Net income (1) 1,137 1,373 1,168 3,527
Earnings per share:
Basic $ 0.13 $ 0.15 $ 0.13 $ 0.38
Diluted $ 0.12 $ 0.14 $ 0.12 $ 0.37
Shares used in computing per share amounts:
Basic 9,062 9,124 9,170 9,183
Diluted 9,623 9,805 9,769 9,347
1997 1st 2nd 3rd 4th
---------------------------------------------------------
(Unaudited, in thousands except per share data)
Revenue $8,001 $8,494 $9,195 $9,698
Gross profit 3,191 3,791 3,972 4,323
Income (loss) from operations (198) (39) (11) 425
Net income (loss) (97) 67 98 498
Earnings (loss) per share:
Basic $(0.01) $ 0.01 $ 0.01 $ 0.05
Diluted $(0.01) $ 0.01 $ 0.01 $ 0.05
Shares used in computing per share amounts:
Basic 8,759 8,804 8,962 8,999
Diluted 8,759 9,281 9,239 9,476
<FN>
- -----------------
(1) During the fourth fiscal quarter of 1998, the Company reversed its
valuation allowance for certain deferred tax assets in accordance with
Statement of Financial Accounting Standards 109, "Accounting for Income
Taxes." This resulted in a non-recurring income tax benefit for the fourth
fiscal quarter of 1998 of $3,930, 000 or $0.32 per basic and diluted share.
</FN>
</TABLE>
46
<PAGE>
<TABLE>
Schedule II
Elantec Semiconductor, Inc.
Valuation And Qualifying Accounts
Year ended September 30, 1998, 1997, and 1996
<CAPTION>
Additions
Balance at Charged to
Beginning Cost and Balance at
of Year Expense Deductions End of Year
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended September 30, 1998
Allowance for doubtful accounts and product
returns (deducted from accounts receivable) $840 $ 242 ($ 6) $1,076
===========================================================
Year ended September 30, 1997
Allowance for doubtful accounts and product
returns (deducted from accounts receivable) $340 $1,447 ($947) $ 840
===========================================================
Year ended September 30, 1996
Allowance for doubtful accounts and product
returns (deducted from accounts receivable) $265 $ 566 ($491) $ 340
===========================================================
</TABLE>
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Milpitas, State of California, on the 8th day of December, 1998.
ELANTEC SEMICONDUCTOR, INC.
By: /s/ James V. Diller
------------------------------------
James V. Diller
Acting President and Chief Executive Officer,
Chairman of the Board of Directors
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James V. Diller, his true and lawful
attorneys-in-fact, each with the power of substitution, for him in any and all
capacities, to sign amendments to this Report on Form 10-K, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and conforming all
that said attorneys-in-fact, or his or her substitute or substitutes, may do or
cause to be done by virtue thereof.
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
Principal Executive Officer:
/s/ James V. Diller Acting President and Chief Executive Officer, December 8, 1998
- ------------------------------------ Chairman of the Board of Directors
James V. Diller
Principal Financial Officer:
/s/ Ephraim Kwok Vice President of Finance and Administration December 8, 1998
- ------------------------------------ and Chief Financial Officer
Ephraim Kwok
Additional Directors:
/s/ Chuck K. Chan Director December 8, 1998
- ------------------------------------
Chuck K. Chan
/s/ Alan V. King Director December 8, 1998
- ------------------------------------
Alan V. King
/s/ B. Yeshwant Kamath Director December 8, 1998
- ------------------------------------
B. Yeshwant Kamath
</TABLE>
48
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
EXHIBITS
to
Form 10-K
Under
THE SECURITIES ACT OF 1933
-----------
ELANTEC SEMICONDUCTOR, INC.
49
<PAGE>
INDEX TO EXHIBITS
Exhibit Page
Number Description No.
- ------ ----------- ---
23.01 Consent of Deloitte & Touche LLP, Independent Auditors. 51
23.02 Consent of Ernst & Young LLP, Independent Auditors. 52
27.01 Financial Data Schedule 53
50
Exhibit 23.01
CONSENT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement Nos.
333-39613 and 33-48101 of Elantec Semiconductor, Inc. on Form S-8 of our report
dated October 22, 1998 (December 3, 1998 as to Note 10.), appearing in this
Annual Report on Form 10-K of Elantec Semiconductor, Inc. for the year ended
September 30, 1998.
DELOITTE & TOUCHE LLP
San Jose, California
December 8, 1998
51
Exhibit 23.02
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-39613) pertaining to the 1995 Equity Incentive Plan and in the
Registration Statement (Form S-8 No. 33-98880) pertaining to the 1995 Employee
Stock Purchase Plan, the 1995 Directors Stock Option Plan, the 1995 Equity
Incentive Plan, the 1994 Equity Incentive Plan and the 1983 Stock Option Plan of
Elantec Semiconductor, Inc., of our report dated October 22, 1997 with respect
to the consolidated financial statements and schedule of Elantec Semiconductor,
Inc. included in the Annual Report (Form 10-K) for the year ended September 30,
1998.
ERNST & YOUNG LLP
San Jose, California
December 7, 1998
52
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-27-1998
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<RECEIVABLES> 6,283
<ALLOWANCES> 1,076
<INVENTORY> 9,059
<CURRENT-ASSETS> 27,699
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0
0
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<SALES> 45,682
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<INTEREST-EXPENSE> 413
<INCOME-PRETAX> 4,522
<INCOME-TAX> (2,683)
<INCOME-CONTINUING> 7,205
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 7,205
<NET-INCOME> 7,205
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.75
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