SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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Commission File No. 000-26690
ELANTEC SEMICONDUCTOR, INC.
(Exact Name of registrant as specified in its charter)
Delaware 77-0408929
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
675 Trade Zone Boulevard, Milpitas, California 95035
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 945-1323
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of June 27, 1999, 9,302,621 shares of the Registrant's Common Stock, $0.01
par value, were issued and outstanding.
1
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TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements .................. 3
Notes to Condensed Consolidated Financial Statements ......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk ... 16
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................. 17
Signatures ................................................... 18
2
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
<TABLE>
ELANTEC SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
------------------------ -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 13,005 $ 11,815 $ 36,379 $ 34,709
Cost of revenues 6,184 6,123 19,580 17,980
Cost of revenues - inventory write-down 0 0 1,008 0
-------- -------- -------- --------
Gross profit 6,821 5,692 15,791 16,729
Operating expenses:
Research and development 1,847 1,997 5,127 5,409
Marketing, sales, general and administrative 2,840 2,440 7,980 7,575
Restructuring and other non-recurring charges 0 0 12,009 0
-------- -------- -------- --------
Total operating expenses 4,687 4,437 25,116 12,984
-------- -------- -------- --------
Income (loss) from operations 2,134 1,255 (9,325) 3,745
Interest and other income, net 70 14 42 252
-------- -------- -------- --------
Income (loss) before taxes 2,204 1,269 (9,283) 3,997
Provision (benefit) for income taxes 727 101 (3,662) 319
-------- -------- -------- --------
Net income (loss) $ 1,477 $ 1,168 $ (5,621) $ 3,678
======== ======== ======== ========
Earnings (loss) per share:
Basic $ 0.16 $ 0.13 $ (0.61) $ 0.40
======== ======== ======== ========
Diluted $ 0.14 $ 0.12 $ (0.61) $ 0.38
======== ======== ======== ========
Shares used in computing per share amounts:
Basic 9,280 9,170 9,230 9,119
======== ======== ======== ========
Diluted 10,459 9,769 9,230 9,732
======== ======== ======== ========
<FN>
See accompanying notes to the condensed consolidated financial statements.
</FN>
</TABLE>
3
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ELANTEC SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30 Sept. 30
1999(1) 1998(2)
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Assets:
Current assets:
Cash and cash equivalents $16,046 $ 5,815
Short-term investments 992 3,651
Trade receivables 4,814 5,207
Inventories 3,203 9,059
Deferred income taxes 3,820 3,367
Prepaid expenses and other current assets 346 600
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Total current assets 29,221 27,699
Property and equipment, net 8,105 18,625
Other assets 473 657
Noncurrent deferred income taxes 4,999 563
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Total assets $42,798 $47,544
======= =======
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable and accrued liabilities $ 6,739 $ 6,807
Deferred revenue 3,035 2,626
Current portion of long-term obligations 1,412 1,480
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Total current liabilities 11,186 10,913
Long-term obligations 4,703 4,354
Stockholders' equity 26,909 32,277
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Total liabilities and stockholders' equity $42,798 $47,544
======= =======
(1) Unaudited
(2) These amounts were derived from the Company's audited consolidated
financial statements at September 30, 1998
See accompanying notes to the condensed consolidated financial statements.
4
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<TABLE>
ELANTEC SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
June 30,
--------------------------------
1999 1998
-------- --------
<S> <C> <C>
Operating activities:
Net income (loss) $ (5,621) $ 3,678
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,136 1,871
Inventory write-down 1,008 0
Asset impairment 11,090 0
Deferred tax benefit (4,889) 0
Changes in operating assets and liabilities:
Accounts receivable 393 (1,789)
Inventories 4,848 (2,578)
Prepaid expenses and other current assets 254 47
Accounts payable and accrued liabilities (67) 2,895
Deferred revenue 409 1,080
-------- --------
Net cash provided by operating activities 9,561 5,204
Investing activities:
Sale/maturity of available-for-sale securities 2,659 3,440
Purchase of property and equipment (1,291) (9,245)
Decrease in other assets 145 (86)
-------- --------
Net cash provided by (used in) investing activities 1,513 (5,891)
Financing activities:
Payments on capital lease and other debt (1,133) (1,153)
Issuance of common stock 290 248
-------- --------
Net cash used in financing activities (843) (905)
Increase (decrease) in cash and cash equivalents 10,231 (1,592)
Cash and cash equivalents at beginning of period 5,815 9,839
-------- --------
Cash and cash equivalents at end of period $ 16,046 $ 8,247
======== ========
Supplemental disclosures of cash flow information:
Lease and installment financing for capital equipment $ 0 $ 1,621
Interest paid $ 316 $ 165
Taxes paid $ 220 $ 140
<FN>
See accompanying notes to the condensed consolidated financial statements.
</FN>
</TABLE>
5
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ELANTEC SEMICONDUCTOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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NOTE 1. BASIS OF PRESENTATION
The Company has prepared the unaudited condensed consolidated financial
statements included herein pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, all adjustments (consisting
of normal recurring items) considered necessary for a fair presentation have
been included. The results of operations for the three and nine months ended
June 30, 1999 are not necessarily indicative of the results to be expected for
the entire year. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
September 30, 1998.
The Company's fiscal year end is the Sunday closest to September 30. The
Company's fiscal quarters end on the Sunday closest to the end of the calendar
quarter. For convenience, the Company has indicated that its quarters end on
December 31, March 31, June 30 and September 30.
NOTE 2. 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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
NOTE 3. 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 purposes of balance sheet and statement of cash flows presentation.
Cash and cash equivalents are carried at cost, which approximates market value.
NOTE 4. 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
maturity of less than one year. All of the Company's marketable investments are
classified as "available-for-sale" and the Company classifies its
available-for-sale portfolio as available for use in its current operations. At
June 30, 1999, there was no significant difference between the fair market value
and the underlying cost of such securities.
6
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NOTE 5. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist of the following balances in thousands:
June 30, September 30,
1999 1998
------ ------
Raw materials $ 133 $ 498
Work-in-process 2,058 6,481
Finished goods 1,012 2,080
------ ------
$3,203 $9,059
====== ======
NOTE 6. EARNINGS (LOSS) PER SHARE
<TABLE>
Basic earnings (loss) per share is based upon the weighted average number of
shares of common shares outstanding during the period. Diluted earnings (loss)
per share includes the dilutive effect of employee stock options using the
treasury stock method. The following table sets forth the computation of basic
and diluted earnings per share:
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator for basic and diluted net income per share:
Net income (loss) $ 1,477 $ 1,168 $(5,621) $ 3,678
======= ======= ======= =======
Denominator:
Denominator for basic net income per share -
weighted average shares 9,280 9,170 9,230 9,119
Effect of dilutive securities:
Common stock options 1,179 599 -- 613
------- ------- ------- -------
Denominator for diluted earnings per share 10,459 9,769 9,230 9,732
======= ======= ======= =======
Basic net income (loss) per share $ 0.16 $ 0.13 $ (0.61) $ 0.40
======= ======= ======= =======
Diluted net income (loss) per share $ 0.14 $ 0.12 $ (0.61) $ 0.38
======= ======= ======= =======
</TABLE>
At June 30, 1999, outstanding options to purchase 17,187 shares at exercise
prices between $9.44 and $13.56 were excluded from the computation of net income
per share as the option price was greater than the average market price of the
common shares and, therefore, would be antidilutive under the treasury stock
method. At June 30, 1998, outstanding options to purchase 325,600 shares at
exercise prices between $8.00 and $10.00 were excluded from the computation of
net income per share as the option price was greater than the average market
price of the common shares and, therefore, would be antidilutive under the
treasury stock method.
7
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NOTE 7. COMPREHENSIVE INCOME
In the first quarter of fiscal year 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130 ). FAS 130 establishes new rules for the reporting and display of
comprehensive income (loss) and its components. Components of comprehensive
income (loss) include net income (loss) and certain transactions that are
reported in the consolidated statement of stockholders' equity. FAS 130 requires
that these transactions be included in the financial statements. The adoption of
this statement had no impact on the Company's net income (loss) or stockholders'
equity and, during the periods presented, the Company had no material
transactions other than net income (loss) that should be reported as
comprehensive income.
NOTE 8. RECENT ACCOUNTING PRONOUNCEMENTS
Segment Information. In June 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 131, " Disclosures
about Segments of an Enterprise and Related Information" (FAS 131). FAS 131
establishes annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic areas
and major customers. The Company has not yet determined its business segments
for purposes of these disclosures. Adoption of this statement will not impact
the Company's consolidated financial position, results of operations or cash
flows. As allowed by FAS 131, the Company will adopt this statement in its
financial statements for the year ending September 30, 1999.
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.
NOTE 9. RESTRUCTURING AND OTHER CHARGES
During the first quarter of fiscal 1999, the Company implemented a plan to
restructure its manufacturing operations in response to a shift in the mix of
products fabricated internally compared to products fabricated by outside
foundries. During the several quarters preceding this decision, production
volume and revenue from products fabricated by outside foundries, particularly
those products in the data processing market, have generally increased.
Simultaneously, the Company experienced a decline in volume and revenue from
internally fabricated products. As a result, the Company was in a position of
significant over-capacity in its internal fabrication facility located in
Milpitas, California.
The Company evaluated its long-term manufacturing strategy and decided to
discontinue development of dielectric isolation (DI) process technology.
Therefore, internally fabricated products using DI technology are expected to
continue to decline as a percentage of revenues over the next several years.
However, the Company intends to develop alternate technologies, including
silicon-on-insulator (SOI), at its fabrication facility in Milpitas, California,
while moving to an external foundry-based manufacturing strategy.
8
<PAGE>
During the first quarter of fiscal 1999, the Company's decision to discontinue
development of future-generation products using dielectric isolation technology
would, more likely than not, obsolete certain existing products and capitalized
patents. Accordingly, the Company recorded a pretax charge of $1.0 million
related to a write-down of inventory and $0.2 million related to a write-down of
patents.
The restructuring also included operating initiatives to improve the Company's
cost structure including a reduction of approximately 10% of the Company's work
force. The Company recorded a pretax charge of $0.6 million related to cost
reductions and $0.1 million other non-recurring charges due to a legal
settlement with AMP Incorporated.
In response to the over-capacity issue and change in strategy, the Company
engaged independent consulting firms to assist in the determination of the fair
value of the assets of its Milpitas, California fabrication facility. As a
result of this independent analysis, and in accordance with Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" (FAS 121), the Company recorded a pretax
impairment of $11.1 million to reduce the carrying value of its internal
fabrication facility. Restructuring and other non-recurring charges resulted in
pretax charges of $12.0 million to operating expenses and $1.0 million to cost
of goods sold in the first quarter of fiscal 1999. Remaining cash payments
related to these activities are expected to be $0.1 million and $0.3 million in
fiscal 1999 and 2000, respectively. The following table summarizes the
restructuring and other charges in thousands:
Total Utilized Balance at
Restructuring through June 30,
Charge June 30, 1999
1999
-------------------------------------------
Asset impairment $11,090 $11,090 $ --
Write-down of inventory 1,008 1,008 --
Payments to employees
involuntarily terminated 638 417 221
Write-down of patents 174 174 --
Legal settlement 107 107 --
-------------------------------------------
Total $13,017 $12,796 $ 221
===========================================
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, certain matters
discussed in this Form 10-Q, including discussions related to the discontinuance
of the Company's military and commercial hybrid products, change in
manufacturing strategy, and use of SOI technology may contain forward-looking
statements that involve risks and uncertainties. The Company's actual future
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" in the
Company's 1998 Form 10-K filed with the Securities and Exchange Commission.
<TABLE>
Results of Operations - The table below states the income statement items for
the three and nine months ended June 30, 1999 and 1998 as a percentage of net
revenues and provides the percentage change in absolute dollars from the
previous year:
<CAPTION>
Three Three Nine Nine
Months Ended Months Ended Dollar % Months Ended Months Ended Dollar %
June 30, 1999 June 30, 1998 Change June 30, 1999 June 30, 1998 Change
-------------- -------------- ---------- -------------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues 100.0 100.0 10.1 100.0 100.0 4.8
Cost of revenues 47.6 51.8 1.0 53.8 51.8 8.9
Cost of revenues-inventory
write down -- -- -- 2.8 -- --
Gross profit 52.4 48.2 19.8 43.4 48.2 (5.6)
Operating expenses:
Research and development 14.2 16.9 (7.5) 14.1 15.6 (5.2)
Marketing, sales, general
and administrative 21.8 20.7 16.4 21.9 21.8 5.3
Restructuring and other
Non-recurring charges -- -- -- 33.0 -- --
</TABLE>
During the third quarter of fiscal 1999, the Company generated record net
revenues of $13.0 million, an increase of 10.1% from the $11.8 million reported
in the same quarter of the previous year. This increase was due to higher unit
shipments, partially offset by lower average selling prices. International
revenues during the third quarter of fiscal 1999 were 55.7% of total revenues
compared to 53.2% of total revenues for the third quarter of fiscal 1998. This
increase in international revenues over the same quarter during the prior year
was primarily due to strong optical storage product demand in Japan.
For the first nine-months of fiscal 1999, net revenue was $36.4 million, an
increase of 4.8% from the $34.7 million reported in the corresponding period of
fiscal 1998. This increase was due to higher unit shipments, partially offset by
lower average selling prices. International revenues during the first nine
months of fiscal 1999 were 58.2% of total revenues, compared to 54.2% of total
revenues for the first nine months of fiscal 1998. Again, the increase in
international revenue over the prior year was primarily due to strong optical
storage product demand in Japan.
10
<PAGE>
During second and third fiscal quarters of 1999, the Company experienced a trend
towards shorter than historical order lead times. This affects the Company's
ability to forecast future revenues, profitability and limits forward business
climate visibility. The Company is reacting to shorter lead times by continuing
efforts to reduce production cycle time and expects inventory as a percent of
revenues to increase.
The Company defers recognition of revenue from shipments to domestic and certain
international distributors until such distributors resell the Company's products
to their customers. Generally, sales to international distributors are
recognized upon shipment.
The volume of product sales, mix of products sold, manufacturing capacity
utilization, product yields and average selling prices affect gross profit.
Gross margin increased to 52.4% of net revenues for the third quarter of fiscal
1999 from 48.2% for the same period of fiscal 1998. This increase in gross
profit as a percentage of net revenues is due to a shift in demand to higher
margin products, improved product yields and improved manufacturing efficiency
caused by increased capacity utilization.
For the first nine months of fiscal 1999 gross profit as a percent of net
revenues was 43.4% compared to 48.2% for the first nine months of fiscal 1998.
During the first quarter of fiscal 1999, the Company concluded that its change
in strategy to discontinue development of future-generation products using
dielectric isolation technology would, more likely than not, obsolete certain
existing products. Accordingly, additional provisions for inventory obsolescence
of $1.0 million were charged to cost of revenues. Without this non-recurring
charge, gross profit for the first nine months of fiscal 1999 would have been
46.2% of net revenues compared to 48.2% during the first nine months of fiscal
1998. This decrease as a percentage of net revenues was primarily due to factors
occurring in the first half of fiscal 1999 including (i) a shift in demand to
lower margin products and (ii) under-utilization of the Company's internal
fabrication facility caused by a shift in product demand toward products
manufactured by third-party foundries.
In July 1997, the Company announced that it would discontinue its military and
commercial hybrid product. This product line accounted for 12.3% and 8.9% of net
revenues during the third quarters of 1999 and 1998, respectively, and 8.2% and
9.3% of net revenues for the first nine months of fiscal 1999 and 1998,
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 these last-buy orders during
fiscal 1999.
Research and development expenses of $1.9 million in the third quarter of fiscal
1999 decreased $0.2 million, or 7.5%, when compared to the third quarter of
1998. This decrease is primarily due to lower costs associated with engineering
test wafers. As a percentage of revenues, research and development expenses
decreased to 14.2% for the third quarter of fiscal 1999 from 16.9% during the
same quarter of the prior fiscal year primarily due to higher revenues during
the third quarter of fiscal 1999.
For the first nine months of fiscal 1999, research and development expenses of
$5.1 million decreased $0.3 million, or 5.2%, when compared to the first nine
months of fiscal 1998. As a percentage of revenues, research and development
expenses decreased to 14.1% of net revenues in the first nine months of fiscal
1999 from 15.6% of net revenues in the first nine months of fiscal 1998. This
decrease as a percentage of revenues was primarily due to higher revenues during
fiscal 1999. Management expects research and development expenses, in absolute
dollars,
11
<PAGE>
to increase as the Company develops silicon on insulator (SOI) technology (see
discussion in the section titled "Factors Affecting Future Results" below) and
focuses its new product development efforts. However, there can be no assurance
that net revenues will increase at the same rate as anticipated research and
development expenses.
Marketing, selling and general and administrative expenses of $2.8 million
increased $0.4 million, or 16.4%, when compared to the third quarter of fiscal
1998. This increase is primarily due to higher consulting fees, salaries, sales
commissions and management incentives. As a percentage of net revenues,
marketing, selling and general and administrative expenses during the third
quarter of fiscal 1999 increased to 21.8% from 20.7% for the third quarter of
fiscal 1998.
For the first nine months of fiscal 1999, marketing, selling and general and
administrative expenses of $8.0 million increased $0.4 million, or 5.3%, when
compared to the first nine months of fiscal 1998. This increase is primarily due
to higher consulting fees, salaries, sales commissions and management incentives
during the third quarter of fiscal 1999. As a percentage of revenues, marketing,
selling and general and administrative expense for the first nine months of
fiscal 1999 and 1998 were relatively flat at 21.9% and 21.8% of net revenue,
respectively.
During the first quarter of fiscal 1999 the Company evaluated and changed its
long-term manufacturing strategy and, as a result, concluded that projected
production volume and related cash flow from the Company's internal fabrication
facility were not sufficient to recover its carrying value. In accordance with
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (FAS 121), the
Company recorded a pretax non-recurring write-down of $11.1 million to properly
reflect the value of its internal fabrication facility. The Company also
recorded a pretax non-recurring charge of $0.9 million for organizational
restructuring related to the change in its manufacturing strategy.
Net income for the third quarter of fiscal 1999 was $1.5 million compared to net
income of $1.2 million for the same quarter of fiscal 1998. Net loss for the
first nine months of fiscal 1999 was $5.6 million, or $0.61 per diluted share,
including the previously discussed restructuring and other non-recurring pretax
charges of $13.0 million. Excluding restructuring and other non-recurring
charges, pro forma net income for the first nine months of fiscal 1999 was $2.5
million or $0.27 per diluted share compared to net income of $3.7 million or
$0.38 per diluted share for the first nine months of fiscal 1998.
The Company's effective tax rate for the first nine months of fiscal 1999
differs from tax computed at the federal statutory rate due to state income
taxes partially offset by the benefit from the foreign sales corporation and tax
credits.
Factors Affecting Future Results
The Company sells its products to distributors and manufacturers in Asian
countries that recently experienced an economic recession. The Company does not
expect economic conditions in Asia to worsen or have a material adverse impact
on the Company's results of operations in the near term. However, should the
economic 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
12
<PAGE>
foundries that have the capability to process dielectrically isolated
semiconductor wafers is limited. The Company's dielectric isolation foundry
discontinued supplying this technology in the fourth fiscal quarter of 1998.
Currently, the Company internally processes all dielectric isolated wafer steps
except one out-sourced step. The Company's results of operations would be
materially adversely affected if the supply of this out-sourced process step is
interrupted.
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
and changed its long-term manufacturing and process technology strategies. The
Company recognized $13.0 million in restructuring cost and other non-recurring
charges during the first quarter of 1999. There can be no assurance that these
restructuring initiatives will be sufficient to improve earnings. Additional
restructuring actions, if required, may have a material adverse effect on the
Company's results of operations in the future.
During second and third fiscal quarters of 1999, the Company experienced a trend
towards shorter than historical order lead times. This affects the Company's
ability to forecast future revenues, profitability and limits forward business
climate visibility. The Company is reacting to shorter lead times by continuing
efforts to reduce production cycle time and expects inventory as a percent of
revenues to increase. If the Company is unable to maintain adequate levels of
inventory to satisfy actual product demand, the future results of operations
could be materially adversely impacted.
The Company expects to expend approximately $2.3 million on capital expenditures
during the remainder of fiscal 1999. Additionally, the Company anticipates
significant continuing capital expenditures in the next 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.
New products and process technology development require significant research and
development expenditures. 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 materially 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. Management believes that the development of a viable SOI process
technology is virtually complete. However, there can be no assurance that SOI
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 materially adversely
affect the Company's new product development program.
13
<PAGE>
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, transferring production to
alternative suppliers, changes to existing or newly developed process
technologies, ramping production, or installing new equipment at its facilities.
The semiconductor industry is highly cyclical and has been subject to
significant economic fluctuations at various times that have been characterized
by rapidly fluctuating product demand, periods of over and under capacity, and
accelerated erosion of average selling prices. A material change in
industry-wide production capacity, shift in industry capacity toward products
competitive with the Company's products, rapidly fluctuating demand, or other
factors could result in a rapid decline in product pricing or unit volumes which
could have a material adverse affect on the Company's operating results.
Vigorous protection and pursuit of intellectual property rights or positions,
which have resulted in significant and often protracted and expensive
litigation, characterize the semiconductor industry. 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, damages or
royalties to develop non-infringing technology. There can be no assurance that
the Company would be able to obtain such licenses on acceptable terms or to
develop non-infringing technology without a material adverse effect on the
Company.
The Company is subject to a variety of regulations related to hazardous
materials used in its manufacturing process. Any failure by the Company to
control the use of, or to restrict adequately the discharge of, hazardous
materials under present or future regulations could subject it to substantial
liability or could cause its manufacturing operations to be suspended.
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. These factors may materially
adversely affect the price of the Common Stock.
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.
14
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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 and upgraded manufacturing-execution software has been implemented and
the Company is currently installing patches received from the vendors to ensure
Y2K compliance. 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 is
not aware of any material year 2000 problems with suppliers, vendors,
consultants, or other parties on which it depends. However, there can be no
assurance that the Company has properly identified and corrected incompliant
systems or that potential problems with third parties have been identified.
Failure to identify incompliant systems may have a material adverse affect on
future operations.
The Company believes its products are Y2K compliant. 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, which 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 remedy the Company's remaining year 2000 issues is estimated to be $0.2
million in fiscal 1999. The cost of the year 2000 project 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.
Elantec's operating results have been, and in the future may be, subject to
fluctuations due to a wide variety of factors including the timing of or 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 of product sold, availability and costs
of raw materials, reliance on and availability of 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.
Liquidity and Capital Resources
The Company's primary sources of liquidity at June 30, 1999 are cash and
short-term investments of a record $17.0 million. Cash and short-term
investments increased $7.6 million from $9.5 million at September 30, 1998.
Additionally, at June 30, 1999, the Company had a revolving credit line of $5.0
million, all of which was unused and available. The line of credit expires on
June 30, 2000. Borrowings under this line are secured by a first priority
security interest in virtually all the Company's assets except for certain
capital assets previously acquired under lease agreements. The agreement
contains certain covenants that include a restriction on the declaration and
payment of cash dividends and restrictions on business mergers, acquisitions and
investments. The Company was in compliance with all covenants at June 30, 1999.
15
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Net cash provided by operations was $9.6 million for the first three fiscal
quarters of 1999. Cash provided by investing activities was $1.5 million. This
increase was primarily due to reinvesting maturities of short-term investments
in cash equivalents with maturities less than 90 days partially offset by
purchases of fixed assets. Financing activities used $0.8 million primarily due
to payments of lease obligations and long-term liabilities partially offset by
proceeds form exercise of employee stock options.
The Company believes that its cash and equivalents, short-term investments, line
of credit, borrowing capacity, and cash generated from operations will satisfy
its expected working capital and capital expenditure requirements for 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 financing with favorable terms, or at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 June 30, 1999, the fair value of the approximately $15.7 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.
At June 30, 1999, the Company had approximately $4.7 million of outstanding
obligations under capital lease arrangements and long-term debt. These
borrowings do not carry variable interest rates. Accordingly, if interest rates
were to increase 10 percent, no material impact on the Company's net income or
cash flows would result. 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 June 30, 1999, the fair value of these foreign
currency amounts would decline by an immaterial amount.
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PART II - OTHER INFORMATION
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K during the quarter ended June
30, 1999
17
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELANTEC SEMICONDUCTOR, INC.
(Registrant)
Date: August 2, 1999 By: /s/ Ephraim Kwok
------------------
Ephraim Kwok
Chief Financial Officer (duly
authorized officer and
principal financial officer)
18
<PAGE>
EXHIBIT INDEX
Exhibit
27.1 Financial Data Schedule
19
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 16,046
<SECURITIES> 992
<RECEIVABLES> 6,268
<ALLOWANCES> 1,454
<INVENTORY> 3,203
<CURRENT-ASSETS> 29,220
<PP&E> 32,066
<DEPRECIATION> 23,961
<TOTAL-ASSETS> 42,797
<CURRENT-LIABILITIES> 11,186
<BONDS> 4,703
0
0
<COMMON> 93
<OTHER-SE> 26,816
<TOTAL-LIABILITY-AND-EQUITY> 42,797
<SALES> 13,005
<TOTAL-REVENUES> 13,005
<CGS> 6,184
<TOTAL-COSTS> 6,184
<OTHER-EXPENSES> 4,280
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70
<INCOME-PRETAX> 2,204
<INCOME-TAX> 727
<INCOME-CONTINUING> 1,477
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,477
<EPS-BASIC> 0.16
<EPS-DILUTED> 0.14
</TABLE>
