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 December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______TO _______
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 January 31, 1999, 9,203,293 shares of the Registrant's Common Stock, $0.01
par value, were issued and outstanding.
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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......................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......15
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................16
Signatures.......................................................17
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ELANTEC SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
----------------------
December 31 December 31
1998 1997
-------- --------
Net revenues $ 10,653 $ 11,234
Cost of revenues 6,401 5,858
Cost of revenues - inventory write-down 1,008 0
-------- --------
Gross profit 3,244 5,376
Operating expenses:
Research and development 1,711 1,642
Marketing, sales, general and administrative 2,429 2,587
Restructuring and other non-recurring charges 12,009 0
-------- --------
Total operating expenses 16,149 4,229
-------- --------
Income (loss) from operations (12,905) 1,147
Interest and other income (expense), net (8) 116
-------- --------
Income (loss) before taxes (12,913) 1,263
Provision (benefit) for income taxes (4,889) 126
-------- --------
Net income (loss) $ (8,024) $ 1,137
======== ========
Earnings (loss) per share:
Basic $ (0.87) $ 0.13
======== ========
Diluted $ (0.87) $ 0.12
======== ========
Shares used in computing per share amounts:
Basic 9,197 9,062
======== ========
Diluted 9,197 9,623
======== ========
See accompanying notes to the condensed consolidated financial statements.
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ELANTEC SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
Dec. 31 Sept. 30
1998(1) 1998(2)
------- -------
Assets:
Current assets:
Cash and cash equivalents $ 5,848 $ 5,815
Short-term investments 3,232 3,651
Trade receivables 3,898 5,207
Inventories 6,301 9,059
Deferred income taxes 3,820 3,367
Prepaid expenses and other current assets 523 600
------- -------
Total current assets 23,622 27,699
Property and equipment, net 8,781 18,625
Other assets 501 657
Noncurrent deferred income taxes 4,999 563
------- -------
Total assets $37,903 $47,544
======= =======
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable and accrued liabilities $ 4,452 $ 6,808
Deferred revenue 2,382 2,626
Current portion of long-term obligations 1,402 1,480
------- -------
Total current liabilities 8,236 10,914
Long-term obligations 5,419 4,354
Stockholders' equity 24,248 32,276
------- -------
Total liabilities and stockholders' equity $37,903 $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.
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<TABLE>
ELANTEC SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended
December 31,
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
Operating activities:
Net income (loss) $ (8,024) $ 1,137
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 737 618
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 1,309 (782)
Inventories 1,750 (59)
Prepaid expenses and other current assets 77 29
Accounts payable and accrued liabilities (2,356) 19
Deferred revenue (244) 586
-------- --------
Net cash provided by operating activities 458 2,095
Investing activities:
Sale/maturity (purchase) of available-for-sale securities 419 (2,219)
Purchase of property and equipment (531) (1,378)
Decrease in other assets 118 16
-------- --------
Net cash provided by (used in) investing activities 6 (3,581)
Financing activities:
Payments on capital lease and other debt (431) (393)
Issuance of common stock 0 77
-------- --------
Net cash provided by (used in) financing activities (431) (317)
Increase (decrease) in cash and cash equivalents 33 (1,803)
Cash and cash equivalents at beginning of period 5,815 9,839
-------- --------
Cash and cash equivalents at end of period $ 5,848 $ 8,036
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 113 $ 103
Taxes paid $ 220 $ 25
<FN>
See accompanying notes to the condensed consolidated financial statements.
</FN>
</TABLE>
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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 months ended December 31,
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
December 31, 1998, there was no significant difference between the fair market
value and the underlying cost of such securities.
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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:
December 31, September 30,
1998 1998
------ ------
Raw materials $ 561 $ 498
Work-in-process 3,589 6,481
Finished goods 2,151 2,080
------ ------
$6,301 $9,059
====== ======
NOTE 6. EARNINGS (LOSS) PER SHARE
<TABLE>
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 (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
December 31,
-------------------------------
1998 1997
--------- ------
<S> <C> <C>
Numerator for basic and diluted net income per share:
Net income $ (8,024) $1,137
========= ======
Denominator:
Denominator for basic earnings (loss) per share - weighted average shares 9,197 9,062
Effect of dilutive securities:
Common stock options -- 561
--------- ------
Denominator for diluted earnings (loss) per share 9,197 9,623
========= ======
Basic earnings (loss) per share $ (0.87) $ 0.13
========= ======
Diluted earnings (loss) per share $ (0.87) $ 0.12
========= ======
</TABLE>
At December 31, 1998, outstanding options to purchase 1,953,391 of common stock
at prices ranging from $0.20 to $9.00 were excluded from the computation of
diluted net income per share because the effect of the conversion of the options
reduces the loss per share and is therefore, antidilutive. At December 31, 1997,
outstanding options to purchase 388,632 shares at exercise prices between $0.20
to $6.13 were excluded from the computation of diluted net income per share as
the option price was greater than the average market price of the common shares
as of such dates and, therefore, would be antidulutive under the treasury stock
method.
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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 have
generally been reported in the consolidated statement of shareholders' 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 shareholders' 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 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 past several quarters, 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. In response to
this shift in product mix, the Company evaluated its long-term manufacturing
strategy and concluded that, based on current projections, this trend was
expected to continue.
During the quarter, 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 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 the change in strategy, the Company
engaged independent consulting firms to analyze the anticipated cash flow as
well as the fair value of the assets its Milpitas, California fabrication
facility. The studies 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 impairment of
$11.1 million to reduce the carrying value of its internal fabrication facility
based on valuations performed.
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<TABLE>
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. Cash
payments related to these activities are expected to be $0.5 million and $0.3
million in fiscal 1999 & 2000, respectively. The following table summarizes the
restructuring and other charges in thousands.
<CAPTION>
Total Expected Balance at Expected Balance at
Restructuring in Sep. 30, in Sep. 30,
Charge 1999 1999 2000 2000
------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
Asset impairment $11,090 $11,090 $ -- $ -- $ --
Write-down of inventory 1,008 1,008 -- -- --
Payments to employees
involuntarily terminated 638 357 281 281 --
Write-down of patents 174 174 -- -- --
Legal Settlement 107 107 -- -- --
------- ------- ------- ------- -----------
Total $13,017 $12,736 $ 281 $ 281 $ --
======= ======= ======= ======= ===========
</TABLE>
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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.
Restructuring and other non-recurring 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 past several
quarters, 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. In response to this shift in product mix, the
Company evaluated and changed its long-term manufacturing strategy and concluded
that, based on current projections, this trend was expected to continue.
Due to the aforementioned over-capacity and change in strategy, the Company's
restructuring activities consisted primarily of a write down of certain
equipment, a write-down of inventory, severance costs, and a write-down of
previously capitalized patent costs. These actions resulted in pretax charges of
$12.0 million to operating expenses and $1.0 million to cost of goods sold.
Approximately $12.6 million was utilized in the first quarter of fiscal 1999.
Approximately $0.1 million and $0.3 million will be utilized during the
remainder of fiscal 1999 and fiscal 2000, respectively.
<TABLE>
Results of Operations - The table below states the income statement items for
the three months ended December 31, 1998 and 1997 as a percentage of net
revenues and provides the percentage change in absolute dollars from the
previous year:
<CAPTION>
Three Three
Months Ended Months Ended Dollar %
Dec. 31, 1998 Dec. 31, 1997 Change
----------------- ------------------ -----------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% (5)%
Cost of revenues 60.1% 52.1% 9%
Cost of revenues-inventory write-down 9.5% -- --
Gross profit 30.4% 47.9% (40)%
Operating expenses:
Research and development 16.1% 14.6% 4%
Marketing, sales, general and administrative 22.8% 23.0% 6%
Restructuring and other non-recurring charges 112.7% -- --
</TABLE>
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During the first quarter of fiscal 1999, the Company generated net revenues of
$10.7 million, a decrease of 5% from the $11.2 million reported in the same
quarter of the previous year. This decrease was due primarily to lower unit
shipments, while the average selling price was relatively constant.
International revenues were 56% of total revenues, compared to 57% of total
revenues for the first quarter of fiscal 1998. The decrease in international
revenue was primarily due to continued weak demand in Asian countries other than
Japan. Domestic revenues were relatively flat at 44% and 43% of total revenues
for the first quarter of fiscal 1999 and 1998, respectively.
Cost of goods sold was 70% of net sales for the first quarter of fiscal 1999
compared to 52% for the same period of fiscal 1998. During the quarter, 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
goods sold. Without this non-recurring charge, cost of goods sold would have
been 60% of net revenues as compared to 52% during the first quarter of fiscal
1998. This increase, and corresponding decrease in gross margin, is primarily
due to 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 4% and 8% of product
revenues during the first quarters of 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 and beyond. The
Company expects higher gross margins from these 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.
Research and development expenses of $1.7 million increased $0.1 million or 4%
in the first quarter of 1999 when compared to the first quarter of 1998. This
increase is primarily due to costs associated with increased engineering
headcount. As a percentage of revenues, research and development expenses
increased from 15% to 16% for the first quarter of 1999 primarily due to lower
revenues during the first quarter of fiscal 1999.
Marketing, selling and general and administrative expenses of $2.4 million
decreased $0.2 million for the first quarter of 1999 when compared to the first
quarter of 1998. This decrease is primarily due to lower sales commissions from
lower sales during the current fiscal quarter. As a percentage of net revenues,
marketing, selling and general and administrative expenses were flat at 23% for
the first quarter of fiscal 1999 and 1998.
During the first quarter of fiscal 1999 the Company evaluated and changed its
long-term manufacturing strategy and, as a result of this change, 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 loss for the first quarter was $8.0 million, or $0.87 per share, including
the previously discussed restructuring and other non-recurring pretax charges of
$13.0 million. Excluding
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restructuring and other non-recurring charges, first quarter pro forma net
income was $0.1 million or $0.01 per share compared to net income of $1.1
million or $0.13 per basic and $0.12 per diluted share for the first quarter of
fiscal 1998.
Factors Affecting Future Results - The Company sells its products to
distributors and manufacturers in Asian countries that are currently
experiencing an economic recession. The Company experienced a slight sequential
increase in revenues to these countries during the first quarter of fiscal 1999
and the Company does not expect that the financial difficulties experienced in
Asia will worsen further and 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's
dielectric isolation foundry discontinued supplying this technology in the
fourth fiscal quarter of 1998. 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. Currently, the Company processes all
dielectric isolated wafer steps except one out-sourced step. The Company's
results of operations would be adversely affected if the supply of this
out-sourced process step is interrupted.
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.
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.
The Company expects to expend approximately $1.0 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, process technology and start-up 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
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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. Management believes that the development of a viable SOI process
technology is approximately 90% 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 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, 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 and damages 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
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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.
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 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'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 remedy the Company's
remaining year 2000 issues is estimated to be $0.5 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.
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
14
<PAGE>
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.
Liquidity and Capital Resources - Cash and equivalents and short-term
investments were $9.1 million at December 31, 1998, representing a decrease of
$0.4 million from September 30, 1998. The decrease is primarily a result of cash
outflows from investing activities, including capital expenditures of
approximately $0.5 million, and cash outflows from financing activities,
including payments on capital leases and other debt, of approximately $0.4
million. These cash outflows were partially offset by cash generated by
operations of $0.5 million.
Accounts receivable decreased 22.7% from September 30, 1998 to December 31, 1998
while revenues declined by only 7.4% during the same period. This decrease is
primarily due to timing of shipments during the quarter combined with effective
collection efforts. Inventories decreased 30.4% from September 30, 1998 to
December 31, 1998. This decrease is due to additional provisions for excess and
obsolete inventory combined with reductions in on-hand inventory quantities.
Inventory management remains an area of focus as the Company balances the need
to maintain strategic inventory levels to ensure competitive lead times versus
the risk of inventory obsolescence because of rapidly changing technology and
customer requirements.
Accounts payable and accrued liabilities decreased by 40.1% at December 31, 1998
over September 30, 1998. This decrease is primarily due to payment of previously
accrued invoices relating to the Company's expansion of its Milpitas
manufacturing facility during the first quarter of fiscal 1999.
At December 31, 1998, the Company 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 and the
Company expects to renew the line. At December 31, 1998, $3.9 million was
outstanding, and approximately $2.6 million remained available under the line.
There were no material outstanding commitments to purchase capital assets and
leasehold improvements at December 31, 1998.
The Company's management believes that its current 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.
15
<PAGE>
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 December 31, 1998, the fair value of the approximately $3.2 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 December 31, 1998, the Company had approximately $5.4 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 December 31, 1998, the fair value of these
foreign currency amounts would decline by an immaterial amount.
16
<PAGE>
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 a Current Report with the Securities and Exchange
Commission on November 12, 1998 related to the resignation of its
former President and Chief Executive Officer, David O'Brien.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to report to be signed on its behalf
by the undersigned thereunto duly authorized.
ELANTEC SEMICONDUCTOR, INC.
(Registrant)
Date: February 12, 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> OCT-01-1998
<PERIOD-END> DEC-31-1999
<CASH> 8,247
<SECURITIES> 2,649
<RECEIVABLES> 5,234
<ALLOWANCES> 1,336
<INVENTORY> 6,301
<CURRENT-ASSETS> 23,622
<PP&E> 31,399
<DEPRECIATION> 22,618
<TOTAL-ASSETS> 37,903
<CURRENT-LIABILITIES> 8,236
<BONDS> 5,419
0
0
<COMMON> 92
<OTHER-SE> 24,156
<TOTAL-LIABILITY-AND-EQUITY> 37,903
<SALES> 10,653
<TOTAL-REVENUES> 10,653
<CGS> 7,409
<TOTAL-COSTS> 7,409
<OTHER-EXPENSES> 16,149
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> (12,913)
<INCOME-TAX> 4,889
<INCOME-CONTINUING> (8,024)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,024)
<EPS-PRIMARY> (0.87)
<EPS-DILUTED> (0.87)
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