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 March 31, 1999
[ ] 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
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
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 April 30, 1999, 9,274,856 shares of the Registrant's Common Stock, $0.01
par value, were issued and outstanding.
1
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C>
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 4. Submission of Matters to a Vote of Security Holders...................................17
Item 5. Other information ....................................................................17
Item 6. Exhibits and Reports on Form 8-K......................................................18
Signatures............................................................................19
</TABLE>
2
<PAGE>
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 Six Months Ended
March 31, March 31
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 12,721 $ 11,660 $ 23,374 $ 22,894
Cost of revenues 6,995 5,999 13,396 11,857
Cost of revenues - inventory write-down 0 0 1,008 0
-------- -------- -------- --------
Gross profit 5,726 5,661 8,970 11,037
Operating expenses:
Research and development 1,569 1,770 3,280 3,412
Marketing, sales, general and administrative 2,711 2,548 5,140 5,135
Restructuring and other non-recurring charges 0 0 12,009 0
-------- -------- -------- --------
Total operating expenses 4,280 4,318 20,429 8,547
-------- -------- -------- --------
Income (loss) from operations 1,446 1,343 (11,459) 2,490
Interest and other income (expense), net (20) 122 (28) 238
-------- -------- -------- --------
Income (loss) before taxes 1,426 1,465 (11,487) 2,728
Provision (benefit) for income taxes 500 92 (4,389) 218
-------- -------- -------- --------
Net income (loss) $ 926 $ 1,373 $ (7,098) $ 2,510
======== ======== ======== ========
Earnings (loss) per share:
Basic $ 0.10 $ 0.15 $ (0.77) $ 0.28
======== ======== ======== ========
Diluted $ 0.10 $ 0.14 $ (0.77) $ 0.26
======== ======== ======== ========
Shares used in computing per share amounts:
Basic 9,212 9,124 9,205 9,093
======== ======== ======== ========
Diluted 9,605 9,805 9,205 9,714
======== ======== ======== ========
<FN>
See accompanying notes to the condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
ELANTEC SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
Mar. 31 Sept. 30
1999(1) 1998(2)
------- -------
Assets:
Current assets:
Cash and cash equivalents $ 9,553 $ 5,815
Short-term investments 2,684 3,651
Trade receivables 5,400 5,207
Inventories 3,926 9,059
Deferred income taxes 3,820 3,367
Prepaid expenses and other current assets 372 600
------- -------
Total current assets 25,755 27,699
Property and equipment, net 8,149 18,625
Other assets 527 657
Noncurrent deferred income taxes 4,999 563
------- -------
Total assets $39,430 $47,544
======= =======
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable and accrued liabilities $ 5,486 $ 6,807
Deferred revenue 2,248 2,626
Current portion of long-term obligations 1,387 1,480
------- -------
Total current liabilities 9,121 10,913
Long-term obligations 5,064 4,354
Stockholders' equity 25,245 32,277
------- -------
Total liabilities and stockholders' equity $39,430 $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
<PAGE>
<TABLE>
ELANTEC SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Six Months Ended
March 31,
--------------------------------
1999 1998
-------- --------
<S> <C> <C>
Operating activities:
Net income (loss) $ (7,098) $ 2,510
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,417 1,248
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 (193) (3,037)
Inventories 4,125 (71)
Prepaid expenses and other current assets 228 (95)
Accounts payable and accrued liabilities (1,321) 3,873
Deferred revenue (378) 1,017
-------- --------
Net cash provided by operating activities 3,989 5,445
Investing activities:
Sale/maturity (purchase) of available-for-sale securities 967 (1,151)
Purchase of property and equipment (613) (7,023)
Decrease in other assets 92 (79)
-------- --------
Net cash (used in) investing activities 446 (8,253)
Financing activities:
Payments on capital lease and other debt (796) (781)
Issuance of common stock 99 160
-------- --------
Net cash provided by (used in) financing activities (697) (621)
Increase (decrease) in cash and cash equivalents 3,738 (3,429)
Cash and cash equivalents at beginning of period 5,815 9,839
-------- --------
Cash and cash equivalents at end of period $ 9,553 $ 6,410
======== ========
Supplemental disclosures of cash flow information:
Lease and installment financing for capital equipment $ 0 $ 433
Interest paid $ 217 $ 90
Taxes paid $ 220 $ 20
<FN>
See accompanying notes to the condensed consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
ELANTEC SEMICONDUCTOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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 six months ended
March 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
March 31, 1998, there was no significant difference between the fair market
value and the underlying cost of such securities.
6
<PAGE>
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 $ 206 $ 498
Work-in-process 2,353 6,481
Finished goods 1,365 2,080
--------- ---------
$ 3,926 $ 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 Six Months Ended
March 31, March 31,
--------------------- ------------------------
1999 1998 1999 1998
------ ------ ------- ------
<S> <C> <C> <C> <C>
Numerator for basic and diluted net income per share:
Net income $ 926 $1,373 $(7,098) $2,510
====== ====== ======= ======
Denominator:
Denominator for basic net income per share --
weighted average shares 9,212 9,124 9,205 9,093
Effect of dilutive securities:
Common stock options 393 681 -- 621
------ ------ ------- ------
Denominator for diluted earnings per share 9,605 9,805 9,205 9,714
====== ====== ======= ======
Basic net income per share $ 0.10 $ 0.15 $ 0.77 $ 0.28
====== ====== ======= ======
Diluted net income per share $ 0.10 $ 0.14 $ 0.77 $ 0.26
====== ====== ======= ======
</TABLE>
At March 31, 1999, outstanding options to purchase 443,673 shares at exercise
prices between $5.00 and $9.00 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. At March 31, 1998, outstanding options to purchase 118,222 shares at
exercise prices between $8.00 and $10.00 were excluded from the computation
7
<PAGE>
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.
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 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.
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 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
Restruc- through at
turing Mar. 31, Mar. 31,
Charge 1999 1999
------- ------- -------
Asset impairment $11,090 $11,090 $ --
Write-down of inventory 1,008 1,008 --
Payments to employees
involuntarily terminated 638 265 373
Write-down of patents 174 174 --
Legal settlement 107 107 --
------- ------- -------
Total $13,017 $12,644 $ 373
======= ======= =======
9
<PAGE>
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 six months ended March 31, 1999 and 1998 as a percentage of net
revenues and provides the percentage change in absolute dollars from the
previous year:
<CAPTION>
Three Three Six Six
Months Ended Months Ended Dollar % Months Ended Months Ended Dollar %
Mar. 31, 1999 Mar. 31, 1998 Change Mar. 31, 1999 Mar. 31, 1998 Change
-------------- -------------- ---------- -------------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 9.1% 100.0% 100.0% 2.1%
Cost of revenues 55.0% 51.4% 16.6% 57.6% 51.8% 13.0%
Cost of revenues-inventory
write down - - - 4.3% - -
Gross profit 45.0% 48.6% 1.1% 38.1% 48.2% (19.3%)
Operating expenses:
Research and development 12.3% 15.2% (11.4%) 14.0% 14.9% (3.9%)
Marketing, sales,
general
and administrative 21.3% 21.9% 6.3% 21.7% 22.4% (1.0%)
Restructuring and other
Non-recurring charges - - - 51.4% - -
</TABLE>
During the second quarter of fiscal 1999, the Company generated net revenues of
$12.7 million, an increase of 9.1% from the $11.7 million reported in the same
quarter of the previous year. This increase was due to higher unit shipments,
while the average selling price was relatively constant. International revenues
during the second quarter of fiscal 1999 were 63.0% of total revenues, compared
to 52.0% of total revenues for the second quarter of fiscal 1998. The increase
in international revenue over the prior year was primarily due to strong optical
storage product demand in Japan.
For the first six-months of fiscal 1999 net revenue was $23.4 million, an
increase of 2.1% from the $22.9 million reported in the corresponding period of
fiscal 1998. This increase over the prior year was due to a significant increase
in optical storage revenues. This increase was almost completely offset by
decreased revenues in the Company's video and other product lines. International
revenues during the first six months of fiscal 1999 were 59.2% of total
revenues, compared to 54.8% of total revenues for the first six 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>
Cost of revenues was 55.0% of net revenues for the second quarter of fiscal 1999
compared to 51.4% for the same period of fiscal 1998. This increase as a
percentage of net revenues was due to a shift in demand to lower margin products
and to under-utilization of the Company's internal fabrication facility caused
by a shift in product demand toward products manufactured by third-party
foundries, combined with additional provisions for product license royalties.
For the first six months of fiscal 1999 cost of goods sold as a percent of net
revenues was 61.9% compared to 51.8% for the first six 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, cost of goods sold for the first six months of fiscal 1999 would have
been 57.6% of net revenues compared to 51.8% during the first six months of
fiscal 1998. This increase in cost of revenues as a percent of revenues was due
to a shift in demand to lower margin products and 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 7.1% and 10.2% of net
revenues during the second quarters of 1999 and 1998, respectively, and 5.8% and
5.2% of net revenues for the first six 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 and beyond. The Company expects higher gross margins from these last-buy
orders during fiscal 1999.
Research and development expenses of $1.6 million in the second quarter of
fiscal 1999 decreased $0.2 million or 11.4% when compared to the second 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 12.3% for the second quarter of fiscal 1999 from 15.2%
during the same quarter of the prior fiscal year primarily due to higher
revenues during the second quarter of fiscal 1999.
For the first six months of fiscal 1999, research and development expenses of
$3.3 million decreased $0.1 million or 3.9% when compared to the first six
months of fiscal 1998. As a percentage of revenues, research and development
expenses decreased to 14.0% of net revenues in the first six months of fiscal
1999 from 14.9% of net revenues in the first six months of fiscal 1998.
Management expects research and development expenses, in absolute dollars, 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 $2.7 million, or
6.3% for the second quarter of fiscal 1999, increased $0.2 million when compared
to the second quarter of fiscal 1998. This increase is primarily due to higher
sales commissions from higher sales during the current fiscal quarter and
increased operating expenses in Japan. As a percentage of net revenues,
marketing, selling and general and administrative expenses were relatively flat
at 21.3% and 21.9% for the second quarter of fiscal 1999 and 1998, respectively.
11
<PAGE>
For the first six months of fiscal 1999 and 1998, marketing, selling and general
and administrative expenses were flat at $5.1 million. As a percentage of
revenues, marketing, selling and general and administrative expense for the
first six months of fiscal 1999 and 1998 were also relatively flat at 21.7% and
22.4% 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 second quarter of fiscal 1999 was $0.9 million compared to
net income of $1.4 million for the same quarter of fiscal 1998. Net loss for the
first six months of fiscal 1999 was $7.1 million, or $0.77 per 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 six months of fiscal 1999 was $1.0 million or
$0.11 per share compared to net income of $2.5 million or $0.26 per share for
the first six months of fiscal 1998.
The Company's effective tax rate for the first six months of fiscal 1999 is
higher than the statutory rate due to state income taxes partially offset by the
benefit of 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
recognized its second quarterly sequential increase in revenues to these
countries during the second quarter of fiscal 1999 and the Company does not
expect that the economic conditions 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 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 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
12
<PAGE>
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 $2.0 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 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 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 materially 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
13
<PAGE>
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.
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 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.
14
<PAGE>
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 $0.5 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 - Cash and equivalents and short-term
investments were $12.2 million at March 31, 1999, representing an increase of
$2.8 million from September 30, 1998. The increase is a result of cash generated
from operations primarily due to inventory reductions partially offset by
payments made on capital leases and other debt and purchases of property and
equipment.
Accounts receivable increased 3.7% from September 30, 1998 to March 31, 1999
while revenues increased by 2.1% during the same period. This increase in
accounts receivable is primarily due to timing of shipments during the quarter
combined with effective collection efforts. Inventories decreased 56.7% from
September 30, 1998 to March 31, 1999. This decrease is due to reductions in
on-hand inventory quantities combined with additional provisions for excess and
obsolete inventory. 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 19.4% at March 31, 1999
from September 30, 1998. This decrease is primarily due to payment of accrued
invoices relating to the Company's expansion of its Milpitas manufacturing
facility during the first quarter of fiscal 1999 combined with reduced inventory
purchases.
At March 31, 1999, the Company had $5.0 million outstanding on non-revolving
lease lines utilized for up to 100% of the value of financed equipment. Amounts
drawn under this line represent three and five-year capital leases. There were
no material outstanding commitments to purchase capital assets and leasehold
improvements at March 31, 1999.
The Company's management 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.
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 March 31, 1999, the fair value of the approximately $2.7 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 March 31, 1999, the Company had approximately $5.0 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 March 31, 1999, the fair value of these
foreign currency amounts would decline by an immaterial amount.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1999 Annual Meeting of Stockholders of the Company ("Annual Stockholders
Meeting") was held on January 22, 1999, in Milpitas, California. At the Annual
Stockholders Meeting the stockholders elected members of the Company's Board of
Directors; amended the 1995 Equity Incentive Plan to increase the number of
shares of Common Stock reserved for issuance by 1,000,000 shares; amended the
1995 Directors Stock Option Plan to increase the number of shares of Common
Stock reserved for issuance thereunder from 150,000 to 250,000, an increase of
100,000 shares; and ratified the Company's appointment of Deloitte & Touche LLP
as independent auditors.
The vote for nominated directors was as follows:
Nominee In Favor Withheld
- ---------------------------- ------------------- ---------------------
Chuck K. Chan 7,789,922 670,875
James V. Diller 7,824,480 636,317
B. Yeshwant Kamath 7,791,180 669,617
Alan V. King 7,782,280 678,517
The results of voting for approval of an amendment to the 1995 Equity Incentive
Plan to increase the number of shares reserved for issuance by 1,000,000 shares
were:
Broker
For Against Abstain Non-Votes
- ------------------- ----------------- -------------- ---------------
3,190,526 1,618,370 39,486 3,612,415
The results of voting for approval of an amendment to the 1995 Directors Stock
Option Plan to increase the number of shares of Common Stock reserved for
issuance thereunder from 150,000 to 250,000, an increase of 100,000 shares were:
Broker
For Against Abstain Non-Votes
- ------------------- ----------------- -------------- ---------------
4,253,985 659,144 40,796 3,506,872
The results of voting for ratification of appointment of Deloitte & Touche LLP
as independent auditors for the Company for the next fiscal year were:
For Against Abstain
- ------------------- ----------------- --------------
8,418,657 25,600 16,540
ITEM 5. - OTHER INFORMATION
In November 1998, David O'Brien, the Company's President and Chief Executive
Officer resigned from the Company. On April 29, 1999 the Company announced that
James V. Diller, Director and Chairman of the Board, accepted the position of
Chairman, President and Chief Executive Officer, a position Mr. Diller
previously held on an interim basis.
17
<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 no reports on Form 8-K during the quarter ended March
31, 1999
18
<PAGE>
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: May 14, 1999 By: /s/ Ephraim Kwok
-------------------------------------------
Ephraim Kwok
Chief Financial Officer (duly authorized
officer and principal financial officer)
19
<PAGE>
EXHIBIT INDEX
Exhibit
27.1 Financial Data Schedule
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,553
<SECURITIES> 2,684
<RECEIVABLES> 6,873
<ALLOWANCES> 1,473
<INVENTORY> 3,926
<CURRENT-ASSETS> 25,755
<PP&E> 31,390
<DEPRECIATION> 23,241
<TOTAL-ASSETS> 39,430
<CURRENT-LIABILITIES> 9,121
<BONDS> 5,064
0
0
<COMMON> 92
<OTHER-SE> 25,153
<TOTAL-LIABILITY-AND-EQUITY> 39,430
<SALES> 10,653
<TOTAL-REVENUES> 12,721
<CGS> 6,995
<TOTAL-COSTS> 6,995
<OTHER-EXPENSES> 4,280
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> 1,426
<INCOME-TAX> 500
<INCOME-CONTINUING> 926
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 926
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
