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, 2000
[ ] 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, 2000, 19,545,106 shares of the Registrant's Common Stock, $0.01
par value, were issued and outstanding.
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<PAGE>
TABLE OF CONTENTS
Page
----
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....................................11
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 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 Six Months Ended
March 31, March 31
------------------------ ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 20,020 $ 12,721 $ 35,732 $ 23,374
Cost of revenues 7,694 6,995 13,835 13,396
Cost of revenues - inventory write-down -- -- -- 1,008
-------- -------- -------- --------
Gross profit 12,326 5,726 21,897 8,970
Operating expenses:
Research and development 3,347 1,569 5,754 3,280
Marketing, sales, general and administrative 3,748 2,711 6,803 5,140
Unusual charges -- -- -- 12,009
-------- -------- -------- --------
Total operating expenses 7,095 4,280 12,557 20,429
-------- -------- -------- --------
Income (loss) from operations 5,231 1,446 9,340 (11,459)
Interest and other income (expense), net 233 (20) 363 (28)
-------- -------- -------- --------
Income (loss) before taxes 5,464 1,426 9,703 (11,487)
Provision for (benefit from) income taxes 2,111 500 3,590 (4,389)
-------- -------- -------- --------
Net income (loss) $ 3,353 $ 926 $ 6,113 $ (7,098)
======== ======== ======== ========
Earnings (loss) per share:
Basic $ 0.18 $ 0.05 $ 0.32 $ (0.39)
======== ======== ======== ========
Diluted $ 0.14 $ 0.05 $ 0.27 $ (0.39)
======== ======== ======== ========
Shares used in computing per share amounts:
Basic 19,144 18,424 19,004 18,410
======== ======== ======== ========
Diluted 23,386 19,210 22,874 18,410
======== ======== ======== ========
<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)
Mar. 31 Sept. 30
2000(1) 1999(2)
-------- --------
Assets:
Current assets:
Cash and cash equivalents $ 18,662 $ 17,459
Short-term investments 1,038 1,204
Trade receivables 9,936 4,946
Inventories 4,674 3,300
Deferred income taxes 2,478 3,278
Prepaid expenses and other current assets 1,454 1,101
-------- --------
Total current assets 38,242 31,288
Property and equipment, net 12,630 8,765
Other assets 914 946
Noncurrent deferred income taxes 2,872 2,872
-------- --------
Total assets $ 54,658 $ 43,871
======== ========
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable and accrued liabilities $ 9,872 $ 6,054
Deferred revenue 2,654 2,266
Current portion of capital lease obligations
1,464 1,440
-------- --------
Total current liabilities 13,990 9,760
Long-term capital lease obligations 2,110 2,840
Other long-term liabilities 1,730 1,745
Stockholders' equity:
Common stock 194 191
Additional paid-in capital 36,151 34,964
Retained earnings (deficit) 521 (5,592)
Accumulated other comprehensive loss (38) (37)
-------- --------
Total stockholders' equity 36,828 29,526
-------- --------
Total liabilities and stockholders' equity $ 54,658 $ 43,871
======== ========
(1) Unaudited
(2) These amounts were derived from the Company's audited consolidated
financial statements at September 30, 1999
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>
Six Months Ended
March 31,
--------------------------------
2000 1999
-------- --------
<S> <C> <C>
Operating activities:
Net income (loss) $ 6,113 $ (7,098)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,521 1,417
Inventory write-down -- 1,008
Asset impairment -- 11,090
Deferred income taxes 800 (4,889)
Changes in operating assets and liabilities:
Accounts receivable (4,990) (193)
Inventories (1,374) 4,125
Prepaid expenses and other current assets (364) 228
Accounts payable and accrued liabilities 3,812 (1,321)
Deferred revenue 388 (378)
-------- --------
Net cash provided by operating activities 5,906 3,989
Investing activities:
Sale/maturity of available-for-sale securities 167 967
Purchase of property and equipment (5,374) (613)
Decrease in other assets
32 92
-------- --------
Net cash provided by (used in) investing activities (5,175) 446
Financing activities:
Payments on capital lease (721) (796)
Exercise of common stock options 1,193 99
-------- --------
Net cash provided by (used in) financing activities 472 (697)
Increase (decrease) in cash and cash equivalents 1,203 3,738
Cash and cash equivalents at beginning of period 17,459 5,815
-------- --------
Cash and cash equivalents at end of period $ 18,662 $ 9,553
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 159 $ 217
Taxes paid $ 2,472 $ 220
<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)
- --------------------------------------------------------------------------------
1. Basis of Presentation
We have 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,
2000 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 our
Annual Report on Form 10-K for the year ended September 30, 1999.
All share and per share information has been adjusted for the effect of our
two-for-one stock split which occurred on April 21, 2000.
Our fiscal year end is the Sunday closest to September 30 and our fiscal
quarters end on the Sunday closest to the end of the calendar quarter. For
convenience, we have indicated that our quarters end on December 31, March 31,
June 30 and September 30.
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.
3. Cash and Cash Equivalents
We consider 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.
4. Short-term Investments
Our 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. Our marketable investments are classified as "available-for-sale"
and we classify our available-for-sale portfolio as available for use in our
current operations. At March 31, 2000, there was no significant difference
between the fair market value and the underlying cost of such securities.
6
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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:
March 31, September 30,
2000 1999
------ ------
Raw materials $ 25 $ 45
Work-in-process 3,523 1,645
Finished goods 1,126 1,610
------ ------
$4,674 $3,300
====== ======
6. Earnings (loss) per share
<TABLE>
Earnings (loss) per share (EPS) is computed as basic EPS using the weighted
average number of shares of common stock outstanding and diluted EPS using the
weighted average number of shares of common stock and dilutive common
equivalents shares outstanding from stock options (using the treasury stock
method) and shares issuable under our employee stock purchase plan. 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,
------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings (loss) per share:
Net earnings (loss) $ 3,353 $ 926 $ 6,113 $ (7,098)
-------- -------- -------- --------
Denominator:
Denominator for basic earnings (loss) per share
-- weighted average shares 19,144 18,424 19,004 18,410
Effect of dilutive securities:
Common stock options 4,221 786 3,860 --
Shares issuable under Employee Stock Purchase Plan 21 -- 10 --
-------- -------- -------- --------
Denominator for diluted earnings (loss) per share 23,386 19,210 22,874 18,410
======== ======== ======== ========
Basic earnings (loss) per share $ 0.18 $ 0.05 $ 0.32 $ (0.39)
======== ======== ======== ========
Diluted earnings (loss) per share $ 0.14 $ 0.05 $ 0.27 $ (0.39)
======== ======== ======== ========
</TABLE>
At March 31, 2000, outstanding options to purchase 15,912 shares at exercise
prices between $29.75 and $41.38 were excluded from the computation of earnings
(loss) 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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At March 31, 1999, outstanding options to purchase 887,346 shares at exercise
prices between $2.50 and $4.50 were excluded from the computation of earnings
(loss) 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. Comprehensive Income (loss)
There were no material differences between comprehensive income (loss) and net
income (loss) for all periods presented.
8. Segment Information
In the fourth quarter of fiscal year 1999, the Company adopted 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.
Based upon the criteria of SFAS 131, the Company has a single reportable
segment.
<TABLE>
The Company markets its products in the United States and in foreign countries
through its sales personnel, independent sales representatives and distributors.
The Company's geographic sales, as a percentage of net revenues, were as
follows:
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
---------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Domestic 30% 37% 28% 40%
Export:
Europe 11% 13% 11% 13%
Japan 33% 42% 40% 40%
Other Pacific Rim Countries 26% 8% 21% 7%
--- --- --- ---
100% 100% 100% 100%
--- --- --- ---
</TABLE>
The Company's assets located outside the United States are insignificant.
The Company's products are sold to a wide variety of original equipment
manufacturers through a direct sales force and to a network of distributors.
<TABLE>
Customers comprising 10% or greater of the Company's net revenues are summarized
as follows:
<CAPTION>
Three months ended Six months ended
March 31, March 31,
--------------- ---------- ----
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Microtek International, Inc. - Japan 29% 31% 33% 32%
Insight Electronics, Inc. - United States 10% 8% 10% 8%
</TABLE>
8
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As of March 31, 2000, Microtek International and Insight Electronics accounted
for 25% and 12%, respectively, of the Company's trade receivables. The same
customers accounted for 44% and 11%, respectively, of the Company's trade
receivables at September 30, 1999.
9. Recent Accounting Pronouncements
Derivative Instruments and Hedging Activities. In June 1998, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No.133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 133 provides a comprehensive and consistent
standard for the recognition and measurements of derivatives and hedging
activities. We are required to adopt SFAS 133, as amended, beginning in the
first quarter of fiscal 2001. Although we have not fully assessed the
implication of SFAS 133, we do not expect the adoption of the statement to have
a significant effect on our consolidated financial position, results of
operations or cash flows.
Revenue Recognition. In December 1999, the Securities and Exchange Commission
(SEC) released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements." This bulletin summarizes certain interpretations and
practices followed by the Division of Corporation Finance and the Office of the
Chief Accountant of the SEC in administering the disclosure requirements of the
federal securities laws in applying generally accepted accounting principles to
revenue recognition in financial statements. Although we have not fully assessed
the implications of SAB No. 101, our management does not believe adoption of
this bulletin will have a material impact on our consolidated financial
position, results of operations or cash flows.
10. Unusual 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 the restructuring, production
volume and revenue from products fabricated by outside foundries had generally
increased, while the volume and revenue from internally fabricated products
generally declined. 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 the aforementioned, the Company decided to move gradually toward
a primarily outsourced model through a period of several years. The Company
further decided to discontinue development of future dielectric process
technology in favor of silicon-on-insulator technology, where volume production
will be outsourced. Based on the change in manufacturing strategy, the Company
estimated the future nondiscounted cash flows relating to the internal wafer
fabrication facility and concluded under FAS No. 121 that impairment was
indicated.
The Company engaged independent valuation consultants to assist in evaluating
the fair value of these assets to be held and used in the facility. The Company,
based on the valuations wrote-down the carrying value of the equipment by $4.3
million and leasehold improvements by $6.8 million.
9
<PAGE>
The book values of assets, by category, before and after the write-down was as
follows (in thousands):
Balances at December 31, 1998
---------------------------------------
Before Write-Down After Write-Down
----------------- ----------------
Machinery & equipment $ 5,444 $ 1,159
Furniture & Fixtures 51 11
Leasehold Improvements 8,595 1,830
------- -------
Total $14,090 $ 3,000
======= =======
The Company also believed that its decision to discontinue development of
future-generation products using dielectric isolation technology would 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 severance
and $0.1 million related to a legal settlement with AMP Incorporated.
These unusual 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 for the remainder of fiscal 2000. The following table summarizes
the restructuring and other charges in thousands:
Utilized
Total through Balance
Restructuring Mar. 31, at Mar. 31,
Charge 2000 2000
------- ------- -------
Asset impairment $11,090 $11,090 $ --
Write-down of inventory 1,008 1,008 --
Payments to employees
involuntarily terminated 638 554 84
Write-down of patents 174 174 --
Legal settlement 107 107 --
------- ------- -------
Total $13,017 $12,933 $ 84
======= ======= =======
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements that involve risks
and uncertainties. Our 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 our 1999 Form 10-K filed with the Securities
and Exchange Commission.
<TABLE>
Results of Operations - The following table sets forth, as a percentage of net
revenues, certain consolidated statement of operations data for the periods
indicated.
<CAPTION>
Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
Mar. 31, 2000 Mar. 31, 1999 Mar. 31, 2000 Mar. 31, 1999
-------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net revenues 100% 100% 100% 100%
Cost of revenues 38% 55% 39% 58%
Cost of revenues-inventory
write down - - - 4%
Gross profit 62% 45% 61% 38%
Operating expenses:
Research and development 17% 13% 16% 14%
Marketing, sales, general
and administrative 19% 21% 19% 22%
Unusual charges - - - 51%
Income (loss) from operations 26% 11% 26% (49%)
Income (loss) before income taxes 27% 11% 27% (49%)
Net income (loss) 17% 7% 17% (30%)
</TABLE>
Net Revenues. During the second quarter of fiscal 1999, the Company generated
net revenues of $20.0 million, an increase of 57% from the $12.7 million
reported in the same quarter of the previous year. This increase was due to an
increase in unit shipments which was partially offset by a decline in the
average selling prices of our products. Sales increased in all geographic areas.
Revenue contribution from the communications market has shown significant
growth, exceeding 10% of our quarterly revenue.
International revenues during the second quarter of fiscal 2000 were 70% of
total revenues, compared to 63% of total revenues for the second quarter of
fiscal 1999. The increase in international revenue over the prior year was
primarily due to strong video and optical storage product demand in Asia.
In the second quarter of fiscal 2000, domestic revenues were 30% compared to 37%
in the second quarter of 1999 because we discontinued our military and
commercial hybrid product line at the end of fiscal 1999. This product line
accounted for 5% of product revenues in the second quarter of fiscal 1999. We do
not expect the discontinuance of this product line to have a material impact on
our fiscal 2000 operating results.
11
<PAGE>
For the first six-months of fiscal 2000, net revenue was $35.7 million, an
increase of 53% from the $23.4 million reported in the corresponding period of
fiscal 1999. This increase over the prior year was due to a significant increase
in total units shipped despite a decline in average selling prices. Sales
increased in all geographic areas, especially in Asia.
Gross margin. Gross margin was 62% and 61% for the second quarter and first six
months of fiscal 2000 respectively, compared to 45% and 38% in the corresponding
periods in fiscal 1999. The improvement in gross margin was primarily due to the
allocation of fixed manufacturing costs across a higher revenue base and
improvements in manufacturing efficiencies and yields.
Also, the improvement in gross margin in the first six months of fiscal 2000
over fiscal 1999, was due to our conclusion in the first quarter of fiscal 1999,
that our change in strategy, as discussed in "Unusual Charges" below, to
discontinue development of future-generation products using dielectric isolation
technology would, more likely than not, obsolete certain existing products. Of
the $1.0 million write-down of inventory in the first quarter of fiscal 1999,
approximately $0.8 million related to work in process and approximately $0.2
million related to finished goods. The dielectric inventory value at December
31, 1998 prior to the write-down consisted of $3.2 million in work in process
and $0.6 million in finished goods. The amount of dielectric inventory on the
balance sheet, after the write-down, at March 31, 2000 was $1.8 million in work
in process and $0.6 million in finished goods.
Research and development expenses. Research and development expenses ("R&D")
increased by $1.8 million or 113% and $2.5 million or 75% for the second quarter
and first six months of fiscal 2000, respectively, as compared to the
corresponding periods in fiscal 1999. The increase in R&D expenses in the second
quarter and first six months of fiscal 2000 as compared to the same periods of
fiscal 1999 was due primarily to an increase in staffing and related
compensation of $1.0 million and $1.4 million respectively, particularly design
engineering personnel, and higher spending of $0.8 million and $1.1 million
respectively, on new product designs.
Marketing, selling, general and administrative expenses. Marketing, selling,
general and administrative expenses ("SG&A") increased by $1.0 million or 38%
and $1.7 million or 32% for the second quarter and first six months of fiscal
2000, respectively, as compared to the corresponding periods in fiscal 1999. The
increase in SG&A expenses in the second quarter and first six months of fiscal
2000 as compared to the same periods of fiscal 1999 was due primarily to an
increase in staffing and related compensation of $0.6 million and $1.2 million
respectively, particularly sales and marketing personnel, and higher commissions
paid to outside manufacturers' representatives of $0.6 million and $0.7 million
respectively, due to increase in revenue. These increases were partially offset
by a decrease in outside services of $0.2 million each in the second quarter and
first six months of fiscal 2000 compared to the same periods in fiscal 1999.
Unusual Charges. During the first quarter of fiscal 1999, we implemented a plan
to restructure our manufacturing operations in response to a shift in the mix of
products fabricated internally compared to products fabricated by outside
foundries. During several quarters preceding the restructuring, production
volume and revenue from products fabricated by outside foundries had generally
increased, while the volume and revenue from internally fabricated products
generally declined. As a result, we were in a position of significant
over-capacity in our internal fabrication facility located in Milpitas,
California.
In response we decided to move gradually toward a primarily outsourced model
through a period of several years. We also decided to discontinue development of
future dielectric process
12
<PAGE>
technology in favor of silicon-on-insulator technology, where volume production
is expected to be outsourced.
Our 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 (see Note 10 of Notes to Condensed
Consolidated Financial Statements). These actions 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. Approximately $0.1 million was utilized in the
second quarter of fiscal 2000.
Interest and Other Income. Interest and other income was $0.2 million and $0.4
million in the second quarter and first six months of fiscal 2000, an increase
of $0.3 million and $0.4 million respectively, over the corresponding periods of
fiscal 1999. The increase in interest and other income was due primarily to
higher levels of cash, cash equivalents and short-term investments.
Provision/Benefit for Taxes on Income. The Company's effective tax rate for the
first six months of fiscal 2000 was 37% compared to 38% for the comparable prior
year period. Provision for income taxes in the first six months of fiscal 1999
benefited from the unusual charges recorded by us in the first quarter of fiscal
1999.
Factors Affecting Future Results
Except for historical information contained herein, the matters set forth in
this Form 10-Q, including the statements in the following paragraphs, are
forward-looking statements that are dependent on certain risks and uncertainties
including such factors as, among others, delays in new product and process
technology announcements and product introductions by us or our competitors,
competitive pricing pressures, fluctuations in manufacturing yields, changes in
the mix or markets in which products are sold, availability and costs of raw
materials, reliance on subcontractors, the cyclical nature of the semiconductor
industry, industry-wide wafer processing capacity, political and economic
conditions in various geographic areas, and costs associated with other events,
such as under-utilization or expansion of production capacity, intellectual
property disputes, litigation, or environmental regulation and other factors
described below.
Our past performance may not be a good indicator of future performance due to
factors affecting us, our competitors, the semiconductor industry and the
overall economy. The semiconductor industry is characterized by rapid
technological change, price erosion, cyclical markets, periodic oversupply,
occasional shortages of materials, capacity constraints, variation in
manufacturing efficiencies and significant expenditures for capital equipment
and product development. Furthermore, new product introductions and patent
protection of existing products are critical factors for future sales growth and
sustained profitability.
Our business is growing and the outlook is positive. As previously mentioned the
communications market has started contributing significantly to our revenue
growth. This is a market segment that is still being defined and is attracting
intense competition. We are investing in technical talent to maximize our
opportunities in this market. However, there can be no assurance that the
products we define and manufacture for this market will meet customer acceptance
or that these products will perform to specifications. Also, 85% of our revenue
in the first six months of fiscal 2000 were derived from the video and optical
storage markets. These markets are highly dependent on consumer spending. As a
result, any significant downturn in the economic climate could lead to a
slowdown of orders from our customers. Also, a significant portion of the
revenue generated from the video and optical storage market is driven by design
13
<PAGE>
wins with application specific standard products ("ASSPs"). Should our ASSP's
get designed out by some of our customers, our operating results could be
adversely affected.
We sell our products to distributors and manufacturers in Asian countries that
have experienced severe economic problems in the past. Sales to this region
represented 59% and 61% of our net revenues in the second quarter and first six
months of fiscal 2000 compared to 50% and 47% in the same periods of fiscal
1999. Additionally, 29% and 33% of the net revenues in the second quarter and
first six months of fiscal 2000 were to Microtek International, Inc. in Japan
(See Note 8 of Notes to Condensed Consolidated Financial Statements). Should the
region experience another economic slowdown, there can be no assurance that our
results of operations will not be adversely impacted in the future. In addition,
we give most of our customers in Asia extended credit terms, should any of these
customers (especially Microtek International, Inc.) fail to make timely payment
of our invoices, our operating results could be adversely affected.
We use 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 with capability to process bipolar wafers is
limited. Additionally, we rely on an external vendor for a key process step in
our dielectric isolation process. Manufacturing problems encountered with our
outside foundries may have a material adverse effect on our business and results
of operations.
The semiconductor industry is extremely capital intensive. To remain
competitive, we may have to continue investing in advanced manufacturing
equipment and process technologies. Our management anticipates significant
continuing capital expenditures during the following several years. There can be
no assurance that we will not be required to seek debt or equity financing to
satisfy our cash and capital needs or that such financing will be available on
terms satisfactory to us. If such financing is required and if such financing
were not available on terms satisfactory to us, our operations would be
materially adversely affected.
New products and process technology require significant research and development
expenditures. However, there can be no assurance that we 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 we are unable to develop new products in a timely manner, and to
sell them at gross margins comparable to our current products, the future
results of operations could be adversely impacted.
Part of our future bipolar product development strategy includes the development
of silicon-on-insulator ("SOI") technology. Currently, we believe that, if
successful, the SOI technology could provide technologically advanced products
at a lower cost than our current dielectric isolation complementary bipolar
technology. 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 our current technology. Significant delays or cancellation of
the development of the SOI technology could have a material adverse affect on
our business and results of operations. In addition, delays or cancellation of
the development of this technology could adversely affect our new product
development program.
From time to time, we have experienced production difficulties that have caused
delivery delays and quality problems. There can be no assurance that we will not
experience manufacturing problems and product delivery delays in the future as a
result of, among other things, changes to our process technologies, ramping
production and equipment failures. We depend on outside
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foundries for majority of our revenue. Any product delivery delays, quality and
manufacturing problems from these foundries could adversely affect our 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. We believe our
products do not infringe upon any valid patents. However, there can be no
assurance that our 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 us. The intellectual property
claims that have been made, or may be asserted against us in the future, could
require that we discontinue the use of certain processes or cease the
manufacture, use and sale of infringing products. Additionally, we may incur
significant litigation costs and damages to develop noninfringing technology.
There can be no assurance that we will be able to obtain such licenses on
acceptable terms or to develop noninfringing technology without a material
adverse effect on us.
We are subject to a variety of federal, state and local governmental regulations
related to the use, storage, discharge and disposal of toxic, volatile or
otherwise hazardous chemicals used in its manufacturing process. Although we
believe that our activities conform to presently applicable environmental
regulations, the failure to comply with present or future regulations could
result in fines being imposed on us, suspension of production or a cessation of
operations. There can be no assurance that regulatory changes or changes in
regulatory interpretation or enforcement will not render compliance more
difficult and costly. Any failure on our part to control the use of, or
adequately restrict the discharge of, hazardous substances, or otherwise comply
with environmental regulations, could subject us to significant future
liabilities.
Our 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,
the companies in the semiconductor industry or in the markets served by us, or
announcements by us or our 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. Most times, these fluctuations have been unrelated or
disproportionate to the operating performance of these companies. These factors
may adversely affect the price of our Common Stock.
Liquidity and Capital Resources
Our primary sources of liquidity are cash and cash equivalents and short-term
investments of $19.7 million at March 31, 2000. Additionally, at March 31, 2000,
we had a revolving credit line of $5.0 million, all of which was unused and
available. The line of credit expires June 30, 2000. The line bears interest at
the bank's prime rate. Borrowings under this line are secured by a first
priority security interest in virtually all our 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. We were in compliance with all covenants at March 31, 2000.
Cash and cash equivalents were $18.7 million at March 31, 2000, representing an
increase of $1.2 million from September 30, 1999. The increase is primarily a
result of cash generated from operations of $5.9 million, net sale of available
for sale securities of approximately $0.1 million and proceeds from exercise of
employee stock options of $1.2 million. These cash inflows were
15
<PAGE>
offset by capital expenditures of approximately $5.4 million primarily for new
process development, assembly and test facilities and payments on capital leases
of approximately $0.7 million.
Accounts receivable has doubled since September 30, 1999. This increase is a
reflection of the increased shipments to our customers in Asia. These customers
typically require extended credit terms. Inventories increased 42% from
September 30, 1999 to March 31, 2000. Inventory management remains an area of
focus as management 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.
Our management believes that our current cash and equivalents, short-term
investments, line of credit, borrowing capacity, and cash generated from
operations will satisfy our expected working capital and capital expenditure
requirements for the next twelve months.
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. Our
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". We are exposed to market risks related to changes in
interest rates and foreign currency exchange rates. We do not use derivative
financial instruments for speculative or trading purposes.
Interest Rate Sensitivity. We maintain 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, 2000, the fair value of the approximately $1.0 million portfolio would
decline by an immaterial amount. We intend to hold our fixed income investments
until maturity, and therefore we do not expect our 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 our securities portfolio.
At March 31, 2000, we had approximately $3.6 million of outstanding obligations
under capital lease arrangements. As the lease payments associated with these
arrangements do not have variable interest rates, an increase of 10 percent in
short-term interest rates would not have a material impact on our net income or
cash flows. We do not hedge any interest rate exposures.
Since we do not have any significant exposure to changing interest rates because
of the low levels of marketable securities with maturities more than 90 days, we
did not undertake any specific actions to cover exposure to interest rate risk
and we are not a party to any interest rate risk management transactions. We did
not purchase or hold any derivative financial instruments for trading purposes.
Foreign Currency Exchange Risk. The Yen is the functional currency of our
subsidiary in Japan and we denominate certain sales transactions in Japanese
Yen. We have established a foreign currency-hedging program, utilizing foreign
currency forward exchange contracts, or forward contracts of various duration to
hedge trade receivables denominated in Japanese Yen. Under this
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<PAGE>
program, gains and losses on the forward contracts mitigate the risk of material
foreign currency transaction gains and losses and offset increases or decreases
in our foreign currency receivables. We do not use forward contracts for trading
purposes. We believe that the use of foreign currency financial instruments
should reduce the risks that arise from conducting business in international
markets.
PART II - OTHER INFORMATION
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2000 Annual Meeting of Stockholders of the Company ("Annual Stockholders
Meeting") was held on January 14, 2000, 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 470,000 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 7,841,944 308,969
James V. Diller 7,843,013 307,900
Alan V. King 7,842,919 307,994
Umesh Padval 7,844,313 306,600
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 470,000 shares
were:
Broker
For Against Abstain Non-Votes
- ------------------- ----------------- -------------- ---------------
6,075,850 2,062,020 13,043 -
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
- ------------------- ----------------- --------------
8,144,877 1,157 4,879
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 for the six months ended March
31, 2000.
(b) Reports on Form 8-K:
None.
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: May 12, 2000 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> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-04-1999
<PERIOD-END> APR-02-2000
<CASH> 18,662
<SECURITIES> 1,038
<RECEIVABLES> 11,757
<ALLOWANCES> 1,821
<INVENTORY> 4,674
<CURRENT-ASSETS> 38,242
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<TOTAL-ASSETS> 54,658
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<BONDS> 2,110
0
0
<COMMON> 194
<OTHER-SE> 36,634
<TOTAL-LIABILITY-AND-EQUITY> 54,658
<SALES> 35,732
<TOTAL-REVENUES> 35,732
<CGS> 13,835
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<OTHER-EXPENSES> 12,557
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<INTEREST-EXPENSE> 159
<INCOME-PRETAX> 9,703
<INCOME-TAX> 3,590
<INCOME-CONTINUING> 6,113
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,113
<EPS-BASIC> 0.32
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