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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number: 0-21184
MICROCHIP TECHNOLOGY INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
Delaware 86-0629024
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2355 W. Chandler Blvd., Chandler, AZ 85224-6199
(480) 792-7200
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's
Principal Executive Offices)
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 the filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares of common stock, $.001 Par Value, outstanding as of November 8,
2002: 203,084,208 shares.
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MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
September, 30, 2002 and March 31, 2002.............................3
Condensed Consolidated Statements of Income -
Three and Six Months Ended September 30, 2002 and
September 30, 2001.................................................4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended September 30, 2002 and September 30, 2001.........5
Notes to Condensed Consolidated Financial Statements -
September 30, 2002.................................................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.......30
Item 4. Controls and Procedures..........................................31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................31
Item 4. Submission of Matters to a Vote of Security Holders..............31
Item 6. Exhibits and Reports on Form 8-K.................................33
SIGNATURES....................................................................34
CERTIFICATIONS................................................................35
EXHIBITS
2
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
September 30, March 31,
2002 2002
------------- -----------
(Unaudited) (Note 1)
ASSETS
Cash and cash equivalents $ 141,328 $ 280,647
Accounts receivable, net 89,919 80,747
Inventories 92,142 88,615
Prepaid expenses 6,748 6,154
Deferred tax assets 112,102 83,980
Other current assets 73,481 9,033
----------- -----------
Total current assets 515,720 549,176
Property, plant and equipment, net 784,276 715,960
Goodwill 30,746 --
Intangible assets, net 5,333 --
Other assets 9,908 10,464
----------- -----------
Total assets $ 1,345,983 $ 1,275,600
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 33,962 $ 38,292
Accrued liabilities 103,409 88,506
Deferred income on shipments to distributors 46,148 40,800
----------- -----------
Total current liabilities 183,519 167,598
Pension accrual 1,066 1,091
Deferred tax liability 30,864 31,132
Stockholders' equity:
Preferred stock, $.001 par value; authorized 5,000,000 shares;
no shares issued or outstanding -- --
Common stock, $.001 par value; authorized 300,000,000 shares;
issued 202,746,423 and outstanding 202,686,423 shares at
September 30, 2002; issued 200,802,633 and outstanding
200,629,908 shares at March 31, 2002 203 201
Additional paid-in capital 480,128 459,303
Retained earnings 651,243 619,254
Less shares of common stock held in treasury at cost; 60,000 shares
at September 30, 2002 and 172,725 shares at March 31, 2002 (1,040) (2,979)
----------- -----------
Net stockholders' equity 1,130,534 1,075,779
----------- -----------
Total liabilities and stockholders' equity $ 1,345,983 $ 1,275,600
=========== ===========
See accompanying notes to condensed consolidated financial statements
3
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales $ 169,748 $ 141,662 $ 329,493 $ 280,556
Cost of sales 78,239 70,793 154,087 140,281
---------- ---------- ---------- ----------
Gross profit 91,509 70,869 175,406 140,275
Operating expenses:
Research and development 22,337 20,168 43,897 39,702
Selling, general and administrative 23,127 20,165 45,068 41,608
Special charges 41,500 -- 50,800 --
---------- ---------- ---------- ----------
86,964 40,333 139,765 81,310
Operating income 4,545 30,536 35,641 58,965
Other income (expense):
Interest income 1,072 1,284 2,474 2,546
Interest expense (122) (125) (258) (332)
Other, net 203 20 187 363
---------- ---------- ---------- ----------
Income before income taxes 5,698 31,715 38,044 61,542
Income tax provision (benefit) (4,565) 8,567 6,055 16,621
---------- ---------- ---------- ----------
Net income $ 10,263 $ 23,148 $ 31,989 $ 44,921
========== ========== ========== ==========
Basic net income per share $ 0.05 $ 0.12 $ 0.16 $ 0.23
========== ========== ========== ==========
Diluted net income per share $ 0.05 $ 0.11 $ 0.15 $ 0.22
========== ========== ========== ==========
Weighted average common
shares outstanding 202,047 199,209 201,654 198,180
========== ========== ========== ==========
Weighted average common and potential
common shares outstanding 209,642 208,587 210,433 207,507
========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements
4
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended
September 30,
------------------------
2002 2001
---------- ----------
Cash flows from operating activities:
Net income $ 31,989 $ 44,921
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for doubtful accounts 30 28
Provision for inventory valuation 3,496 3,968
Provision for pension accrual 22 77
Gain on sale of fixed assets -- (242)
Fab 3 impairment charge 41,500 --
Loss on write-down of fixed assets 2,146 --
In-process research and development charge 9,300 --
Depreciation and amortization 55,070 54,615
Deferred income taxes (21,301) 11,550
Tax benefit from exercise of stock options 12,719 9,390
(Increase) decrease in accounts receivable (8,082) 6,538
Increase in inventories (6,524) (2,424)
Increase (decrease) in accounts payable and accrued liabilities 7,901 (38,548)
Change in other assets and liabilities 253 (35,715)
---------- ----------
Net cash provided by operating activities 128,519 54,158
---------- ----------
Cash flows from investing activities:
PowerSmart acquisition, net of cash acquired (50,674) --
Proceeds from sale of assets -- 1,029
Purchase of Fab 4 (184,512) --
Capital expenditures (42,117) (30,895)
---------- ----------
Net cash used in investing activities (277,303) (29,866)
---------- ----------
Cash flows from financing activities:
Purchase of treasury stock (7,450) --
Proceeds from sale of stock 16,915 16,942
---------- ----------
Net cash provided by financing activities 9,465 16,942
---------- ----------
Net (decrease) increase in cash and cash equivalents (139,319) 41,234
Cash and cash equivalents at beginning of period 280,647 129,909
---------- ----------
Cash and cash equivalents at end of period $ 141,328 $ 171,143
========== ==========
See accompanying notes to condensed consolidated financial statements
5
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Microchip Technology Incorporated and its wholly owned
subsidiaries (the "Company"). All intercompany balances and transactions have
been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles in the
United States of America, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all
adjustments of a normal recurring nature which are necessary for a fair
presentation have been included. Certain information and footnote disclosures
normally included in audited consolidated financial statements have been
condensed or omitted pursuant to such Securities and Exchange Commission rules
and regulations. It is suggested that these condensed consolidated financial
statements be read in conjunction with the audited consolidated financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended March 31, 2002. The results of operations for the six
months ended September 30, 2002 are not necessarily indicative of the results
that may be expected for the year ending March 31, 2003 or for any other period.
Certain reclassifications have been made to conform the prior year amounts
to the current period presentation.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 ("SFAS 141"), BUSINESS COMBINATIONS, and
No. 142 ("SFAS 142"), GOODWILL AND OTHER INTANGIBLE ASSETS, effective for fiscal
years beginning after December 15, 2001. In accordance with SFAS Nos. 141 and
142, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized, but will be subject to annual impairment tests. Other
intangible assets will continue to be amortized over their useful lives.
Goodwill will be subject to impairment tests annually, or earlier if indicators
of potential impairment exist, using a fair-value-based approach. The Company
adopted the new rules on accounting for goodwill and other intangible assets
beginning in the first quarter of fiscal 2003 and such rules were applied to the
acquisition of PowerSmart, Inc. The annual impairment tests will be performed in
the fourth quarter of each fiscal year. As of September 30, 2002, no impairment
of goodwill has been recognized. There can be no assurance that future goodwill
impairment tests will not result in a charge to earnings.
(2) ACQUISITION OF GRESHAM, OREGON WAFER FABRICATION FACILITY
On August 23, 2002, the Company completed its acquisition of a
semiconductor manufacturing complex in Gresham, Oregon. The Company acquired the
facility for $183.5 million in cash plus direct acquisition costs of
approximately $1.0 million. The facility is situated on an approximately
140-acre campus east of Portland and comprises approximately 826,500 square
feet, including approximately 200,000 square feet of clean room space. The
facility came equipped with approximately 350 process tools and 170 support
tools. The Company plans to initially produce 8-inch wafers on its 0.5 micron
and 0.35 micron process technologies at the Gresham facility. The facility will
also house offices, meeting rooms and support functions. The facility is
expected to be placed into production in the second quarter of fiscal 2004.
6
(3) SPECIAL CHARGES
FAB 3 IMPAIRMENT CHARGE
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS 144"), ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS, which is applicable to financial statements for fiscal years beginning
after December 15, 2001. This standard provides a single accounting model for
long-lived assets to be disposed of and significantly changes the criteria that
would have to be met to classify an asset as held-for-sale. Classification as
held-for-sale is an important distinction since such assets are not depreciated
and are stated at the lower of book value or fair value less cost to sell. SFAS
144 was effective for the Company as of the beginning of fiscal 2003. In
accordance with SFAS 144, the Company recorded a $41.5 million asset impairment
charge during the quarter ended September 30, 2002 as described below.
The Company acquired a semiconductor manufacturing facility in Puyallup,
Washington, referred to as Fab 3, in July 2000. The original purchase consisted
of semiconductor manufacturing facilities and real property. It was the
Company's intention to bring Fab 3 to productive readiness and commence volume
production of 8-inch wafers using its 0.7 and 0.5 micron process technologies by
August 2001. The Company delayed its intended production start up at Fab 3 due
to deteriorating business conditions in the semiconductor industry. Fab 3 has
never been brought to productive readiness.
As described above in Note 2, the Company acquired a semiconductor
manufacturing facility in Gresham, Oregon, referred to as Fab 4. After the
acquisition of Fab 4 was completed, the Company undertook a detailed analysis of
the potential production capacity at Fab 4. The results of the Fab 4 production
capacity analysis led the Company to determine that Fab 3's capacity would not
be needed in the foreseeable future and during the second quarter the Company
committed to a plan to sell Fab 3. Accordingly, Fab 3 has been classified as an
asset held-for-sale at September 30, 2002.
The Company retained an independent third party firm, other than its
independent auditors, to complete a fair value appraisal of Fab 3. The
independent third party used the market approach and considered comparable sales
in determining the fair value of Fab 3. The comparable sales included eight
properties including the subject property from the Company's prior purchase in
2000. Based on the results of this appraisal, the Company recorded an asset
impairment charge on Fab 3 of $36.9 million, including costs to sell. The
remaining value of $60.2 million is classified as an asset held-for-sale and is
included as a component of other current assets at September 30, 2002.
During the quarter ended September 30, 2002, the Company also recorded an
asset impairment charge of $4.6 million to write-down certain excess
manufacturing equipment located at Fab 3 to its net realizable value of
$212,000. This manufacturing equipment became "excess" as a result of duplicate
equipment acquired in the purchase of Fab 4. The net realizable value for the
excess manufacturing equipment was determined based on management estimates.
Substantially all of the other manufacturing equipment located at Fab 3 will be
transferred to and used in the Company's other wafer fabrication facilities
located in Chandler, Arizona (Fab 1), Tempe, Arizona (Fab 2) and Gresham, Oregon
(Fab 4).
If actual market conditions are less favorable than those estimated in the
appraisal, or if future market conditions deteriorate, the net proceeds from the
assets held-for-sale could be less than the amount estimated in the financial
statements and additional losses could result prior to or at the time of the
sale of Fab 3.
POWERSMART IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE
On June 5, 2002, the Company completed the acquisition of PowerSmart, Inc.
in which Microchip acquired all of PowerSmart's outstanding capital stock and
assumed certain stock options for consideration of $54.0 million in cash. The
purchase price was allocated among PowerSmart's tangible and intangible assets,
7
in-process research and development and goodwill based on an independent
valuation analysis performed by a firm other than the Company's independent
auditors.
The acquisition was accounted for as a purchase business combination in
accordance with SFAS No. 141, BUSINESS COMBINATIONS, and accordingly, the
results of PowerSmart's operations are included in the Company's consolidated
results from the date of the acquisition. The acquisition was not considered
significant under the rules and regulations of the Securities and Exchange
Commission (Rule 3-05 of Regulation S-X).
The amount paid in excess of the fair value of the net tangible assets has
been allocated to separately identifiable intangible assets based upon an
independent valuation analysis. An allocation of $9.3 million of the purchase
price was assigned to in-process research and development and was written off at
the date of the acquisition in accordance with FASB Interpretation No. 4,
"Applicability of FASB Statement No. 2, BUSINESS COMBINATIONS ACCOUNTED FOR BY
THE PURCHASE METHOD."
An allocation of approximately $30.7 million of the purchase price was made
to goodwill related to the acquisition in accordance with SFAS No. 142, GOODWILL
AND OTHER INTANGIBLE ASSETS. Goodwill related to this acquisition will not be
amortized but will be subject to periodic impairment tests. None of the goodwill
is expected to be deductible for tax purposes.
An allocation of $5.6 million of the purchase price was made to core
technology and other identifiable intangible assets and will be amortized over
their estimated useful lives of seven years.
(4) ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (amounts in thousands):
September 30, March 31,
2002 2002
-------- --------
Trade accounts receivable $ 91,585 $ 84,336
Other 2,283 348
-------- --------
93,868 84,684
Less allowance for doubtful accounts 3,949 3,937
-------- --------
$ 89,919 $ 80,747
======== ========
(5) INVENTORIES
The components of inventories consist of the following (amounts in
thousands):
September 30, March 31,
2002 2002
-------- --------
Raw materials $ 11,086 $ 7,187
Work in process 53,909 61,724
Finished goods 27,147 19,704
-------- --------
$ 92,142 $ 88,615
======== ========
Provisions for inventory valuation charges establish a new cost basis for
inventory and charges are not subsequently reversed to income even if
circumstances later suggest that increased carrying amounts are recoverable.
8
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (amounts in
thousands):
September 30, March 31,
2002 2002
---------- ----------
Land $ 11,538 $ 23,685
Building and building improvements 188,902 191,186
Machinery and equipment 744,362 722,049
Projects in process 318,732 211,098
---------- ----------
1,263,534 1,148,018
Less accumulated depreciation
and amortization 479,246 432,058
---------- ----------
$ 784,288 $ 715,960
========== ==========
Depreciation and amortization expense attributed to property and equipment
was $55.1 million and $54.6 million for the six months ended September 30, 2002
and September 30, 2001, respectively.
(7) LINES OF CREDIT
The Company has an unsecured revolving credit facility with a syndicate of
banks totaling $100,000,000, bearing interest at LIBOR plus 0.625%. The Company
can elect to increase the facility to $150,000,000, subject to certain
conditions set forth in the credit agreement. This facility has a termination
date of May 31, 2003. The Company had no borrowings against this line of credit
as of September 30, 2002. The credit facility requires the Company to achieve
certain financial ratios and operating results to maintain the credit facility.
The Company's ability to fully utilize this credit facility is dependent on it
being in compliance with such covenants and ratios. The Company was in
compliance with these covenants as of September 30, 2002.
The Company has an additional unsecured short-term line of credit with
various financial institutions in Asia for up to $15,000,000 (U.S. Dollar
equivalent). These borrowings are predominantly denominated in U.S. Dollars,
bearing interest at the Singapore Interbank Offering Rate (SIBOR) of 1.748% at
September 30, 2002 plus 0.5% (average) and expiring on various dates through
March 2003. There were no borrowings against this line of credit as of September
30, 2002, and an allocation of $851,000 of the available line was made, relating
to import guarantees associated with the Company's business in Thailand. There
are no covenants relative to the foreign line of credit.
9
(8) NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share (in thousands, except per share amounts):
Three Months Ended Six Months Ended
September 30, September 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income $ 10,263 $ 23,148 $ 31,989 $ 44,921
Weighted average common
shares outstanding 202,047 199,209 201,654 198,180
Dilutive effect of stock options 7,595 9,378 8,779 9,327
-------- -------- -------- --------
Weighted average common and
potential common shares outstanding 209,642 208,587 210,433 207,507
======== ======== ======== ========
Basic net income per share $ 0.05 $ 0.12 $ 0.16 $ 0.23
======== ======== ======== ========
Diluted net income per share $ 0.05 $ 0.11 $ 0.15 $ 0.22
======== ======== ======== ========
(9) STOCK REPURCHASE
On August 7, 2002, the Company's Board of Directors authorized the Company
to repurchase up to 2,500,000 shares of its common stock in the open market or
in privately negotiated transactions. During the quarter ended September 30,
2002, the Company purchased 392,700 shares of its common stock for $7,449,781.
332,700 of the purchased shares were reissued during the quarter ended September
30, 2002 to fund stock option exercises and purchases under the Company's
employee stock purchase plan. At September 30, 2002, there were 60,000 purchased
shares held as treasury shares. The timing and amount of any future repurchases
will depend upon market conditions and corporate considerations.
(10) SUBSEQUENT EVENT
On October 28, 2002, the Company announced that its Board of Directors had
approved and instituted a quarterly cash dividend on its common stock. The
initial quarterly dividend is $0.02 per share and is payable to shareholders of
record on November 8, 2002. The initial quarterly dividend payment is expected
to be approximately $4.1 million and will be paid in the third quarter of fiscal
2003.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain operational data as a percentage of
net sales for the periods indicated:
Three Months Ended Six Months Ended
September 30, September 30,
(Unaudited) (Unaudited)
------------------ ------------------
2002 2001 2002 2001
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 46.1% 50.0% 46.8% 50.0%
------ ------ ------ ------
Gross profit 53.9% 50.0% 53.2% 50.0%
Research and development 13.2% 14.2% 13.3% 14.2%
Selling, general and
administrative 13.6% 14.2% 13.7% 14.8%
Special charges 24.4% 0.0% 15.4% 0.0%
------ ------ ------ ------
Operating income 2.7% 21.6% 10.8% 21.0%
====== ====== ====== ======
NET SALES
We operate in one industry segment and engage primarily in the design,
development, manufacture and marketing of semiconductor products. We sell our
products to distributors and original equipment manufacturers, referred to as
OEMs, in a broad range of market segments, perform on-going credit evaluations
of our customers and generally require no collateral.
Our net sales for the quarter ended September 30, 2002 were $169.7 million,
an increase of 6.3% from the previous quarter's sales of $159.7 million, and an
increase of 19.8% from net sales of $141.7 million in the quarter ended
September 30, 2001. Our net sales for the six months ended September 30, 2002
were $329.5 million, an increase of 17.4% from net sales of $280.6 million for
the six months ended September 30, 2001. The increases in net sales for the
three and six-month periods ended September 30, 2002, compared to the three and
six-month periods ended September 30, 2001, were primarily due to increased
demand predominantly for our proprietary products. Key factors in our success in
achieving these increases in net sales during the three and six-month periods
ended September 30, 2002 include:
* continued market share gains
* increased semiconductor content in our customers' products
* new product offerings by us that have increased our served available
market, and
* increased demand for our programmable solutions.
11
Sales by product line for the three and six-month periods ended September
30, 2002 and September 30, 2001 were as follows (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
(Unaudited) (Unaudited)
-------------------------------------- --------------------------------------
2002 % 2001 % 2002 % 2001 %
-------- ------ -------- ------ -------- ------ -------- ------
Microcontrollers $134,129 79.0% $109,749 77.5% $259,613 78.8% $217,290 77.4%
Serial EEPROM products 22,973 13.5% 19,990 14.1% 4,833 13.6% 41,208 14.7%
Analog and interface products 12,646 7.5% 11,923 8.4% 25,047 7.6% 22,058 7.9%
-------- ------ -------- ------ -------- ------ -------- ------
Total sales $169,748 100.0% $141,662 100.0% $329,493 100.0% $280,556 100.0%
======== ====== ======== ====== ======== ====== ======== ======
MICROCONTROLLERS
Our microcontroller product line represents the largest component of our
total net sales. Microcontrollers and associated application development systems
accounted for approximately 79% of our total net sales in each of the three and
six-month periods ended September 30, 2002.
Microcontrollers and associated applicable development systems accounted
for approximately 78% of our total net sales for the three-month period ended
September 30, 2001, and 77% of our total net sales for the six-month period
ended September 30, 2001.
Net sales of our microcontroller products increased approximately 22.2% in
the three-month period ended September 30, 2002, and 19.5% in the six-month
period ended September 30, 2002, compared to the three and six-month periods
ended September 30, 2001. These sales increases were primarily due to increased
demand for our microcontroller products in end markets driven principally by
market share gains and those factors described above at page 11. The end markets
that we serve include the automotive, communications, computing, consumer and
industrial control markets.
Historically, average selling prices in the semiconductor industry decrease
over the life of any particular product. The overall average selling prices of
our microcontroller products have remained relatively constant over time due to
the proprietary nature of these products. We have experienced, and expect to
continue to experience, moderate pricing pressure in certain microcontroller
product lines, primarily due to competitive conditions. We have been able to in
the past, and expect to be able to in the future, moderate average selling price
declines in our microcontroller product lines by introducing new products with
more features and higher prices. We may be unable to maintain average selling
prices for our microcontroller products as a result of increased pricing
pressure in the future, which would adversely affect our operating results.
SERIAL EEPROM PRODUCTS
Sales of our Serial EEPROM products accounted for approximately 14% of our
net sales in each of the three and six-month periods ended September 30, 2002.
Sales of our Serial EEPROM products accounted for approximately 14% of our
total net sales for the three-month period ended September 30, 2001, and 15% of
our total net sales for the six-month period ended September 30, 2001.
12
Net sales of our Serial EEPROM products increased approximately 14.9% in
the three-month period ended September 30, 2002, and 8.8% in the six-month
period ended September 30, 2002, compared to the three and six-month periods
ended September 30, 2001. These sales increases were driven primarily by
customer demand conditions within the Serial EEPROM market.
Serial EEPROM product pricing has historically been cyclical in nature,
with steep price declines followed by periods of relative price stability,
driven by changes in industry capacity at different stages of the business
cycle. During the periods covered by this report, we have experienced several
Serial EEPROM product pricing trends due to market conditions. We experienced
significant competitive downward pricing pressures in our Serial EEPROM product
lines during the first half of fiscal 2002, returning to modest pricing declines
in the second half of fiscal 2002. Serial EEPROM pricing was essentially flat
during the three and six-month periods ended September 30, 2002. We currently
anticipate Serial EEPROM pricing to be approximately flat in the third quarter
of fiscal 2003, compared to the second quarter of fiscal 2003.
ANALOG AND INTERFACE PRODUCTS
Sales of our analog and interface products accounted for approximately 8%
of our total net sales in each of the three and six-month periods ended
September 30, 2002 and September 30, 2001.
Net sales of our analog and interface products increased approximately 6.1%
in the three-month period ended September 30, 2002, and 13.6% in the six-month
period ended September 30, 2002, compared to the three and six-month periods
ended September 30, 2001. These sales increases were driven primarily by new
proprietary design wins, supply and demand conditions within the market and our
ability to gain market share.
Analog and interface products can be proprietary or non-proprietary in
nature. Currently, we consider approximately 40% of our analog and interface
product mix to be proprietary in nature, where prices are relatively stable,
similar to the pricing stability experienced in our microcontroller products.
The non-proprietary portion of our analog and interface business will experience
price fluctuations, driven primarily by the current supply and demand for those
products. During the three-month period ending September 30, 2002, pricing of
our non-proprietary analog and interface products decreased approximately 9%
compared to the three-month period ended June 30, 2002. During the six-month
period ending September 30, 2002, pricing of our non-proprietary analog and
interface products was approximately flat compared to the three-month period
ended March 31, 2002. We currently anticipate analog and interface product
pricing to be approximately flat in the third quarter of fiscal 2003, compared
to the second quarter of fiscal 2003. We may be unable to maintain the average
selling prices of our analog and interface products as a result of increased
pricing pressure in the future, which would adversely affect our operating
results. We anticipate the proprietary portion of our analog and interface
products to increase over time.
TURNS ORDERS
Our net sales in any given quarter depend upon a combination of shipments
from backlog and orders received in that quarter for shipment in that quarter,
which we refer to as turns orders. We measure turns orders at the beginning of a
quarter based on the orders needed to meet the revenue target that we set
entering the quarter. We emphasize our ability to respond quickly to customer
orders as part of our competitive strategy, resulting in customers placing
orders with short delivery schedules. Turns orders directly correlate to product
lead times, which are currently between two and four weeks generally,
essentially unchanged from lead times a year ago. Shorter lead times generally
mean that turns orders as a percentage of our business are relatively high in
any particular quarter and reduces our visibility on future product shipments.
With current lead times between two and four weeks generally, customers do not
place orders beyond their immediate requirements.
13
The percentage of turns orders in any given quarter is dependent on overall
semiconductor industry conditions and product lead times. As such, our
percentage of turns orders has fluctuated over the last three fiscal years
between 20% and 61%. At October 1, 2002, we required turns orders of
approximately 60% in order to achieve our revenue target for the third quarter
of fiscal 2003. At July 1, 2002, we required turns orders of approximately 50%
to achieve our revenue target for the second quarter of fiscal 2003.
Turns orders are difficult to predict, and we may not experience the
combination of turns orders and shipments from backlog in a quarter that would
be sufficient to achieve anticipated net sales. If we do not achieve a
sufficient level of turns orders in a particular quarter, our net sales and
operating results will suffer.
THE FOREGOING STATEMENTS REGARDING COMPETITIVE PRICING PRESSURE IN OUR
MICROCONTROLLER PRODUCT LINES, OUR ABILITY TO MODERATE FUTURE AVERAGE SELLING
PRICE DECLINES IN OUR MICROCONTROLLER PRODUCT LINES, ANTICIPATED SERIAL EEPROM
AND ANALOG AND INTERFACE PRODUCT PRICING IN THE QUARTER ENDING DECEMBER 31,
2002, THE PROPRIETARY PORTION OF OUR ANALOG AND INTERFACE PRODUCT LINES
INCREASING OVER TIME, AND THE LEVEL OF TURNS ORDERS REQUIRED TO MEET OUR REVENUE
TARGET FOR THE THIRD QUARTER OF FISCAL 2003 ARE FORWARD-LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG
OTHERS: THE LEVEL OF ORDERS THAT ARE RECEIVED AND CAN BE SHIPPED IN A QUARTER;
DEMAND FOR OUR PRODUCTS AND THE PRODUCTS OF OUR CUSTOMERS; THE LEVEL AT WHICH
PREVIOUS DESIGN WINS BECOME ACTUAL ORDERS; INVENTORY MIX AND TIMING OF CUSTOMER
ORDERS; CUSTOMERS' INVENTORY LEVELS, ORDER PATTERNS AND SEASONALITY; POSSIBLE
DISRUPTIONS TO OUR CUSTOMERS' OPERATIONS OCCASIONED BY ANY SLOW DOWN OR
CESSATION IN INTERNATIONAL TRANSPORT OR DELIVERY CAUSED BY LABOR STRIKES OR WORK
STOPPAGES AT INTERNATIONAL PORTS OF DELIVERY IN THE UNITED STATES OR ELSEWHERE
(SUCH AS THE RECENT PORT LOCKOUTS ON THE WEST COAST OF THE U.S.) WHICH COULD
RESULT IN REDUCED CUSTOMER PURCHASES RELATIVE TO OUR EXPECTATIONS; OUR ABILITY
TO RAMP PRODUCTS INTO VOLUME PRODUCTION; COMPETITION AND COMPETITIVE PRESSURES
ON PRICING AND PRODUCT AVAILABILITY; POSSIBLE DISRUPTION IN COMMERCIAL
ACTIVITIES OCCASIONED BY TERRORIST ACTIVITY AND ARMED CONFLICT, SUCH AS CHANGES
IN LOGISTICS AND SECURITY ARRANGEMENTS, AND REDUCED END-USER PURCHASES RELATIVE
TO EXPECTATIONS; IMPACT OF EVENTS OUTSIDE THE UNITED STATES, SUCH AS THE
BUSINESS IMPACT OF FLUCTUATING CURRENCY RATES OR UNREST OR POLITICAL
INSTABILITY; THE CYCLICAL NATURE OF BOTH THE SEMICONDUCTOR INDUSTRY AND THE
MARKETS ADDRESSED BY OUR PRODUCTS; MARKET ACCEPTANCE OF OUR NEW PRODUCTS AND
THOSE OF OUR CUSTOMERS; THE FINANCIAL CONDITION OF OUR CUSTOMERS; FLUCTUATIONS
IN PRODUCTION YIELDS, PRODUCTION EFFICIENCIES AND OVERALL CAPACITY UTILIZATION;
CHANGES IN PRODUCT MIX; ABSORPTION OF FIXED COSTS, LABOR AND OTHER FIXED
MANUFACTURING COSTS; AND GENERAL INDUSTRY, ECONOMIC AND POLITICAL CONDITIONS.
DISTRIBUTION
Distributors accounted for approximately 58% of our net sales in the
three-month period ended September 30, 2002, and 61% of our net sales in the
three-month period ended September 30, 2001. Distributors accounted for
approximately 60% of our net sales in the six-month period ended September 30,
2002, and 62% of our net sales in the six-month period ended September 30, 2001.
Our largest distributor accounted for approximately 11% of our net sales in
the three-month period ended September 30, 2002, and 13% of our total net sales
in the three-month period ended September 30, 2001. Our largest distributor
accounted for approximately 12% of our total net sales in the six-month period
ended September 30, 2002, and 13% of our total net sales in the six-month period
ended September 30, 2001.
Generally, we do not have long-term agreements with our distributors and
our distributors may terminate their relationships with us with little or no
advanced notice. The loss of, or the disruption in the operations of, one or
more of our distributors could reduce our future net sales in a given quarter
and could result in an increase in inventory returns.
14
SALES BY GEOGRAPHY
Sales by geography for the three and six-month periods ended September 30,
2002 and 2001 were as follows (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
(Unaudited) (Unaudited)
-------------------------------------- --------------------------------------
2002 % 2001 % 2002 % 2001 %
-------- ------ -------- ------ -------- ------ -------- ------
Americas $ 58,303 34.4% $ 48,563 34.3% $111,717 33.9% $ 96,470 34.4%
Europe 42,811 25.2% 41,726 29.4% 87,610 26.6% 89,611 31.9%
Asia 68,634 40.4% 51,373 36.3% 130,166 39.5% 94,475 33.7%
-------- ------ -------- ------ -------- ------ -------- ------
Total Sales $169,748 100.0% $141,662 100.0% $329,493 100.0% $280,556 100.0%
======== ====== ======== ====== ======== ====== ======== ======
Our sales to foreign customers have been predominately in Asia and Europe,
which we attribute to the manufacturing strength in those areas for automotive,
communications, computing, consumer and industrial control products. Americas
sales include sales to customers in the United States, Canada, Central America
and South America.
Sales to foreign customers accounted for approximately 69% of our net sales
in the three months ended September 30, 2002 and approximately 68% of our net
sales in the three months ended September 30, 2001.
Sales to foreign customers accounted for approximately 71% of our net sales
in the six months ended September 30, 2002 and approximately 69% of our net
sales in the six months ended September 30, 2001. The majority of our foreign
sales are U.S. Dollar denominated.
GROSS PROFIT
Our gross profit was $91.5 million in the three months ended September 30,
2002, and $70.9 million in the three months ended September 30, 2001. Our gross
profit was $175.4 million in the six months ended September 30, 2002, and $140.3
million in the six months ended September 30, 2001.
Gross profit as a percent of sales was 53.9% in the three months ended
September 30, 2002, and 50.0% in the three months ended September 30, 2001.
Gross profit as a percent of sales was 53.2% in the six months ended September
30, 2002, and 50.0% in the six months ended September 30, 2001.
The most significant factors affecting gross profit percentage in the
periods covered by this report were:
* higher levels of manufacturing capacity utilization in the first and
second quarters of fiscal 2003
* continued cost reductions in wafer fabrication and assembly and test
manufacturing
* our ability to maintain average selling prices for our microcontroller
products where moderate downward pricing pressures have been offset by
introduction of new products with more features and higher selling
prices
* significant competitive downward pricing pressures in Serial EEPROM
products in the first and second quarters of fiscal 2002, compared to
a more stable pricing environment in the first and second quarters of
fiscal 2003
* fluctuations in the product mix of proprietary microcontroller and
analog products and related Serial EEPROM products as illustrated in
the chart in Net Sales on page 12
* the sale of inventory that was previously reserved for, and
* one-week plant shutdowns in each of the first and second quarters of
fiscal 2002.
15
During fiscal 2002, we operated at approximately 70% of our cumulative
total Fab 1 (Chandler, Arizona) and Fab 2 (Tempe, Arizona) capacity due to the
capacity reductions implemented in the March 2001 quarter and one-week plant
shutdowns in each quarter of fiscal 2002. Our overall gross margins were
negatively impacted by these actions due to the relatively high fixed costs
inherent in our wafer fabrication manufacturing, which continued even at lower
capacity utilization levels in fiscal 2002. Capacity utilization increased to
approximately 83% in the first quarter of fiscal 2003 and 84% in the second
quarter of fiscal 2003, which favorably impacted gross margins, compared to the
gross margins attained in fiscal 2002. We expect capacity utilization in the
third quarter of fiscal 2003 to be approximately 84%.
Our overall inventory levels were $92.1 million as of September 30, 2002,
compared to $88.6 million at March 31, 2002. We maintained 107 days of inventory
on our balance sheet as of September 30, 2002, compared to 110 days as of March
31, 2002. The highest number of days of inventory that we experienced in either
fiscal 2002 or fiscal 2003 was 127 days as of September 30, 2001. We expect days
of inventory to be approximately 104 days as of December 31, 2002.
As of September 30, 2002, Fab 3 (Puyallup, Washington) was not an active
operating asset. We are currently holding Fab 3 as an asset held-for-sale and
are maintaining it at minimal operating cost. See "Special Charges - Fab 3
Impairment Charge," below at page 18, for a complete discussion of the status of
Fab 3.
Fabs 1 and 2 currently utilize various manufacturing process technologies,
but predominantly utilize our 1.0 to 0.5-micron processes. We continue to
transition products to more advanced process technologies to reduce future
manufacturing costs. In fiscal 2002 and the first and second quarters of fiscal
2003, approximately 80% of our production was on 8-inch wafers.
We anticipate that gross margins will fluctuate over time, driven primarily
by the overall product mix of microcontroller, analog and interface and Serial
EEPROM products and the percentage of net sales of each of these products in a
particular quarter, as well as manufacturing yields, fixed cost absorption,
wafer fab loading levels and competitive and economic conditions.
THE FOREGOING STATEMENTS RELATING TO OUR EXPECTED CAPACITY UTILIZATION IN
THE THIRD QUARTER OF FISCAL 2003, OUR EXPECTED INVENTORY LEVELS AS OF DECEMBER
31, 2002, THE TRANSITION TO ADVANCED PROCESS TECHNOLOGIES TO REDUCE FUTURE
MANUFACTURING COSTS AND THE FLUCTUATION OF GROSS MARGINS OVER TIME ARE
FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF
THE FOLLOWING FACTORS, AMONG OTHERS: FUTURE DEMAND FOR OUR PRODUCTS AND THE
PRODUCTS OF OUR CUSTOMERS; FLUCTUATIONS IN PRODUCTION YIELDS, PRODUCTION
EFFICIENCIES AND OVERALL CAPACITY UTILIZATION; ABSORPTION OF FIXED COSTS, LABOR
AND OTHER DIRECT MANUFACTURING COSTS; COMPETITION AND COMPETITIVE PRESSURE ON
PRICING; POSSIBLE DISRUPTIONS TO OUR CUSTOMERS' OPERATIONS OCCASIONED BY ANY
SLOW DOWN OR CESSATION IN INTERNATIONAL TRANSPORT OR DELIVERY CAUSED BY LABOR
STRIKES OR WORK STOPPAGES AT INTERNATIONAL PORTS OF DELIVERY IN THE UNITED
STATES OR ELSEWHERE (SUCH AS THE RECENT PORT LOCKOUTS ON THE WEST COAST OF THE
U.S.) WHICH COULD RESULT IN REDUCED CUSTOMER PURCHASES RELATIVE TO OUR
EXPECTATIONS; POSSIBLE DISRUPTION IN COMMERCIAL ACTIVITIES OCCASIONED BY
TERRORIST ACTIVITY AND ARMED CONFLICT, WHICH COULD RESULT IN CHANGES IN
LOGISTICS AND SECURITY ARRANGEMENTS, AND REDUCED END-USER PURCHASES RELATIVE TO
EXPECTATIONS; IMPACT OF EVENTS OUTSIDE THE UNITED STATES, SUCH AS THE BUSINESS
IMPACT OF FLUCTUATING CURRENCY RATES OR UNREST OR POLITICAL INSTABILITY; OUR
ABILITY TO INCREASE MANUFACTURING CAPACITY AS NEEDED; COST AND AVAILABILITY OF
RAW MATERIALS; CHANGES IN PRODUCT MIX; AND OTHER GENERAL INDUSTRY, ECONOMIC AND
POLITICAL CONDITIONS.
At September 30, 2002, approximately 74% of our assembly requirements were
being performed in our Thailand facility, compared to approximately 48% as of
September 30, 2001. Third-party contractors located throughout Asia perform the
balance of our assembly operations. Substantially all of our test requirements
were being performed in our Thailand facility as of September 30, 2002 and
September 30, 2001. We believe that the assembly and test operations performed
at our Thailand facility provide us with significant cost savings when compared
to third-party contractor assembly and test costs, as well as increased control
over these portions of the manufacturing process.
16
Our use of third parties involves some reduction in our level of control
over the portions of our business that we subcontract. While we review the
quality, delivery and cost performance of our third-party contractors, our
future operating results could suffer if any third-party contractor is unable to
maintain manufacturing yields, assembly and test yields and costs at
approximately their current levels.
Our reliance on foreign operations, maintenance of substantially all of our
finished goods in inventory at foreign locations, and significant foreign sales
exposes us to foreign political and economic risks, including:
* political, social and economic instability
* trade restrictions and changes in tariffs
* import and export license requirements and restrictions
* difficulties in staffing and managing international operations
* employment regulations
* disruptions in international transport or delivery
* fluctuations in currency exchange rates
* difficulties in collecting receivables
* economic slowdown in the worldwide markets served by us, and
* potentially adverse tax consequences.
To date, we have not experienced any significant interruptions in our
foreign business operations. If any of these risks materialize, our sales could
decrease and our operating results could suffer.
RESEARCH AND DEVELOPMENT
Research and development (R&D) expenses for the three months ended
September 30, 2002 were $22.3 million, or 13.2% of sales, compared to $20.2
million, or 14.2% of sales, for the three months ended September 30, 2001. R&D
expenses for the six months ended September 30, 2002 were $43.9 million, or
13.3% of sales, compared to $39.7 million, or 14.2% of sales, for the six months
ended September 30, 2001.
We are committed to investing in new and enhanced products, including
development systems software, and in our design and manufacturing process
technologies. We believe these investments are significant factors in
maintaining our competitive position. We expense all R&D costs as incurred. R&D
expenses include expenditures for labor, depreciation, masks, prototype wafers,
and expenses for the development of process technologies, new packages, and
software to support new products and design environments.
R&D expenses increased $2.2 million, or 10.8%, for the three months ended
September 30, 2002, compared to the three months ended September 30, 2001. R&D
expenses increased $4.2 million, or 10.6%, for the six months ended September
30, 2002, compared to the six months ended September 30, 2001. R&D expenses
increased $0.8 million, or 3.6%, for the three months ended September 30, 2002,
compared to the three months ended June 30, 2002. The primary reason for the
dollar increase in R&D costs in each of these periods was increased labor and
professional service costs associated with expanding our technical resources.
There was also an unpaid one-week plant shut down for all employees in the
quarter ended September 30, 2001.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the three months ended
September 30, 2002 were $23.1 million, or 13.6% of sales, compared to $20.2
million, or 14.2% of sales, for the three months ended September 30, 2001.
Selling, general and administrative expenses for the six months ended September
30, 2002 were $45.1 million, or 13.7% of sales, compared to $41.6 million, or
14.8% of sales, for the six months ended September 30, 2001.
17
Selling, general and administrative expenses include salary expenses
related to field sales, marketing and administrative personnel, advertising and
promotional expenditures and legal expenses. Selling, general and administrative
expenses also include costs related to our direct sales force and field
applications engineers who work in sales offices worldwide to stimulate demand
by assisting customers in the selection and use of our products.
Selling, general and administrative expenses increased $3.0 million, or
14.7%, for the three months ended September 30, 2002, compared to the three
months ended September 30, 2001. Selling, general and administrative expenses
increased $3.5 million, or 8.3%, for the six months ended September 30, 2002,
compared to the six months ended September 30, 2001. Selling, general and
administrative expenses increased $1.2 million, or 5.4%, for the three months
ended September 30, 2002, compared to the three months ended June 30, 2002. The
primary reason for the dollar increase in selling, general and administrative
costs in these periods relate to increased labor costs. There was also an unpaid
one-week plant shut down for all employees in the September 30, 2001 quarter.
Selling, general and administrative expenses fluctuate over time, primarily
due to revenue and operating expense levels.
SPECIAL CHARGES
FAB 3 IMPAIRMENT CHARGE
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS 144"), "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS," which is applicable to financial statements for fiscal years beginning
after December 15, 2001. This standard provides a single accounting model for
long-lived assets to be disposed of and significantly changes the criteria that
would have to be met to classify as asset as held-for-sale. Classification as
held-for-sale is an important distinction because assets held-for-sale are not
depreciated and are stated at the lower of book value or fair value less cost to
sell. SFAS 144 is effective for all of our financial statements issued in fiscal
2003. In accordance with SFAS 144, we recorded a $41.5 million asset impairment
charge during the quarter ended September 30, 2002 as described below.
We acquired Fab 3, a semiconductor manufacturing facility in Puyallup,
Washington, in July 2000. The original purchase consisted of semiconductor
manufacturing facilities and real property. It was the our intention to bring
Fab 3 to productive readiness and commence volume production of 8-inch wafers
using our 0.7 and 0.5 micron process technologies by August 2001. We delayed our
production start up at Fab 3 due to deteriorating business conditions in the
semiconductor industry. Fab 3 has never been brought to productive readiness.
On August 23, 2002, we acquired a semiconductor manufacturing facility in
Gresham, Oregon, which we refer to as Fab 4. See Note 2 to the Condensed
Consolidated Financial Statements on page 6, above. We decided to purchase Fab 4
instead of bringing Fab 3 to productive readiness because, among other things,
the cost of the manufacturing equipment needed to ramp production at Fab 3 over
the next several years was significantly higher than the total purchase price of
Fab 4, and the time to bring Fab 4 to productive readiness was significantly
less than the time required to bring Fab 3 to productive readiness.
After the acquisition of Fab 4 was completed, we undertook an analysis of
the potential production capacity at Fab 4. The results of the production
capacity analysis led us to determine that Fab 3's capacity would not be needed
in the foreseeable future and during the second quarter we committed to a plan
to sell Fab 3. Accordingly, Fab 3 has been classified as an asset held-for-sale
at September 30, 2002.
We retained an independent third party firm, other than our independent
auditors, to complete a fair value appraisal of Fab 3. The independent third
party used the market approach and considered comparable sales in determining
the fair value of Fab 3. The comparable sales included eight properties,
including Fab 3 from our purchase in 2000. Based on the results of this
appraisal, we recorded an asset impairment charge on Fab 3 of $36.9 million,
18
including costs to sell. The remaining value of $60.2 million is classified as
an asset held-for-sale and is included as a component of other current assets at
September 30, 2002.
During the quarter ended September 30, 2002, we also recorded an asset
impairment charge of $4.6 million to write-down certain excess manufacturing
equipment located at Fab 3 to its net realizable value of $212,000. This
manufacturing equipment became "excess" as a result of duplicate equipment
acquired in the purchase of Fab 4. The net realizable value for the excess
manufacturing equipment was determined based on management estimates.
Substantially all of the other manufacturing equipment located at Fab 3 will be
transferred to and used in our other wafer fabrication facilities located in
Chandler, Arizona (Fab 1), Tempe, Arizona (Fab 2) and Gresham, Oregon (Fab 4).
If actual market conditions are less favorable than those estimated in the
appraisal, or if future market conditions deteriorate, the net proceeds from the
assets held-for-sale could be less than the amount estimated in the financial
statements and additional losses could result prior to or at the time of the
sale of the facility.
POWERSMART IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE
During the quarter ended June 30, 2002, purchased in-process research and
development of $9.3 million, associated with our acquisition of PowerSmart, Inc.
was written off at the date of the acquisition (June 5, 2002) in accordance with
FASB Interpretation No. 4, "APPLICABILITY OF FASB STATEMENT NO. 2 BUSINESS
COMBINATIONS ACCOUNTED FOR BY THE PURCHASE METHOD." The value assigned to the
in-process research and development was determined by an independent valuation
analysis performed by a firm other than our independent auditors. As of the
valuation date, there were 15 projects that were considered to be in-process.
The values of the projects were determined based on analyses of cash flows to be
generated by the products that are expected to result from the in-process
projects. These cash flows were estimated by forecasting total revenues expected
from these products then deducting appropriate operating expenses, cash flow
adjustments and contributory asset returns to establish a forecast of net return
on in-process technology. These net returns were substantially reduced to take
into account the time value of money and the risks associated with the inherent
difficulties and uncertainties in achieving commercial readiness. The above
analysis resulted in $9.3 million of value assigned to acquired in-process
research and development, which was expensed on the acquisition date in
accordance with FIN 4. We believe the assumptions used in valuing the in-process
research and development are reasonable, but are inherently uncertain, and no
assurance can be given that the assumptions made will occur. During the six
months ended September 30, 2002, we incurred development costs of approximately
$1.2 million related to the acquired in-process research and development, and
should the projects continue to move toward commercialization, we estimate that
future expenditures could approximate $1.5 million over the next few years. None
of the in-process research and development projects had been completed as of
September 30, 2002.
There were no such special charges incurred during the three and six-month
periods ended September 30, 2001.
THE FOREGOING STATEMENT RELATING TO OUR ESTIMATED FUTURE EXPENDITURES ON
THE ACQUIRED IN-PROCESS R&D PROJECTS IS A FORWARD-LOOKING STATEMENT. ACTUAL
RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS:
DELAYS IN COMPLETION OF A PARTICULAR PROJECT; CHANGES IN OUR PRIORITIZATION OF
PROJECTS; CHANGES IN THE SPECIFICATIONS OF A PARTICULAR PROJECT; UNFORESEEN
ENGINEERING PROBLEMS; AND UNANTICIPATED COSTS.
OTHER INCOME (EXPENSE)
Interest income decreased in the three and six-month periods ended
September 30, 2002 from the corresponding periods of the previous fiscal year
due to lower invested cash balances as a result of our August 23, 2002
acquisition of Fab 4 and our June 5, 2002 acquisition of PowerSmart. The
interest rates applying to our invested cash balances were lower during the
three and six-month periods ended September 30, 2002, compared to the rates
applying during the corresponding periods of the previous fiscal year.
19
INCOME TAXES
Provisions for income taxes reflect tax on foreign earnings and federal and
state tax on U.S. earnings. We had an effective tax rate of 15.9% for the six
months ended September 30, 2002, and 27.0% for the six months ended September
30, 2001. During the six months ended September 30, 2002, our effective tax rate
was lower than it has been historically due to the special charge incurred
during the second quarter of fiscal 2003. Under Accounting Principles Board
Opinion No. 28, INTERIM FINANCIAL REPORTING, we provide for an income tax
provision/benefit for special charges in the period in which they occur
separately from our calculation of the estimated effective tax rate for the
remainder of our operations. Given that the special charge in the second quarter
of fiscal 2003 was incurred in the United States, we provided a tax benefit in
the September 30, 2002 quarter based on the 40% U.S. tax rate that we expect to
apply to the special charges. Based on our current assumptions, we believe that
our tax rate for the remainder of fiscal 2003 will be approximately 25.5%.
As part of the process of preparing our consolidated financial statements,
we are required to estimate our income taxes in each of the jurisdictions in
which we operate. This process involves estimating our actual current tax
exposure, together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within our consolidated
balance sheet. We must then assess the likelihood that our deferred tax asset
will be recovered from future taxable income within the relevant jurisdiction
and, to the extent we believe that recovery is not likely, we must establish a
valuation allowance. We have not provided for a valuation allowance because we
believe that our deferred tax asset will be recovered from future taxable
income. Should we determine that we would not be able to realize all or part of
our net deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged to income in the period such determination was made. At
September 30, 2002, our gross deferred tax asset was $112.1 million. Numerous
taxing authorities in the countries in which we do business are increasing their
scrutiny of various tax structures employed by businesses. We believe that we
maintain adequate tax reserves to offset any potential tax liabilities that may
arise upon audit in the United States and the other countries in which we do
business. If such amounts ultimately prove to be unnecessary, the resulting
reversal of such reserves would result in tax benefits being recorded in the
period the reserves are no longer deemed necessary. If such amounts ultimately
prove to be less than an ultimate assessment, a future charge to expense would
be recorded in the period in which the assessment is determined.
Companies of our size and complexity are regularly audited by the taxing
authorities in the jurisdictions in which they conduct significant operations.
We are currently under audit by the Internal Revenue Service for our fiscal
years ended March 31, 1998, 1999, 2000 and 2001.
THE FOREGOING STATEMENTS REGARDING OUR TAX RATE FOR THE REMAINDER OF FISCAL
2003, THE RECOVERABILITY OF OUR DEFERRED TAX ASSET AND THE ADEQUACY OF OUR TAX
RESERVES ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY
BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: CURRENT AND FUTURE TAX LAWS AND
REGULATIONS; TAXATION RATES IN GEOGRAPHIC REGIONS WHERE WE HAVE SIGNIFICANT
OPERATIONS; RESULTS OF ANY CURRENT OR FUTURE AUDIT CONDUCTED BY THE INTERNAL
REVENUE SERVICE OR OTHER TAXING AUTHORITIES IN THE COUNTRIES IN WHICH WE DO
BUSINESS; AND THE LEVEL OF OUR TAXABLE INCOME AND WHETHER OUR TAXABLE INCOME
WILL BE SUFFICIENT TO UTILIZE OUR DEFERRED TAX ASSET.
EURO CONVERSION ISSUES
We operate in the European Market and currently generate approximately
25.2% of our total net sales from customers located in Europe. Our commercial
headquarters in Europe are located in the United Kingdom, which is not currently
one of the 11 member states of the European Union that has converted to the
Euro.
We currently conduct approximately 94.6% of our business in Europe in U.S.
Dollars and approximately 0.2% of our business in Europe in Pounds Sterling. The
balance of our net sales in Europe is conducted in the Euro. We will monitor the
potential commercial impact of conversion of a portion of our current business
to the Euro, but we do not currently anticipate any material impact to our
business or operations based on this transition.
20
LIQUIDITY AND CAPITAL RESOURCES
We had $141.3 million in cash and cash equivalents at September 30, 2002, a
decrease of $139.3 million from the March 31, 2002 balance. The decrease in cash
and cash equivalents over this time period is primarily attributable to the cash
used in our June 5, 2002 acquisition of PowerSmart and our August 23, 2002
acquisition of Fab 4, offset by cash generated from operating activities.
We maintain an unsecured revolving credit facility with a syndicate of
banks totaling $100.0 million. We can elect to increase the facility to $150.0
million, subject to certain conditions set forth in the credit agreement. This
facility has a termination date of May 31, 2003. There were no borrowings
against this line of credit as of September 30, 2002. We are required to achieve
certain financial ratios and operating results to maintain this line of credit
and were in compliance with these requirements at September 30, 2002.
We also maintain an unsecured short-term line of credit with various
financial institutions in Asia for up to $15.0 million (U.S. Dollar equivalent).
There were no borrowings under the foreign line of credit as of September 30,
2002, but an allocation of approximately $0.8 million of the available line was
made, relating to import guarantees associated with our business in Thailand.
There are no covenants related to the foreign line of credit.
At September 30, 2002, an aggregate of $114.2 million of our credit
facilities was available, subject to financial covenants and ratios with which
we were in compliance. Our ability to fully utilize our credit facilities is
dependent on our remaining in compliance with such covenants and ratios.
During the six months ended September 30, 2002, we generated $128.5 million
of cash from operating activities, an increase of $74.3 million from the six
months ended September 30, 2001. The increase in cash flow from operations was
primarily due to the non-cash impact of the $41.5 million Fab 3 impairment
charge and the $9.3 million in-process research and development charge, and the
impact of changes in accounts payable and accrued liabilities and other assets
and liabilities.
During the six months ended September 30, 2002, net cash used in investing
activities increased $247.4 million, to $277.3 million, from $29.9 million for
the six months ended September 30, 2001. The increase was due to our
acquisitions of Fab 4 and PowerSmart and increased capital expenditures.
We enter into hedging transactions from time to time in an attempt to
minimize our exposure to currency rate fluctuations. Although none of the
countries in which we conduct significant foreign operations have had a highly
inflationary economy in the last five years, there is no assurance that
inflation rates or fluctuations in foreign currency rates in countries where we
conduct operations will not adversely affect our operating results in the
future.
On August 7, 2002, our Board of Directors authorized the repurchase up to
2,500,000 shares of our common stock in the open market or in privately
negotiated transactions. During the quarter ended September 30, 2002, we
repurchased 392,700 shares of common stock for $7,449,781. 332,700 of the
purchased shares were reissued during the quarter ended September 30, 2002 to
fund stock option exercises and purchases under our employee stock purchase
plan. At September 30, 2002, there were 60,000 purchased shares held as treasury
shares. The timing and amount of any future repurchases will depend upon market
conditions and corporate considerations.
Our level of capital expenditures varies from time to time as a result of
actual and anticipated business conditions. Capital expenditures in the six
months ended September 30, 2002 were $226.6 million, compared to $30.9 million
for the six months ended September 30, 2001. The primary reasons for the dollar
increase in capital expenditures in the six-month period ended September 30,
2002 were the purchase of Fab 4, other selective investments to increase our
manufacturing capacity in response to market demand and our continued investment
in research and development equipment. We currently intend to spend
approximately $70 million during the next 12 months to invest in equipment and
21
facilities to maintain, and selectively increase, capacity to meet our currently
anticipated needs.
We expect to generate approximately $55 million in cash from operating
activities and grow our cash balances by approximately $45 million in the
quarter ending December 31, 2002.
On October 28, 2002, we announced that our Board of Directors had approved
and instituted a quarterly cash dividend on our common stock. The initial
quarterly dividend declared is $0.02 per share and is payable to shareholders of
record on November 7, 2002. We estimate the initial quarterly dividend payment
to be approximately $4.1 million to be paid in the third quarter of fiscal 2003.
We expect to finance capital expenditures through our existing cash
balances, cash flows from operations, available debt arrangements and other
sources of financing, including possible issuances of equity and debt securities
depending on market conditions. We believe that the capital expenditures
anticipated to be incurred over the next 12 months will provide sufficient
manufacturing capacity to meet our currently anticipated needs.
THE FOREGOING STATEMENTS REGARDING THE ANTICIPATED LEVEL OF CAPITAL
EXPENDITURES OVER THE NEXT 12 MONTHS AND THE NATURE OF SUCH EXPENDITURES, THE
AMOUNT OF CASH TO BE GENERATED FROM OPERATING ACTIVITIES IN THE QUARTER ENDING
DECEMBER 31, 2002, THE PROJECTED GROWTH IN OUR CASH BALANCES DURING THE QUARTER
ENDING DECEMBER 31, 2002, THE FINANCING AND SUFFICIENCY OF OUR CAPITAL
EXPENDITURES AND THE BELIEF THAT CAPITAL EXPENDITURES ANTICIPATED TO BE INCURRED
OVER THE NEXT 12 MONTHS WILL PROVIDE US SUFFICIENT MANUFACTURING CAPACITY TO
MEET OUR CURRENTLY ANTICIPATED NEEDS ARE FORWARD-LOOKING STATEMENTS. ACTUAL
RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS:
CHANGES IN DEMAND FOR OUR PRODUCTS AND THOSE OF OUR CUSTOMERS; CHANGES IN
UTILIZATION OF CURRENT MANUFACTURING CAPACITY; UNANTICIPATED COSTS IN BRINGING
FAB 4 ON-LINE; MARKET ACCEPTANCE OF OUR PRODUCTS AND OF OUR CUSTOMERS' PRODUCTS;
THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY AND THE MARKETS ADDRESSED BY
OUR PRODUCTS; THE AVAILABILITY AND COST OF RAW MATERIALS, EQUIPMENT AND OTHER
SUPPLIES; ACTUAL CASH FLOWS GENERATED FROM AND USED IN THE OPERATION OF OUR
BUSINESS; ACTUAL LEVELS OF CAPITAL EXPENDITURES; THE FINANCIAL CONDITION OF OUR
CUSTOMERS AND VENDORS; UNINSURED LOSSES; AND THE ECONOMIC, POLITICAL AND OTHER
CONDITIONS IN THE WORLDWIDE MARKETS SERVED BY US.
Net cash provided by financing activities was $9.5 million for the six
months ended September 30, 2002, compared to $16.9 million for the six months
ended September 30, 2001. Proceeds from the sale of stock options were $9.5
million in the six months ended September 30, 2002 and $16.9 million in the six
months ended September 30, 2001.
We had a net shares settled forward contract outstanding as of September
30, 2001. In connection with this contract, we made a net delivery of 572,645
shares of our common stock during the six months ended September 30, 2001. We
closed out the net shares settled forward contract in its entirety on January
15, 2002 and made a cash payment of $27.8 million to purchase the remaining
1,610,606 shares outstanding under the contract. The purchased shares were held
as treasury shares and used to fund stock option exercises and purchases under
our employee stock purchase plan through April 9, 2002.
We believe that our existing sources of liquidity combined with cash
generated from operations will be sufficient to meet our currently anticipated
cash requirements for at least the next 12 months. However, the semiconductor
industry is capital intensive. In order to remain competitive, we must
constantly evaluate the need to make significant investments in capital
equipment for both production and research and development. We may seek
additional equity or debt financing during the next 12 months for the capital
expenditures required to maintain or expand our wafer fabrication and product
assembly and test facilities, or other purposes. The timing and amount of any
such financing requirements will depend on a number of factors, including demand
for our products, changes in industry conditions, product mix, and competitive
factors. There can be no assurance that such financing will be available on
acceptable terms, and any additional equity financing would result in
incremental dilution to existing stockholders.
22
ADDITIONAL FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS
When evaluating Microchip and its business, you should give careful
consideration to the factors listed below, in addition to the information
provided elsewhere in this Form 10-Q and in other documents that we file with
the Securities and Exchange Commission.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE DUE TO FACTORS THAT COULD REDUCE
OUR NET SALES AND PROFITABILITY.
Our quarterly operating results are affected by a wide variety of factors
that could reduce our net sales and profitability, many of which are beyond our
control. Some of the factors that may affect our quarterly operating results
include:
* demand for our products in the distribution and OEM channels
* the level at which previous design wins become actual orders
* the level of orders that are received and can be shipped in a quarter
(turns orders)
* market acceptance of both our products and our customers' products
* customer order patterns and seasonality
* downward pricing pressures in our non-proprietary product lines
* possible disruption in commercial activities or international
transport or delivery caused by terrorist activity, armed conflict, or
unexpected increases in the price of, or decrease in the supply of,
oil, any of which could result in changes in logistics and security
arrangements, and reduced customer purchases relative to expectations
* possible disruptions to our customers' operations occasioned by any
slow down or cessation in international transport or delivery caused
by labor strikes or work stoppages at international ports of delivery
in the United States or elsewhere (such as the recent port lockouts on
the West Coast of the U.S.) which could result in reduced customer
purchases relative to our expectations
* impact of events outside of the United States, such as the business
impact of fluctuating currency rates or unrest or political
instability
* disruption in the supply of wafers or assembly and testing services
* availability of manufacturing capacity, the extent of effective use of
manufacturing capacity and fluctuations in manufacturing yields
* the availability and cost of raw materials, equipment and other
supplies
* the costs and outcome of any litigation involving intellectual
property, customer and other issues
* uninsured losses, and
* economic, political and other conditions in the worldwide markets
served by us.
We believe that period-to-period comparisons of our operating results are
not necessarily meaningful and that you should not rely upon any such
comparisons as indications of future performance. In future periods our
operating results may fall below the expectations of public market analysts and
investors, which would likely have a negative effect on the price of our common
stock.
OUR OPERATING RESULTS WILL SUFFER IF WE INEFFECTIVELY UTILIZE OUR MANUFACTURING
CAPACITY OR FAIL TO MAINTAIN MANUFACTURING YIELDS.
The manufacture and assembly of integrated circuits, particularly
non-volatile, erasable CMOS memory and logic devices such as those that we
produce, are complex processes. These processes are sensitive to a wide variety
of factors, including the level of contaminants in the manufacturing
environment, impurities in the materials used and the performance of our wafer
fabrication personnel and equipment. As is typical in the semiconductor
industry, we have from time to time experienced lower than anticipated
manufacturing yields. Our operating results will suffer if we are unable to
maintain yields at approximately the current levels.
23
Our operating results are also adversely affected when we operate at less
than optimal capacity as was the case throughout fiscal 2002 and the first and
second quarters of fiscal 2003. Lower capacity utilization results in certain
costs being charged directly to expense and lower gross margins.
IF WE DO NOT BRING OUR FAB 4 (GRESHAM, OREGON) WAFER FABRICATION FACILITY ON
LINE IN A TIMELY MANNER, OUR ANTICIPATED REVENUES MAY BE REDUCED AND WE WOULD
INCUR FIXED EXPENSES THAT WOULD REDUCE OUR GROSS MARGINS IN FUTURE PERIODS.
On August 23, 2002, we acquired a semiconductor facility in Gresham,
Oregon, which we refer to as Fab 4. We currently anticipate that Fab 4 will
commence volume production in the second quarter of fiscal 2004. Bringing Fab 4
on-line involves significant risks, including:
* successful implementation of our 0.5 micron manufacturing process at
Fab 4
* effective integration of a variety of hardware and software components
* potential shortages of materials and skilled labor
* unforeseen environmental or engineering problems
* approvals and requirements of governmental and regulatory agencies,
and
* unanticipated costs.
Any one of these risks could delay the equipping and production start-up of
Fab 4, and could involve significant additional costs or reduce our anticipated
revenues.
As a result of these and other factors, Fab 4 may not commence volume
production when anticipated or within budget. Also, we may be unable to achieve
adequate manufacturing yields in Fab 4 in a timely manner and our revenues may
not increase in proportion to the anticipated increase in manufacturing capacity
associated with Fab 4 which would harm our operating results.
WE DEPEND ON ORDERS THAT ARE RECEIVED AND SHIPPED IN THE SAME QUARTER AND
THEREFORE HAVE LIMITED VISIBILITY OF FUTURE PRODUCT SHIPMENTS.
Our net sales in any given quarter depend upon a combination of shipments
from backlog and orders received in that quarter for shipment in that quarter,
which we refer to as turns orders. We emphasize our ability to respond quickly
to customer orders as part of our competitive strategy, resulting in customers
placing orders with short delivery schedules. The percentage of turns orders in
any given quarter depends on overall semiconductor industry conditions and
product lead times. Shorter lead times generally means that turns orders as a
percentage of our business is relatively high in any particular quarter and
reduces our visibility on future product shipments.
As such, our percentage of turns orders has fluctuated over the last three
fiscal years between approximately 20% and 61%. As of October 1, 2002, we
required turns orders of approximately 60% in order to achieve our revenue
target for the third quarter of fiscal 2003. Because turns orders are difficult
to predict, increased levels of turns orders make our net sales more difficult
to forecast.
If we do not achieve a sufficient level of turns orders in a particular
quarter relative to our projections, our revenue and operating results will
suffer.
24
INTENSE COMPETITION IN OUR MARKETS MAY LEAD TO PRICING PRESSURES, REDUCED SALES
OF OUR PRODUCTS AND REDUCED MARKET SHARE.
The semiconductor industry is intensely competitive and has been
characterized by price erosion and rapid technological change. We compete with
major domestic and international semiconductor companies, many of which have
greater market recognition and substantially greater financial, technical,
marketing, distribution and other resources than we with which to pursue
engineering, manufacturing, marketing and distribution of their products.
Emerging companies are also increasing their participation in the market for
embedded control applications. We may be unable to compete successfully in the
future, which could harm our business.
Our ability to compete successfully depends on a number of factors both
within and outside our control, including:
* the quality, performance, reliability, features, ease of use, pricing
and diversity of our products
* the quality of our customer service and our ability to address the
needs of our customers
* our success in designing and manufacturing new products including
those implementing new technologies
* the rate at which customers incorporate our products into their own
products
* our level of manufacturing capacity utilization and manufacturing
yields
* our ability to hire and retain qualified engineering and management
personnel
* product introductions by our competitors
* the number, nature and success of our competitors in a given market
* our ability to obtain adequate supplies of raw materials and other
supplies at acceptable prices
* our ability to protect our products and processes by effective
utilization of intellectual property laws, and
* general market and economic conditions.
Historically, average selling prices in the semiconductor industry decrease
over the life of any particular product. The overall average selling prices of
our microcontroller and proprietary analog and interface products have remained
relatively constant, while average selling prices of our Serial EEPROM and
non-proprietary analog and interface products have declined over time. We have
experienced, and expect to continue to experience, pricing pressure in certain
of our proprietary product lines, due primarily to competitive conditions. We
have been able to moderate average selling price declines in many of our
proprietary product lines by continuing to introduce new products with more
features and higher prices. We experienced significant competitive downward
pricing pressures in our Serial EEPROM product lines during the first half of
fiscal 2002, which moderated in the third and fourth quarters of fiscal 2002 and
the first half of fiscal 2003.
We may be unable to maintain average selling prices for our microcontroller
or other products as a result of increased pricing pressure in the future, which
would reduce our operating results.
WE MUST ATTRACT AND RETAIN QUALIFIED PERSONNEL TO BE SUCCESSFUL, AND COMPETITION
FOR QUALIFIED PERSONNEL IS INTENSE IN OUR MARKET.
Our success depends to a significant extent upon the efforts and abilities
of our senior management, engineering and other personnel. The competition for
qualified engineering and management personnel is intense. We may be
unsuccessful in retaining our existing key personnel or in attracting and
retaining additional key personnel that we require. The loss of the services of
one or more of our key personnel or the inability to add key personnel could
harm our business. We have no employment agreements with any member of our
senior management team.
25
OUR SUCCESS DEPENDS ON OUR ABILITY TO INTRODUCE NEW PRODUCTS ON A TIMELY BASIS.
Our future operating results will depend to a significant extent on our
ability to develop and introduce new products on a timely basis that can compete
effectively on the basis of price and performance and which address customer
requirements. The success of new product introductions depends on various
factors, including:
* proper new product selection
* timely completion and introduction of new product designs
* development of support tools and collateral literature that make
complex new products easy for engineers to understand and use, and
* market acceptance of our customers' end products.
Because our products are complex, we have experienced delays from time to
time in completing development of new products. In addition, our new products
may not receive or maintain substantial market acceptance. We may be unable to
design, develop and introduce competitive products on a timely basis, which
could reduce our future operating results.
Our success also depends upon our ability to develop and implement new
design and process technologies. Semiconductor design and process technologies
are subject to rapid technological change and require significant R&D
expenditures. We and other companies in the industry have, from time to time,
experienced difficulties in effecting transitions to advanced process
technologies and, consequently, have suffered reduced manufacturing yields or
delays in product deliveries. Our future operating results could be adversely
affected if any transition to future process technologies is substantially
delayed or inefficiently implemented.
GENERAL CONDITIONS IN THE INSURANCE INDUSTRY MAY AFFECT OUR COSTS AND INCREASE
THE RISKS TO OUR BUSINESS OPERATIONS.
As conditions in the insurance industry have resulted in decreased capacity
and increased insurance rates over the last two fiscal years, our liability,
property and casualty insurance coverage levels have decreased and our retained
risk exposure from uninsured losses has increased. We have not made any material
change to our operations as a result of the reduced coverage. Availability and
cost of insurance coverage have generally fluctuated over time as the insurance
industry reacts to various market forces and we will consider changes in our
coverage levels based on conditions in the insurance market.
WE CONTRACT WITH SEVERAL THIRD-PARTY CONTRACTORS IN ASIA TO PERFORM KEY
MANUFACTURING FUNCTIONS FOR US.
We use several third-party contractors located throughout Asia for a
portion of the assembly and testing of our products and for a portion of the
wafer fabrication of our analog products. Although we have reduced our
dependence on third-party contractors over time, the disruption or termination
of any of these sources could harm our business and operating results. Our use
of third parties involves some reduction in our level of control over the
portions of our business that we subcontract. Our future operating results could
suffer if any third-party contractor were to experience financial, operations or
production difficulties, or if they were unable to maintain manufacturing
yields, assembly and test yields and costs at approximately their current
levels.
WE MAY LOSE SALES IF OUR SUPPLIERS OF RAW MATERIALS AND EQUIPMENT FAIL TO MEET
OUR NEEDS.
Our semiconductor manufacturing operations require raw materials and
equipment that must meet exacting standards. We generally have more than one
source for these supplies, but there are only a limited number of suppliers
capable of delivering various raw materials and equipment that meet our
standards. In addition, the raw materials and equipment necessary for our
business could become more difficult to obtain as worldwide use of
semiconductors in product applications increases. We have experienced supply
shortages from time to time in the past, and on occasion our suppliers have told
us they need more time than expected to fill our orders or that they will no
longer support certain equipment with updates or spare and replacements parts.
26
An interruption of any raw materials or equipment sources, or the lack of
supplier support for a particular piece of equipment, could harm our business.
OUR BUSINESS IS HIGHLY DEPENDENT ON SELLING THROUGH DISTRIBUTORS.
Sales through distributors accounted for 63% of our net sales for the
fiscal year ended March 31, 2002 and 60% of sales in the first half of fiscal
2003. Sales through one distributor accounted for 13% of our net sales in fiscal
2002 and 12% of our total net sales for the first half of fiscal 2003.
Generally, we do not have long-term agreements with our distributors and our
distributors may terminate their relationship with us with little or no advanced
notice.
The loss of, or a disruption in the operations of, one or more of our
distributors could reduce our net sales in a given quarter and could result in
an increase in inventory returns.
OUR OPERATING RESULTS MAY BE IMPACTED BY THE WIDE FLUCTUATIONS OF SUPPLY AND
DEMAND IN THE SEMICONDUCTOR INDUSTRY.
The semiconductor industry is characterized by wide fluctuations of supply
and demand. Throughout fiscal 2001 and fiscal 2002, the industry experienced a
significant economic downturn, characterized by diminished product demand and
production over-capacity. These conditions have continued during the first half
of fiscal 2003. We have sought to reduce our exposure to this industry
cyclicality by selling proprietary products, that cannot be easily or quickly
replaced, to a geographically diverse base of customers across a broad range of
market segments. However, we have experienced substantial period-to-period
fluctuations in operating results and may, in the future, experience
period-to-period fluctuations in operating results due to general industry or
economic conditions.
INTELLECTUAL PROPERTY CLAIMS AND LITIGATION COULD SUBJECT US TO SIGNIFICANT
LIABILITY FOR DAMAGES AND COULD INVALIDATE OUR PROPRIETARY RIGHTS.
As is typical in the semiconductor industry, we and our customers have from
time to time received, and may in the future receive, communications from third
parties asserting patent or other intellectual property rights on certain of our
products or technologies. In the event a third party were to make a valid
intellectual property claim and a license or other agreement was not available
on commercially reasonable terms, our operating results could be harmed. We have
in the past been, are currently, and may in the future be, involved in
litigation to defend Microchip against alleged infringement of the rights of
others or to enforce our intellectual property rights. Litigation could result
in substantial cost to us and divert our resources. An unfavorable outcome in
any such suit could harm our business, financial condition or results of
operations.
Our ability to obtain patents, licenses and other intellectual property
rights covering our products and manufacturing processes is important for our
success. To that end, we have acquired certain patents and patent licenses and
intend to continue to seek patents on our inventions and manufacturing
processes. The process of seeking patent protection can be long and expensive,
and patents may not be issued from currently pending or future applications. In
addition, our existing patents and any new patents that are issued may not be of
sufficient scope or strength to provide meaningful protection or any commercial
advantage to us. We may be subject to or may initiate interference proceedings
in the U.S. Patent and Trademark Office, which can require significant financial
and management resources. In addition, the laws of certain foreign countries do
not protect our intellectual property rights to the same extent as the laws of
the United States.
WE DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CUSTOMERS.
We do not typically enter into long-term contracts with our customers and
we cannot be certain as to future order levels from our customers. When we do
enter into customer contracts, the contract is generally cancelable at the
convenience of the customer. In the event of any early termination of a contract
27
by one of our major customers, it is unlikely that we would be able to rapidly
replace that revenue source which would harm our financial results.
BUSINESS INTERRUPTIONS COULD HARM OUR BUSINESS.
Operations at any of our primary manufacturing facilities, or at any of our
wafer fabrication or test and assembly subcontractors, may be disrupted for
reasons beyond our control, including work stoppages, power loss, incidents of
terrorism, political instability, telecommunications failure, fire, earthquake,
floods, or other natural disasters. If operations at any of our facilities or by
any of our subcontractors are interrupted, we may not be able to shift
production to other facilities on a timely basis. If this occurs, we may
experience delays in shipments of products to our customers and alternate
sources for production may be unavailable on acceptable terms. This could result
in reduced revenues and profits and the cancellation of orders or loss of
customers. In addition, business interruption insurance will likely not be
enough to compensate us for any losses that may occur and any losses or damages
incurred by us as a result of business interruptions could significantly harm
our business.
WE ARE HIGHLY DEPENDENT ON FOREIGN SALES AND OPERATIONS, WHICH EXPOSES US TO
FOREIGN POLITICAL AND ECONOMIC RISKS.
Sales to foreign customers account for a substantial portion of our net
sales. During the fiscal year ended March 31, 2002, approximately 69% of our net
sales were made to foreign customers. During the first half of fiscal 2003,
approximately 71% of our net sales were made to foreign customers. We purchase a
substantial portion of our raw materials and equipment from foreign suppliers.
In addition, we own a product assembly and testing facility located near
Bangkok, Thailand. We also use various third-party contractors located
throughout Asia for a portion of the assembly and testing of our products and
for a portion of the wafer fabrication of our analog products.
Our reliance on foreign operations, maintenance of substantially all of our
finished goods in inventory at foreign locations and significant foreign sales
exposes us to foreign political and economic risks, including:
* political, social and economic instability
* trade restrictions and changes in tariffs
* import and export license requirements and restrictions
* difficulties in staffing and managing international operations
* employment regulations
* disruptions in international transport or delivery
* fluctuations in currency exchange rates
* difficulties in collecting receivables
* economic slowdown in the worldwide markets served by us, and
* potentially adverse tax consequences.
If any of these risks materialize, our sales could decrease and our
operating results could suffer.
WE ARE SUBJECT TO STRINGENT ENVIRONMENTAL REGULATION, WHICH MAY FORCE US TO
INCUR SIGNIFICANT EXPENSES.
We must comply with many different federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in our manufacturing processes.
Although we believe that our activities conform to presently applicable
environmental regulations, our failure to comply with present or future
regulations could result in the imposition of fines, suspension of production or
a cessation of operations. Any such regulation could require us to acquire
costly equipment or to incur other significant expenses to comply with
environmental regulations. Any failure by us to control the use of or adequately
restrict the discharge of hazardous substances could subject us to future
liabilities. Environmental problems at our facilities may occur that could
subject us to future costs or liabilities.
28
In 1993, TelCom Semiconductor, Inc., with whom we merged in January 2001,
acquired the semiconductor manufacturing operations of Teledyne, Inc. previously
conducted at TelCom's Mountain View, California facility. The semiconductor
manufacturing operations conducted by Teledyne at the facility allegedly
contaminated the soil and groundwater of the facility, and the groundwater of
properties located down-gradient of the facility. Although TelCom was
indemnified by Teledyne against, among other things, any liabilities arising
from any such contamination, and although we should be able to benefit from this
indemnification as a successor to TelCom's business, we cannot assure you that
claims will not be made against us or that such indemnification will be
available or will provide meaningful protection at the time any such claim is
brought. To the extent that we are subject to a claim that is not covered by the
indemnity from Teledyne or as to which Teledyne is unable to provide
indemnification, our financial condition or operating results could suffer.
OUR FAILURE TO SUCCESSFULLY INTEGRATE BUSINESSES, PRODUCTS OR TECHNOLOGIES WE
ACQUIRE COULD DISRUPT OR HARM OUR ONGOING BUSINESS.
We have from time to time acquired, and may in the future acquire,
additional complementary businesses, products and technologies. Achieving the
anticipated benefits of an acquisition depends, in part, upon whether the
integration of the acquired business, products or technology is accomplished
efficiently and effectively. In addition, successful acquisitions in the
semiconductor industry may be more difficult to accomplish than in other
industries because such acquisitions require, among other things, integration of
product offerings, manufacturing operations and coordination of sales and
marketing and R&D efforts. These difficulties can become more challenging due to
the need to coordinate geographically separated organizations, the complexities
of the technologies being integrated, and the necessities of integrating
personnel with disparate business background and combining two different
corporate cultures. The integration of operations following an acquisition also
requires the dedication of management resources, which may distract attention
from the day-to-day business and may disrupt key R&D, marketing or sales
efforts. The inability of our management to successfully integrate any future
acquisition could harm our business. Furthermore, products acquired in
connection with acquisitions may not gain acceptance in our markets, and we may
not achieve the anticipated or desired benefits of such transaction.
POWERSMART, INC., WHICH WE ACQUIRED ON JUNE 5, 2002, DEPENDED ON THIRD-PARTY
WAFER MANUFACTURERS FOR ALL OF ITS PRODUCT REQUIREMENTS. ANY INABILITY OR
UNWILLINGNESS OF POWERSMART'S WAFER SUPPLIERS TO MEET THESE MANUFACTURING
REQUIREMENTS WOULD SIGNIFICANTLY DELAY OUR ABILITY TO PRODUCE AND SHIP
POWERSMART PRODUCTS.
While Microchip has historically manufactured virtually all of its own
wafers, PowerSmart purchased its wafers primarily from two outside foundries.
Each of these foundries also fabricates wafers for other semiconductor
companies, including some of our competitors. One of the foundries used by
PowerSmart is a direct competitor of ours. During fiscal 2003, we expect to
continue to rely on these wafer suppliers to supply a substantial portion of the
wafers that are required to support the business that we acquired from
PowerSmart. We may be unable to acquire wafers from these foundries if they
experience manufacturing failures, yield shortfalls or other situations when
demand exceeds capacity or for other reasons. In such case, we may not be able
to qualify additional manufacturing sources for existing PowerSmart products on
a timely manner or at all, and such arrangements, if any, may not be on
favorable terms to us.
Although current market conditions in the semiconductor industry indicate
that there is sufficient manufacturing capacity at outside foundries, a
significant increase in demand for PowerSmart products during fiscal 2003 could
result in wafers being in short supply and prevent us from having an adequate
supply to meet our customer requirements and meet requested delivery dates for
customers of our PowerSmart products.
RECENTLY ENACTED AND PROPOSED CHANGES IN SECURITIES LAWS AND RELATED REGULATIONS
COULD RESULT IN INCREASED COSTS TO US.
Recently enacted and proposed changes in the laws and regulations affecting
public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and
rules proposed by the SEC, Nasdaq and the NYSE, could result in increased costs
29
to us as we evaluate the implications of any new rules and respond to their
requirements. The new rules could make it more difficult for us to obtain
certain types of insurance, including director and officer liability insurance,
and we may be forced to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar coverage. In this
regard, during the recent annual renewal of our director and officer liability
insurance policy, we experienced substantially reduced policy limits and terms
at a significant cost increase compared to our prior coverage. The impact of
these events could also make it more difficult for us to attract and retain
qualified persons to serve on our board of directors, on committees of our board
of directors, or as executive officers. We are presently evaluating and
monitoring developments with respect to new and proposed rules and cannot
predict or estimate the amount of the additional costs we may incur or the
timing of such costs.
THE FUTURE TRADING PRICE OF OUR COMMON STOCK COULD BE SUBJECT TO WIDE
FLUCTUATIONS IN RESPONSE TO A VARIETY OF FACTORS.
The market price of our common stock has fluctuated significantly in the
past and is likely to fluctuate in the future. The future trading price of our
common stock could be subject to wide fluctuations in response to a variety of
factors, many of which are beyond our control, including:
* quarterly variations in our operating results and the operating
results of other technology companies
* actual or anticipated announcements of technical innovations or new
products by us or our competitors
* changes in analysts' estimates of our financial performance or
buy/sell recommendations
* general conditions in the semiconductor industry, and
* worldwide political, economic and financial conditions.
In addition, the stock market has experienced significant price and volume
fluctuations that have particularly affected the market prices for many high
technology companies and that often have been unrelated to the operating
performance of such companies. These broad market fluctuations and other factors
may harm the market price of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our investment portfolio, consisting of fixed income securities, was $136.7
million as of September 30, 2002, and $247.6 million as of March 31, 2002. These
securities, like all fixed income instruments, are subject to interest rate risk
and will decline in value if market interest rates increase. If market rates
were to increase immediately and uniformly by 10% from the levels of September
30, 2002 and March 31, 2002, the decline in the fair value of our investment
portfolio would not be material. Additionally, we have the ability to hold our
fixed income investments until maturity and, therefore, we would not expect to
recognize an adverse impact on income or cash flows.
We have international operations and are thus subject to foreign currency
rate fluctuations. To date, our exposure related to exchange rate volatility has
not been significant. If the foreign currency rates fluctuate by 15% from the
rates at September 30, 2002 and March 31, 2002, the effect on our financial
position and results of operations would not be material.
During the normal course of our business, we are routinely subjected to a
variety of market risks, examples of which include, but are not limited to,
interest rate movements and foreign currency fluctuations, as we discuss in this
Item 3, and collectability of accounts receivable. We constantly assess these
risks and have established policies and procedures to protect against the
adverse affects of these other potential exposures. Although we do not
anticipate any material losses in these risk areas, no assurance can be made
that material losses will not be incurred in these areas in the future.
30
We believe that our market risk, as discussed in this Item 3, has not
materially changed from March 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our chief executive officer and our chief financial officer, after
evaluating the effectiveness of our "disclosure controls and procedures" (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934, as amended) as of a date within 90 days of our filing of this quarterly
report on Form 10-Q, referred to as the "Evaluation Date", have concluded that,
as of the Evaluation Date, our disclosure controls and procedures were adequate
and effective to ensure the timely collection, evaluation and disclosure of
information relating to us and our consolidated subsidiaries that would
potentially be subject to disclosure under the Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in our internal controls or other factors
that could significantly affect our internal controls subsequent to the
Evaluation Date. No significant deficiencies or material weaknesses were
identified in the evaluation of our internal controls and therefore no
corrective actions have been taken.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MICROCHIP TECHNOLOGY INCORPORATED V. U.S. PHILIPS CORPORATION, ET AL.
(DISTRICT OF ARIZONA, 01-CV-2090-PGR); U.S. PHILIPS CORPORATION V. ATMEL
CORPORATION, ET AL. (SOUTHERN DISTRICT OF NEW YORK, 01-CV-9178-LAP). As reported
in our annual report on Form 10-K for the fiscal year ended March 31, 2002 and
our quarterly report on Form 10-Q for the quarter ended June 30, 2002, on
October 26, 2001, we filed an action in federal district court in Arizona for
declaratory relief against U.S. Philips Corporation and Philips Electronics
North America Corp. requesting that the Court declare, among other matters, that
we do not infringe Philips' U.S. Patent Nos. 4,689,740 and 5,559,502. We
initiated legal action so that a determination could be made relating to the
validity, enforceability and alleged infringement of, and our license to, the
Philips' patents. In response to our filing the declaratory judgment action in
Arizona, Philips filed an action against us in federal district court in New
York, alleging infringement of the `740 patent and seeking unspecified damages
and injunctive relief. There were no material developments in the litigation
during the quarter ended September 30, 2002. We intend to litigate this matter
vigorously. We currently believe that the outcome of this matter will not have a
material adverse effect on our consolidated financial position or results of
operations. However, the final outcome of this matter is inherently uncertain,
and should the outcome be adverse to us, we may be required to pay damages and
other expenses and may be subjected to injunctive relief. The litigation, even
if resolved in our favor, may also result in diversion of management attention
and significant legal fees.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) We held our Annual Meeting of Stockholders on August 16, 2002.
(b) Steve Sanghi, Albert J. Hugo-Martinez, L.B. Day, Matthew W. Chapman and
Wade F. Meyercord were elected as directors at the Annual Meeting.
(c) The results of the vote on the matters voted upon at the Annual Meeting
were as follows:
31
(1) ELECTION OF DIRECTORS:
DIRECTOR FOR WITHHELD/ABSTAIN
-------- --- ----------------
Steve Sanghi 120,263,265 62,628,085
Albert J. Hugo-Martinez 181,163,470 1,727,880
L.B. Day 182,182,726 708,624
Matthew W. Chapman 179,031,601 3,859,749
Wade F. Meyercord 102,271,781 80,619,569
(2) APPROVAL OF AN AMENDMENT TO OUR CERTIFICATE OF INCORPORATION TO INCREASE
THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK:
FOR AGAINST WITHHELD/ABSTAIN BROKER NON-VOTES
--- ------- ---------------- ----------------
180,132,531 2,569,962 188,857 -0-
(3) APPROVAL OF AN AMENDMENT TO OUR 2001 EMPLOYEE STOCK PURCHASE PLAN TO
INCREASE THE NUMBER OF SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UNDER
THE PLAN:
FOR AGAINST WITHHELD/ABSTAIN BROKER NON-VOTES
--- ------- ---------------- ----------------
178,874,878 3,762,287 254,185 -0-
(4) APPROVAL OF AN AMENDMENT TO THE 1993 STOCK OPTION PLAN TO INCREASE THE
NUMBER OF SHARES OF COMMON STOCK WITH RESPECT TO WHICH OPTIONS ARE
AUTOMATICALLY GRANTED TO NON-EMPLOYEE DIRECTORS FOLLOWING EACH ANNUAL
MEETING OF STOCKHOLDERS, AND TO INCREASE THE NUMBER OF SHARES OF COMMON
STOCK FOR WHICH OPTIONS ARE AUTOMATICALLY GRANTED FOLLOWING A NON-EMPLOYEE
DIRECTOR'S INITIAL APPOINTMENT OR ELECTION TO THE BOARD OF DIRECTORS:
FOR AGAINST WITHHELD/ABSTAIN BROKER NON-VOTES
--- ------- ---------------- ----------------
105,277,347 77,296,701 317,302 -0-
(5) APPROVAL OF AN AMENDMENT TO THE 1993 STOCK OPTION PLAN TO PROVIDE FOR A
SPECIAL ONE-TIME OPTION GRANT TO EACH NON-EMPLOYEE DIRECTOR:
FOR AGAINST WITHHELD/ABSTAIN BROKER NON-VOTES
--- ------- ---------------- ----------------
103,919,610 78,478,872 492,868 -0-
(6) RATIFICATION OF APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S
INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING MARCH 31, 2003:
For Against Withheld/Abstain Broker Non-Votes
--- ------- ---------------- ----------------
176,921,053 5,735,654 234,643 -0-
The foregoing matters are described in more detail in our definitive proxy
statement dated July 12, 2002 relating to the Annual Meeting.
32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
Exhibit 3.1 Restated Certificate of Incorporation of Microchip
Technology Incorporated.
Exhibit 3.2 By-Laws of Microchip Technology Incorporated as
amended through August 16, 2002.
Exhibit 10.1 1993 Stock Option Plan, as amended through
August 16, 2002.
Exhibit 99.1 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant To Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K.
We filed a current report on Form 8-K dated July 17, 2002 to report
the signing of a definitive agreement to acquire a semiconductor
manufacturing facility in Gresham, Oregon from Fujitsu
Microelectronics, Inc. The Purchase and Sale Agreement between Fujitsu
and us, dated as of July 17, 2002, was filed as Exhibit 2.1 to the
current report on Form 8-K.
We filed a current report on Form 8-K dated August 23, 2002 to report
the closing of our acquisition of a semiconductor manufacturing
facility in Gresham, Oregon from Fujitsu Microelectronics, Inc. The
acquisition was pursuant to the Purchase and Sale Agreement between
Fujitsu and us, dated as of July 17, 2002, which was filed as Exhibit
2.1 to our current report on Form 8-K dated July 17, 2002.
33
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.
MICROCHIP TECHNOLOGY INCORPORATED
Date: November 12, 2002 By: /s/ Gordon W. Parnell
-------------------------------------------
Gordon W. Parnell
Vice President and Chief Financial Officer
(Duly Authorized Officer, and
Principal Financial and Accounting Officer)
34
CERTIFICATION
I, Steve Sanghi, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Microchip Technology
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Steve Sanghi
----------------------------------------
Steve Sanghi
President and CEO
35
CERTIFICATION
I, Gordon W. Parnell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Microchip Technology
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Gordon W. Parnell
----------------------------------------
Gordon W. Parnell
Vice President and CFO
36