Microchip Technology Incorporated
2002 Annual Report
Not only survive but thrive.
Contrary to the idea that deserts are uniformly hot, dry and homogeneous in their
lack of plant life, they are actually quite diverse, and flourishing. Each of the four
southwestern US deserts offer habitats in which certain plants -- those that have
altered their physical structure to survive extreme conditions -- endure. Yet each region
is characterized by specific plants which seem to thrive there: from the Sagebrush in
the Great Basin or the Joshua Tree in the Mojave, to the giant Saguaro in the Sonoran
or the Prickly Pear Cactus in the Chihuahuan. In the desert, the strong will survive. Yet
in this rugged, demanding climate, only the innovative thrive. The true beauty of the
desert lies within the medley of blooms that emerge as the different species prosper.
Here, too, lies the wonder of the fifth southwestern desert -- the “Silicon Desert” --
characterized by a golden terrain, a magnificent sky, high technology and an
innovative company called Microchip.
Corporate Profile
Microchip Technology Inc. manufactures the popular PICmicro® field-programmable RISC
microcontrollers (MCUs), which serve 8- and 16-bit embedded control applications, and
a broad spectrum of high-performance linear and mixed-signal, power management
and thermal management devices. The Company also offers complementary micro-
peripheral products including interface devices; serial EEPROMs; and the patented
KEELOQ® authentication devices. This synergistic product portfolio targets thousands
of applications and a growing demand for high-performance designs in the automotive,
communications, computing, consumer and industrial control markets. The Company’s
quality systems are ISO 9001 and QS9000 certified. Microchip is headquartered in
Chandler, Arizona with design facilities in Mountain View, California; Lausanne,
Switzerland; and Bangalore, India; semiconductor fabrication facilities in Tempe
and Chandler, Arizona and Puyallup, Washington; and assembly and test operations
near Bangkok, Thailand. Microchip employs 3,050 people worldwide and has sales
offices throughout Asia, Europe, Japan and the Americas.
Selected Financial Highlights
(in thousands, except per share amounts)
1998
1999
2000
2001
2002
Net Sales
$452,329
$460,723
$553,051
$715,730
$571,254
Gross Profit
$221,616
$220,553
$283,440
$380,714
$286,736
Net Income*
$72,015
$70,858
$113,586
$155,473
$94,814
Diluted Earnings Per Share*
$0.35
$0.37
$0.58
$0.76
$0.45
Stockholders Equity
$403,729
$384,715
$662,878
$942,848
$1,075,779
*Excludes restructuring and acquisition-related special charges/special income
$716
$553
$571
$452
$461
$372
$325
$232
$0.76
$0.58
$0.45
$0.33
$0.37
$0.35
$0.29
$0.20
95
96
97
98
99
00
01
02
95
96
97
98
99
00
01
02
Net Sales
(millions of dollars)
159
142
129
110
77
55
25
13
Diluted Earnings Per Share*
299
261
199
132
98
87
66
73
94
95
96
97
98
99
00
01
94
95
96
97
98
99
00
01
Microcontroller Portfolio
(number of MCU products at calendar year-end)
Analog & Interface Portfolio
(number of analog & interface products
at calendar year-end)
To our shareholders
Many of my peers -- leaders of companies large and
small in the semiconductor industry -- have written letters
describing a year that we’d all prefer to forget: a global
economy once buoyant turned slow and uncertain. A
recession felt around the world. A formidable challenge.
Many companies were unable to navigate the extreme realities of this past year: the harsh
terrain of balancing drastic cost reduction and right-sizing with continued investment
in research, development and the future. But Microchip, here in the heart of the Silicon
Desert, has not only survived. We have thrived.
I am proud to report the financial results of fiscal year 2002. They are a result of the
dedication and painstaking hard work of a global enterprise with one clear mission: to
emerge from this fiscal year having performed to the best of our ability. We accomplished
this … and more. Net sales were $571.3 million, a decrease of only 20.2% from net
sales of $715.7 million in fiscal 2001, securing our position among the best performing
semiconductor companies of the year. Further, Wall Street acknowledged our hard
work as we earned recognition as the top performing company on the NASDAQ 100
for the 12-month period ending May 2002. Diluted earnings per share for fiscal year
2002 were $0.45, a decrease of 40.1% from diluted earnings per share in the prior year
of $0.76* before non-operating charges. We achieved gross margins of more than 50%,
and maintained operating profits above 21%, significantly better than the performance
of most of our competitors. Inventory levels continued to fall throughout the year as
sell-through strengthened and optimism slowly returned to the economy. Our balance
sheet is healthy and debt-free, and we have grown cash balances, driven by
our strong operating results. Our overall performance demonstrates the power of
our enterprise and business model, and reflects our highly diversified customer base,
robust design win activity, high proprietary content in our product portfolio, and our
ability to quickly respond to market and industry changes.
*a decrease of 35.7% from diluted earnings per share in the prior year of $0.70 including non-operating charges.
As of March 31, 2002,
we owned 197 U.S.
patents and 78 foreign
patents, and had an
additional 140 U.S.
patent applications
and 146 foreign patent
applications pending.
How did we do it? We took several actions to adjust our business -- in desert terms
we, like our botanical counterparts in the other southwestern deserts, altered our
structure to survive extreme conditions. We started with the root of our business:
products and technology. During the year we implemented a unique manufacturing
technology that eliminates the traditional design barriers associated with Flash
microcontrollers (MCUs), such as price premiums, endurance, reliability and long
programming times. This .5 micron Flash technology innovation positions Microchip’s
PICmicro® Flash MCU products for many new high-volume, cost-sensitive markets
and applications. Additionally, several existing devices were transferred seamlessly
to this process resulting in reduced costs and increased profitability.
Just as design and development are critical to meeting customer needs, we continued
to focus on the fact that meeting customer expectations -- quality, reliability
and consistency -- are critical to our success. In this fiscal year we completed the
integration and consolidation of the TelCom Semiconductor business into Microchip.
We now perform assembly and test for these products through our Microchip Thailand
facility, and manufacture 60% of the wafer requirements in our Chandler and Tempe
fabs. Our newly ISO 14001-certified Thailand operation also handles our product sampling
activities. Our Mountain View, California facility passed its first QS9000 certification
audit, strengthening our commitment to automotive customers. We successfully
expanded in-house assembly by 57% and introduced 3 new packaging options.
Today, our wafer manufacturing, assembly and test operations deliver world-class
yields, record low cycle times, and outstanding on-time delivery performance.
These fundamental manufacturing achievements laid the foundation for us to survive
in a difficult year. Yet it was our continuing commitment to delivering customer-driven
solutions across all product lines which allowed us to blossom. The performance of
our proprietary products led by our microcontrollers was especially encouraging.
While the rest of the industry was down 30%, our microcontroller business lost only 4%.
Our PICmicro Flash microcontroller family now includes 20 products, highlighted
by our first devices to break the 1 Megabit memory barrier. These powerful MCUs
offer industry-leading performance and unique features including In-Circuit Serial
Programming™ (ICSP™) technology, which allows the devices to be programmed
after being placed in a circuit board.
PIC18F8720, which
has the largest memory
size in PIC® MCU
history, is designed for
high-end applications
requiring a complex
user interface.
In order to address emerging wireless market requirements, we brought to market our
first radio frequency (RF) family of HCS & PICmicro MCU devices which are well suited
for space-constrained designs such as PC peripherals or remote sensing. To ease our
customers’ connectivity design challenges, we introduced a free PICmicro MCU TCP/IP
(Transmission Control Protocol/Internet Protocol) stack solution that enables designers
to connect any of the Company’s high-performance PIC18 microcontrollers directly to the
Internet. Additional achievements include the market launch of our advanced configurable
analog microcontrollers for various measurement and control applications; volume production
of Microchip’s first ROMless microcontrollers, which allow us to serve applications not
previously available to us, such as the multi-language short message service (SMS) platform
that operates on standard telephone lines; and self-programmable Flash memory
devices that provide an intelligent Control Area Network (CAN) 2.0B active interface.
To continue our market share advances, we shipped more than 23,000 development
systems this year, for a cumulative 227,000 installed. This represents one of the largest
user bases of development tools in the semiconductor industry, and continues to be
a positive indicator of new customer activity. The comprehensive suite of systems
now includes the MPLAB® 6.0 Integrated Development Environment -- released to
early adopters at the end of fiscal 2002. MPLAB 6.0 integrates state-of-the-art edit and
debug capabilities for PICmicro MCUs and future dsPIC™ digital signal controllers,
The new Analog & Interface Products Division now offers nearly 300
high-performance mixed-signal, power management, thermal management
and interface solutions for embedded systems applications.
and allows all of Microchip’s software and hardware application development tools to
run seamlessly with each other. We also introduced the next generation MPLAB In-
Circuit Debugger (ICD) 2, a highly flexible microcontroller development system that has
quickly become our most popular development tool. To aid in our penetration of the
emerging China market, we introduced the low-cost, Chinese language PICC ME16 C
Compiler, which allows programmers to write code in familiar C language and secure
local technical support.
The Sensor family
of dsPIC™ Digital
Signal Controllers
features the world’s
highest processing
performance
available in an 18-pin
package.
Last fiscal year I announced the merger of TelCom Semiconductor and its products into
the Microchip portfolio. We are satisfied with the results of this strategic move, and
after a year of consolidation, I am pleased to report that our analog and interface
products are faring quite well. A growing number of Microchip’s embedded control
customers are taking advantage of our ability to service both the digital and analog
requirements of their designs. We began or expanded development of several new
high performance analog product families, including thermal management, high-
resolution data converters, and high-speed network interface devices, which are all
targeted for fiscal 2003 market release. New product innovations include an industry-
first predictive fan failure integrated circuit, ideal for a variety of fan-fault detection
applications, including telecommunications and networking equipment, power supplies,
instrumentation, data storage equipment, notebook PCs, servers and industrial control.
We further developed our power management product line by introducing a
variety of CMOS low dropout regulators (LDOs) with Select Mode™ technology. These
latest LDOs provide space saving solutions without compromising performance. To
solidify our intent to become a leading analog supplier, we rounded out our analog
portfolio with proprietary operational amplifiers (op amps), cost-effective system
supervisors, and new low-power analog-to-digital (A/D) converters. These devices offer
designers a cost-effective way to shrink design time, improve performance and increase
the operational life of low-voltage, low-current battery-powered systems for remote
data acquisition, sensing, communications, test and medical equipment applications
or where space is limited such as PDAs, cellular phones and pagers.
Our strategy for the memory product business continues to support our overall corporate
objectives. Toward the end of the year we experienced improving market conditions
which led to a more stable business environment and a return to more normal pricing.
We introduced industry-first serial EEPROM solutions supporting two leading standards:
the Advanced Communications Riser Special Interest Group (ACRSIG) specification,
and the new Video Electronics Standards Association (VESA) Enhanced Extended Display
Identification Data 1.3 standard for PC monitors, projectors and flat panel displays.
In the early part of fiscal 2002, we introduced our first proprietary products for infrared
wireless communication which support the IrDA® standard. These are the smallest,
most cost-effective solutions for adding wireless connectivity to embedded systems.
We also announced our entry into the stand-alone battery management arena with
the Company’s first Li-Ion battery chargers, each with unique feature sets that address
a variety of high-performance, single-cell battery designs, including portable and
self-charging battery pack applications.
The success of our PICmicro MCUs and the customer acceptance of our analog products
speak to our enthusiasm for and commitment to the embedded control marketplace.
Today, we are excited to forge new ground with our proprietary 16-bit dsPIC digital
signal controllers. During this fiscal year we unveiled architecture and product details
Our new Appliance Market Products Group plans to design, develop and launch
appliance-specific solutions for basic control, user interface, motor control
and energy efficiency in applications such as traditional white goods,
comfort/convenience, personal care and industrial appliances.
of this new product family, which combines the control advantages of a high-performance
16-bit microcontroller with the high computation speed of a fully implemented digital
signal processor (DSP). The electronics industry has recognized Microchip’s technology
leadership by featuring the dsPIC architecture on the cover of the June 4, 2001 issue
of Electronic Design, one of the most widely read and respected trade publications
among design engineers.
Beyond these infrastructure and new product advances, our worldwide sales efforts
advanced Microchip’s ability to bloom. In fiscal 2002 we continued our commitment
to customers of all sizes _ deploying “Here to H.E.L.P. (Helping Engineers Launch
Products),” a program that gave any embedded control designer direct access to
Microchip’s internal product engineering experts for free application engineering support.
We hosted Microchip’s Annual Summer Technical Exchange Review (MASTERs) conferences
in Phoenix, Arizona; Shanghai, China; and Bangalore, India. In its fifth year, MASTERs
provides design engineers from around the world with an annual forum for sharing
and exchanging technical information on the complete Microchip product portfolio.
After several years of instilling a “demand creation” philosophy in our worldwide
distribution channel, we continued to achieve record design-in activity. As the fiscal
year concluded, we began to see stability worldwide _ inventory at our distributors
was at the lowest level in nearly five years _ confirming our belief that the inventory
correction was complete. By creating new analysis tools to help us understand and
track distribution sales, inventory trends and worldwide quoting activities, and by
continuing our pursuit of efficient EDI order processing, we were able to effectively
collaborate with our sales partners and further solidify our reputation as best-in-class.
Our international sales team continued its pursuit of delighting our customers. Our
newly deployed Sales Management System, which focuses sales resources on building
strong corporate relationships and solutions for all customer stakeholders, provided
a strong foundation for key customer penetration in the Americas. In the Asia Pacific
region, we expanded our commitment to the China market by tripling the number of
sales offices there, increasing technical sales and applications assistance for this rapidly
growing territory and resulting in record sales. In Europe, we experienced a strong
rebound in sales for the second half of fiscal 2002, while other suppliers to the European
marketplace lagged. Automotive design opportunities were up 37%, with key design
wins at BMW, Daimler-Chrysler, VW, Volvo, Peugeot and TRW. We believe that Microchip
is well positioned in each of the geographies to continue this pattern of growth.
At the close of the calendar year, Microchip was named one of the “Top 20 Electronics
Companies for 2001” by Electronic Buyers’ News, recognizing us among companies
who have distinguished themselves and who are expected to flourish as the economy
improves. Industry research continues to reveal a growing market acceptance and
demand for our products. And looking forward, we see strong bookings and improved
visibility into our business, which are the positive indicators we need to ramp our
wafer fabrication and test operations to meet incremental demand from our customers.
Our stellar performance in fiscal 2002, and the accolades from industry observers, give
us great optimism for continued success. Despite the lingering uncertainty in the
global economy, we remain extremely positive on our long-term outlook and have
begun positioning the Company for an “up-cycle,” during which I believe Microchip
In October, we
introduced
proprietary products
for the low-end
or “thin client” CAN
applications
market.
will earn increasing market share from the competition, and solidify our command of
the embedded control marketplace.
I am proud of the fortitude of this enterprise, the accomplishments in fiscal 2002, and
the nearly 3,050 employees around the world who each contribute to the Silicon Desert
dweller we call Microchip Technology. Daily, I continue my endeavor to nurture the
enterprising spirit among us which allows Microchip to not only survive but thrive.
With my sincere appreciation for your
continued investment in Microchip Technology Inc.,
Among sales opportunities
in emerging Eastern
Europe are designs for power
meters, access controls and
POS terminals, and other
applications that contribute
to improving civil
infrastructure.
Steve Sanghi
President and CEO
Microchip Technology Incorporated
The statements contained in this annual report relating to the power of our enterprise and business model, the .5
micron Flash technology innovation positioning our PICmicro Flash products for many new high-volume, cost-sensitive
markets and applications, our installed cumulative development systems continuing to be a positive indicator of new
customer activity, projected market release dates of several new families of high-performance analog products,
our belief that Microchip is well positioned in each of the geographies to continue a pattern of growth, industry
research continuing to reveal a growing market acceptance and demand for our products, strong bookings and
improved visibility, and our belief that we will continue to increase market share are forward looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may
differ materially because of the following factors, among others: demand for our products and the products of
our customers; our ability to ramp products into volume production; the level of orders that are received and can
be shipped in a quarter; levels of inventories at our distributors and other customers; inventory mix and timing of
customer orders; changes in customer order patterns and seasonality; the level at which design wins become actual
orders and sales; pricing pressures; disruptions in international transport or delivery occasioned by unexpected
increases in prices or supply of oil or by terrorist activity or armed conflict; impact of events outside the United States,
such as the business impact of fluctuating currency rates or unrest or political instability; disruptions in international
transport or delivery; general industry, economic and political conditions; our ability to maintain operating margins;
financial stability in foreign markets; our timely introduction of new technologies; market acceptance of our new
products and those of our customers; competitive factors, such as competing architectures and manufacturing
technologies and acceptance of new products in the markets we generally serve; the costs and outcome of any
litigation involving intellectual property, customer and other issues; difficulties associated with successfully integrat-
ing Microchip and PowerSmart’s businesses and technologies and failure to achieve anticipated synergies in the
PowerSmart acquisition.
For a detailed discussion of these and other risk factors, please refer to Microchip’s filings on Form 10-K and 10-Q.
Our fiscal 2002 Form 10-K follows this letter to shareholders. Additionally, you can obtain copies of Forms 10-K and
10-Q and any other relevant documents for free at the SEC’s Web site (www.sec.gov) or from commercial
document retrieval services.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
FORM 10-K
X
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended March 31, 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
(State of Incorporation)
86-0629024
(I.R.S. Employer Identification No.)
2355 W. Chandler Blvd., Chandler, AZ 85224
(Address of Principal Executive Offices, Including Zip Code)
(480) 792-7200
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value Per Share
Preferred Share Purchase Rights
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 and (2) has been subject to such filing requirements for the past 90 days.
Yes X
No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of Form 10-K or any amendment to this Form 10-K. (X)
The approximate aggregate market value of the voting stock of the registrant beneficially owned by stockholders,
other than directors, officers and affiliates of the registrant, at April 26, 2002 was $5,498,022,097.
Number of shares of Common Stock, $.001 par value, outstanding as of April 26, 2002: 201,113,363.
Documents Incorporated by Reference
Document
Proxy Statement for the 2002 Annual
Meeting of Stockholders
Part of Form 10-K
III
Item 1.
BUSINESS
PART I
Microchip Technology Incorporated was incorporated in Delaware in 1989. In this Form 10-K, “we,” “us,” and “our”
each refers to Microchip Technology Incorporated and its subsidiaries. In January 2001, we merged with TelCom
Semiconductor, Inc., a company with a diversified portfolio of high performance analog and mixed-signal integrated circuits.
Our executive offices are located at 2355 West Chandler Boulevard, Chandler, Arizona 85224-6199 and our telephone
number is (480) 792-7200. Our website address is microchip.com. The information on our website is not incorporated into
this Form 10-K.
We develop and manufacture specialized semiconductor products used by our customers for a wide variety of embedded
control applications. Our product portfolio comprises field–programmable RISC-based microcontrollers that serve 8- and 16-
bit embedded control applications, and a broad spectrum of high-performance linear and mixed-signal, power management
and thermal management devices. We also offer complementary microperipheral products, including interface devices, serial
EEPROMS, and our patented KEELOQ® security devices. We market our products to the automotive, communications,
computing, consumer and industrial control markets. Our quality systems are ISO 9001 (1994 version) and QS9000 (1998
version) certified.
This Form 10-K contains certain forward-looking statements that involve risks and uncertainties, including statements
regarding our strategy, financial performance and revenue sources. We use words such as "anticipate," "believe," "plan,"
"expect," "future," "intend" and similar expressions to identify forward-looking statements. Our actual results could differ
materially from the results anticipated in these forward-looking statements as a result of certain factors including those set
forth under “Item 1 – Business – Additional Factors That May Affect Results of Operations,” beginning below at page 10,
"Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations," beginning at page 20,
and elsewhere in this Form 10-K. Although we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue
reliance on these forward-looking statements. We disclaim any obligation to update information contained in any forward-
looking statement.
Recent Development
On May 22, 2002, we signed a definitive agreement to acquire PowerSmart, Inc., a privately held fabless semiconductor
company that develops and sells high-accuracy field-programmable integrated circuits and battery sensors based on such
integrated circuits. We will pay approximately $54.0 million in cash for PowerSmart and will assume a balance sheet with
approximately $4.0 million in cash and other net assets, and assume certain employee stock options. The transaction will be
accounted for as a purchase. The transaction is expected to close by June 7, 2002, following approval by PowerSmart’s
stockholders.
Industry Background
Competitive pressures require manufacturers to expand product functionality and provide differentiation while
maintaining or reducing cost. To address these requirements, manufacturers use integrated circuit-based embedded control
systems that provide an integrated solution for application-specific control requirements. Embedded control systems enable
our customers to:
•
•
•
•
differentiate their products
replace less efficient electromechanical control devices
add product functionality, and
significantly reduce product cost.
2
In addition, embedded control systems facilitate the emergence of complete new classes of products. Embedded control
solutions have been incorporated into thousands of products and subassemblies in a wide variety of markets worldwide,
including:
•
•
•
•
•
automotive air bag systems
remote control devices
handheld tools
appliances
portable computers
•
•
•
•
•
cordless and cellular telephone accessories
motor controls
security systems
educational and entertainment devices, and
personal digital assistant (PDA) accessories.
Embedded control systems typically incorporate a microcontroller as the principal active, and sometimes sole,
component. A microcontroller is a self-contained computer-on-a-chip consisting of a central processing unit, non-volatile
program memory, random access memory for data storage and various input/output capabilities. In addition to the
microcontroller, a complete embedded control system incorporates application-specific software and may include specialized
peripheral device controllers and internal or external non-volatile memory components, such as EEPROMs, to store
additional program software.
The increasing demand for embedded control has made the market for microcontrollers one of the largest segments of the
semiconductor market. Microcontrollers are currently available in 4-bit through 32-bit architectures. Although 4-bit
microcontrollers are relatively inexpensive, typically costing under $1.00 each, they generally lack the minimum performance
and features required by today's design engineers for product differentiation and are typically used only to produce basic
functionality in products. While 16- and 32-bit architectures provide very high performance, they are prohibitively expensive
for most high-volume embedded control applications, typically costing $6.00 to $10.00 each. As a result, manufacturers of
competitive, high-volume products have increasingly found 8-bit microcontrollers, that typically cost about $1.00 to $6.00
each, to be the most cost-effective embedded control solution. For example, a typical new automobile may include one 32-bit
microcontroller for engine control, three 16-bit microcontrollers for transmission control, audio systems and anti-lock
braking, and up to 50 8-bit microcontrollers to provide other embedded control functions, such as door locking, automatic
windows, sun roof, adjustable seats, electric mirrors, air bags, fuel pump, speedometer, and the security and climate control
systems.
Most microcontrollers available today are ROM-based and must be programmed by the semiconductor supplier during
manufacturing, resulting in 5- to 15-week lead times, based on current market conditions, for delivery of such
microcontrollers. In addition to delayed product introduction, these long lead times can result in potential inventory
obsolescence and temporary factory shutdowns when changes to the firmware are required. To address time-to-market
constraints, some suppliers have made EPROM, EEPROM, or FLASH Memory-based programmable microcontrollers
available for prototyping and preproduction runs. However, these microcontrollers have been relatively expensive, and
manufacturers have still been required to send program code to the semiconductor factory for ROM programming as product
changes are made. As a result, the long lead times for production volume microcontrollers have not been significantly
reduced by traditional approaches.
Our Products
Our strategic focus is on embedded control products, including:
• microcontrollers
•
•
•
high-performance linear and mixed-signal devices
power management and thermal management devices, and
complementary microperipheral products including interface devices, Serial EEPROMs, low power radio
frequency, or RF, devices, and our patented KEELOQ® security devices.
We provide highly cost-effective embedded control products that also offer the advantages of small size, low
voltage/power operation and ease of development, enabling timely and cost-effective product integration by our customers.
3
Microcontrollers
We offer a broad family of microcontroller products featuring a unique, proprietary architecture marketed under the PIC®
brand name. We believe that our PIC® product family is a price/performance leader in the worldwide microcontroller market.
We have shipped approximately 2.0 billion PIC® microcontrollers to customers worldwide since their introduction in 1990.
Our PIC® products are designed for applications requiring field-programmability, high performance, low power and cost
effectiveness. They feature a variety of memory technology configurations, low voltage and power, small footprint and ease
of use. Our performance results from an exclusive product architecture which features dual data and instruction pathways,
referred to as a Harvard dual-bus architecture; a reduced instruction set, referred to as RISC; and variable length instructions;
all of which provide significant speed advantages over the alternative single-bus, CISC architectures. Prices for our
microcontroller products currently range from approximately $0.46 to $10.00 per unit, in volume quantities.
Our original market focus was in the low-cost segment of the 8-bit microcontroller marketplace. With our baseline
products, we built our current market position as the leading worldwide supplier of field programmable microcontrollers.
Over the past eight years, we have introduced more than 152 new microcontrollers targeted at the baseline, mid-range, high-
end and enhanced architecture segments of the traditional 8-bit microcontroller marketplace. Additionally, with our scalable
product architecture, we have successfully targeted both the entry level of the 16-bit microcontroller market as well as the
higher end of the 4-bit microcontroller marketplace, significantly enlarging our addressable market.
We have used our manufacturing experience and design and process technology to bring additional enhancements and
manufacturing efficiencies to the development and production of our PIC® family of microcontroller products. Our extensive
experience base has enabled us to develop our advanced, low cost user programmability feature by incorporating non-volatile
memory, such as Flash, EEPROM and EPROM Memory, into the microcontroller in addition to masked ROM program
memory being included into the microcontroller.
Development Systems
We offer a comprehensive set of low cost and easy-to-learn application development tools. These tools enable system
designers to quickly and easily program a PIC® microcontroller for specific applications and are a key factor for obtaining
design wins.
Our family of development tools operates in the standard Windows® environment on standard PC hardware. Entry-level
systems, which include an assembler and programmer or in-circuit debugging hardware, are priced at less than $200. A fully
configured system, which also provides in-circuit emulation hardware, is priced at approximately $2,000. Customers moving
from entry-level designs to those requiring real-time emulation are able to preserve their investment in learning and tools as
they migrate to future PIC® devices since all systems share the same integrated development environment.
Many independent companies also develop and market application development tools and systems that support our
standard microcontroller product architecture. Currently, there are more than 120 third-party tool suppliers worldwide whose
products support our proprietary microcontroller architecture.
We believe that familiarity with and adoption of our, and third-party, development systems by an increasing number of
product designers will be an important factor in the future selection of our embedded control products. These development
tools allow design engineers to develop thousands of application-specific products from our standard microcontrollers. To
date, we have shipped more than 220,000 development systems.
ASSPs
Our application-specific standard products, referred to as ASSPs, are specialized products designed to perform specific
end-user applications as opposed to our other products that are more general purpose in nature. Our ASSP device families
currently include the KEELOQ® family of secure data transmission products, low power RF products, as well as other
specialized integrated circuit devices.
4
KEELOQ® security products are designed for low cost, secure, uni- and bi-directional communications and verification
purposes. Applications include:
•
•
•
automotive remote keyless entry systems
automotive immobilizer systems
product authentication
•
•
•
residential security
automatic garage and gate openers, and
residential/hotel door access.
Our rfPIC™ products combine either a PIC® microcontroller or a KEELOQ® security device, referred to as an HCS
device, with low power RF technology targeting wireless sensor and control applications. The rfPIC™ or rfHCS products are
designed for battery powered devices requiring a small footprint, low external component count and ease of use. Applications
include:
•
•
•
•
home appliance control
command and control, such as remote thermostat and water irrigation systems control
wireless sensors, such as smoke detectors and water level sensors, and
home security applications, such as garage door openers and remote infrared detectors.
Mixed-Signal Analog and Interface Products
With the integration of TelCom complete, our mixed-signal analog and interface product offering now consists of several
families with over 300 power management, linear, mixed-signal, thermal management and interface products. By the end of
fiscal 2002, our mixed-signal analog and interface products were being shipped to more than 6,000 end customers.
We continue marketing and selling our analog and interface products into our existing microcontroller customer base,
which we refer to as our analog “attach” strategy, as well as to new customers. In addition to our “attach” strategy, we market
and sell other products that may not fit our traditional PIC® microcontroller and memory products customer base. We market
these, and all of our products, based on a “functions” approach, targeted to solve different problems in development of our
customers' products.
Memory Products
Our memory products consist primarily of serial electrically erasable programmable read only memory, referred to as
EEPROMs. We sell these devices primarily into the embedded control market, and we are one of the largest suppliers of such
devices worldwide. EEPROM products are used for non-volatile program and data storage in systems where such data must
be either modified frequently or retained for long periods. Serial EEPROMs have a very low I/O pin requirement, permitting
production of very small devices. As a result, Serial EEPROMs are widely used to supply non-volatile memory in space-
sensitive applications such as:
•
•
•
•
•
home electronics
portable computers
cellular and cordless telephones
pagers, and
remote control devices.
We address customer requirements by offering products with extremely small package sizes and very low operating
voltages for both read and write functions. High performance circuitry and microcode are also available to reduce power
consumption when a device is not in use, while permitting immediate operating capability when required. Our memory
products also feature long data retention and high erase/write endurance.
Manufacturing
The ownership of our manufacturing resources is an important component of our business strategy, enabling us to
maintain a high level of manufacturing control and to be one of the lowest cost producers in the embedded control industry.
By owning our wafer fabrication and the majority of our test operations, and by employing proprietary statistical process
control techniques, we have been able to achieve high production yields. Direct control over manufacturing resources allows
us to shorten our design and production cycles. This control also allows us to capture the wafer manufacturing and a portion
of the assembly and testing profit margin.
5
Our wafer fabrication and wafer test facilities are located in Chandler, Arizona, which we refer to as Fab 1, and Tempe,
Arizona, which we refer to as Fab 2. In July 2000, we acquired a third wafer fabrication facility located in Puyallup,
Washington, which we refer to as Fab 3. Fab 3 is not currently operational.
We perform product packaging and testing at our facilities located near Bangkok, Thailand. We also use third-party
assembly and test contractors in several Asian countries.
Wafers are produced in Class 10 fabrication modules in Fab 1 and Fab 2. Fab 1 currently contains approximately 40,000
square feet of usable clean room space and currently produces 6-inch wafers. Fab 2 currently contains approximately 50,000
square feet of usable clean room space and currently produces 8-inch wafers. Wafer sort is performed in an 8,000 square
foot, Class 10,000 clean room, equipped with automated wafer handlers and test equipment. Fabs 1 and 2 are managed by the
same management team and utilize similar production techniques. Fab 3 contains approximately 114,000 square feet of clean
room space and, when required for production, will produce 8-inch wafers.
By March 31, 2001, we reduced cumulative capacity at Fabs 1 and 2 by approximately 24%, compared to our capacity at
December 31, 2000, in response to business conditions that resulted in decreased product demand. During fiscal 2002, Fabs 1
and 2 operated at approximately 70% of their capacity due to the capacity reductions implemented in the March 2001 quarter
and a one-week plant shutdown in each quarter of fiscal 2002. Operating at lower percentages of capacity has a negative
impact on operating results as certain fixed operating costs are expensed.
Fab 3 is currently being maintained at minimal operating cost until we expect to require its capacity for production. We
currently plan to utilize Fab 3 for our future production requirements. However, as we begin to plan for the mobilization of
Fab 3, we continue to explore other, potentially more cost-effective, alternatives that may become available to meet our future
production requirements.
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. We also continue to increase the percentage of our production on 8-inch wafers. As of March 31, 2002, 8-inch wafers
accounted for approximately 80% of our production. We believe that our successful transition to more advanced process
technologies is important for us to remain competitive. Our future operating results could be adversely affected if any such
transition is substantially delayed or inefficiently implemented.
The foregoing statements related to our continuing exploration of alternatives to meet our future production
requirements and the transition to more advanced process technologies to reduce future manufacturing costs are forward-
looking statements. Actual results could differ materially because of the following factors, among others: increased or
decreased customer demand for our products; the availability of equipment and other supplies; supply disruption;
fluctuations in production yields, production efficiencies and overall capacity utilization; absorption of fixed costs, labor and
other direct manufacturing costs; changes in product mix; and other economic conditions.
We currently employ proprietary design and manufacturing processes in developing our microcontroller and memory
products. We believe our processes afford us both cost-effective designs in existing and derivative products and greater
functionality in new product designs. While many of our competitors develop and optimize separate processes for their logic
and memory product lines, we use a common process technology for both microcontroller and non-volatile memory products.
This allows us to more fully absorb our process research and development costs and to deliver new products to market more
rapidly. Our engineers utilize advanced CAD tools and software to perform circuit design, simulation and layout, and our in-
house photomask and wafer fabrication facilities enable us to rapidly verify design techniques by processing test wafers
quickly and efficiently.
At March 31, 2002, approximately 53% of our assembly requirements were being performed in our Thailand facility.
Third-party contractors located throughout Asia perform the balance of our assembly operations. Our 200,000 square foot
Thailand facility currently tests substantially all of the products produced in Fabs 1 and 2, and also tested substantially all
such products at March 31, 2002. During fiscal 2003, we will construct an approximately 67,000 square foot expansion of
test capacity at our Thailand facility that, once completed, will increase the facility’s test capacity by up to 70%. The
expansion is currently scheduled to be completed by February 2003. See “Item 2 – Properties,” below at page 15.
6
The foregoing statement related to the expected completion date of the expansion of test capacity at our Thailand
facility is a forward looking statement. Actual results could differ materially because of the following factors, among others:
delays in construction and equipment installation of the additional test capacity; the availability of equipment and other
supplies; supply disruption; labor unrest; political instability and expropriation; and other general economic conditions.
We also contract with third-party wafer foundries to fabricate approximately 40% of our analog products. We expect that
by the end of fiscal 2003, approximately 20% of our analog products will be fabricated by third parties. On a strategic basis,
we will use third-party foundries to shorten our product design cycle on certain key technologies and products.
The foregoing statement related to the amount of analog products being fabricated by third parties at the end of fiscal
2003 is a forward-looking statement. Actual results could differ materially because of the following factors, among others:
increased or decreased customer demand for our analog products; difficulties transitioning products from third-party
foundries to our manufacturing processes and technologies; fluctuations in production yields; production efficiencies and
overall capacity utilization; changes in product mix; competitive pressures on prices; and other economic conditions.
Our reliance on 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 these 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 in foreign
locations, and significant foreign sales exposes us to foreign political and economic risks. To date, we have not experienced
any significant interruptions in our foreign business operations. If any significant interruption in our foreign business
operations materializes, our sales could decrease and our performance could suffer.
Due to the high fixed costs inherent in semiconductor manufacturing, consistently high manufacturing yields can have
significant positive effects on gross profit and overall operating results. During fiscal 2002, we continued to focus on
manufacturing productivity, and maintained average wafer fab line yields in excess of 95%. Our manufacturing yields are
primarily driven by a comprehensive implementation of statistical process control, extensive employee training and selective
upgrading of our manufacturing facilities and equipment. Maintenance of manufacturing productivity and yields are
important factors in the achievement of our operating results. 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.
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. An interruption of any raw materials or equipment sources could harm
our business.
Research and Development
We are committed to continuing our investment in new and enhanced products, including development systems, and in
our design and manufacturing process technologies. We believe these investments are significant factors in maintaining our
competitive position. Our current research and development, or R&D, activities focus on the design of new microcontroller,
16-bit digital signal controller, memory and mixed-signal products, ASSPs, new development systems, and software and
application-specific software libraries. We are also developing new design and process technology to achieve further cost
reductions and performance improvements in existing products. In fiscal 2002, our R&D expenses were $81.7 million,
compared to $78.6 million in fiscal 2001 and $52.4 million in fiscal 2000.
7
Sales and Distribution
We market our products worldwide primarily through a network of direct sales personnel and electronics distributors.
From time to time, we expect that we may restructure certain portions of our sales network as we deem appropriate given the
level of our business.
Our direct sales force focuses primarily on major strategic accounts in three geographical markets: the Americas, Europe
and Asia. We currently maintain sales and support centers in major metropolitan areas in North America, Europe and Asia.
We believe that a strong technical service presence is essential to the continued development of the embedded control market.
The majority of our field sales engineers, referred to as FSEs, field application engineers, referred to as FAEs, and sales
management have technical degrees and have been previously employed in an engineering environment. We believe that the
technical knowledge of our sales force is a key competitive advantage in the sale of our products. Currently, we strive to have
at least one dedicated FAE in every sales and support center. The primary mission of our FAE team is to provide technical
assistance to strategic accounts and to conduct periodic training sessions for FSEs and distributor sales teams. FAEs also
frequently conduct technical seminars in major cities around the world, and work closely with our distributors to provide
technical assistance and end-user support.
Distributors focus primarily on servicing the product and technical support requirements of our broad base of small- and
medium-sized customers. We believe that distributors provide an effective means of reaching this broad customer base.
In fiscal 2002, we derived 62% of our net sales from sales through distributors and 35% of our net sales from direct sales
to original equipment manufacturers, referred to as OEM, customers. Distributors accounted for 65% of our net sales in fiscal
2001 and 63% of our net sales in fiscal 2000. One distributor accounted for 13% of our total net sales for fiscal 2002, 14%
for fiscal 2001 and 14% for fiscal 2000. No other distributor or end customer accounted for more than 10% of our net sales
in fiscal years 2002, 2001 or 2000.
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 future net sales in a given quarter and could result in an increase in inventory returns.
As is common in the semiconductor industry, we provide limited price protection to our distributors. Under our current
policy, distributors receive a credit for the difference, at the time of a price reduction, between the price they were originally
charged for products in inventory and the reduced price that we subsequently charge distributors. From time to time, and on a
case-by-case basis, distributors may also receive credit for specific transactions that we approve in advance. We also grant
some distributors limited rights to return products. We do not recognize net sales and profit on sales to distributors that have
rights of return and price protection until those distributors have sold the products to end customers.
Foreign sales, primarily in Asia and Europe, represented 69% of our total net sales in fiscal 2002, compared to 68% in
each of fiscal 2001 and fiscal 2000. International sales are predominately billed in U.S. Dollars. Although foreign sales are
subject to certain government export restrictions, we have not experienced any material difficulties as a result of export
restrictions to date. For a detailed description of our sales by geographic region, see also "Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations – Results of Operations - Net Sales," at page 20, and Note 16
to our consolidated financial statements.
Backlog
As of April 26, 2002, our backlog was approximately $119.9 million, compared to $137.9 million as of April 27, 2001.
Our backlog includes all purchase orders scheduled for delivery within the subsequent 12 months.
We primarily produce standard products that can be shipped from inventory within a short time after we receive an order.
Our business and, to a large extent, that of the entire semiconductor industry, is characterized by short-term orders and
shipment schedules. Orders constituting our current backlog are subject to changes in delivery schedules, or to cancellation at
the customer’s option without significant penalty. Thus, while backlog is useful for scheduling production, backlog as of any
particular date may not be a reliable measure of sales for any future period. Orders received in a quarter for shipment in that
quarter, which we refer to as turns orders, are an important component of our quarterly operating results. See “Additional
Factors That May Affect Results of Operations,” beginning below at page 10.
8
Competition
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 greater financial, technical, marketing, distribution and other resources than we with which to pursue
engineering, manufacturing, marketing and distribution of their products. Emerging companies may also increase their
participation in the market for embedded control applications. Furthermore, capacity in the semiconductor industry is
increasing over time and such increased capacity or improved product availability could adversely affect our competitive
position.
We currently compete principally on the basis of the technical innovation and performance of our embedded control
products, including such products’:
•
•
•
•
speed
functionality
density
power consumption
•
•
•
•
reliability
packaging alternatives
price
availability
We believe that other important competitive factors in the embedded control market include:
•
•
•
ease of use
functionality of application development systems, and
technical service and support.
We believe that we compete favorably with other companies on all of these factors, but we may be unable to compete
successfully in the future, which could harm our business.
Patents, Licenses and Trademarks
As of March 31, 2002, we owned 197 U.S. patents and 78 foreign patents, expiring on various dates between 2003 and
2021, and had an additional 140 U.S. patent applications and 146 foreign patent applications pending. We 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 believe, however, that our
continued success depends primarily on such factors as the technological skills and innovative abilities of our personnel rather
than on our patents.
We have entered into certain intellectual property licenses and cross-licenses with other companies related to
semiconductor products and manufacturing processes. 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. We investigate all such notices and respond as we
believe is appropriate. Based on industry practice, we believe that in most cases we can obtain any necessary licenses or other
rights on commercially reasonable terms, but we cannot assure that licenses would be on acceptable terms, that litigation
would not ensue or that damages for any past infringement would not be assessed. Litigation, which could result in
substantial cost to us and divert management effort, may be necessary to enforce our patents or other intellectual property
rights, or to defend us against claimed infringement of the rights of others. The failure to obtain necessary licenses or other
rights, or litigation arising out of infringement claims, could harm our business. See "Item 3 – Legal Proceedings," beginning
below at page 16.
9
Environmental Regulation
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, including the
Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the
Superfund Amendment and Reauthorization Act, the Clean Air Act and the Water Pollution Control Act. We believe that we
have obtained all of the environmental permits required to conduct our business. 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. While we have
not experienced any materially adverse effects on our operations from governmental 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 may occur that could subject us to future costs or liabilities.
Employees
As of April 26, 2002, we had 3,041 employees worldwide, including 1,957 in manufacturing, 540 in R&D, 397 in sales
and marketing and 147 in finance and administration. Approximately 41% of our employees work at our Thailand facility.
No employees in the U.S. or Thailand are represented by a labor organization. We have never had a work stoppage and
believe that our employee relations are good.
Executive Officers
The following sets forth certain information regarding our executive officers as of April 26, 2002:
Name
Steve Sanghi
David S. Lambert
Mitchell R. Little
Gordon W. Parnell
Richard J. Simoncic
Age
46
50
49
52
38
Position
Chairman of the Board, President and Chief Executive Officer
Vice President, Fab Operations
Vice President, Worldwide Sales and Applications
Vice President, Chief Financial Officer
Vice President, Analog and Interface Products Division
Mr. Sanghi has been President since August 1990, CEO since October 1991, and Chairman of the Board since October
1993. He has served as a director since August 1990. Mr. Sanghi holds an M.S. degree in Electrical and Computer
Engineering from the University of Massachusetts and a B.S. degree in Electronics and Communication from Punjab
University, India.
Mr. Lambert has served as Vice President, Fab Operations since November 1993. From 1991 to November 1993, he
served as Director of Manufacturing Engineering, and from 1988 to 1991, he served as Engineering Manager of Fab
Operations. Mr. Lambert holds a B.S. degree in Chemical Engineering from the University of Cincinnati.
Mr. Little has served as Vice President, Worldwide Sales and Applications since July 2000. From April 1998 through
July 2000, he served as Vice President, Americas Sales. From November 1995 to April 1998, he served as Vice President,
Standard Microcontroller and ASSP Division. Mr. Little holds a BSET from United Electronics Institute.
Mr. Parnell has served as Vice President and Chief Financial Officer since May 2000. He served as Vice President,
Controller and Treasurer from April 1993 to May 2000. Mr. Parnell holds a finance/accounting qualification with the
Association of Certified Accountants from Edinburgh College, Scotland.
Mr. Simoncic has served as Vice President, Analog and Interface Products Division since September 1999. From
January 1996 to September 1999, he served as Vice President, Memory and Specialty Products Division Mr. Simoncic holds
a B.S. degree in Electrical Engineering Technology from DeVry Institute of Technology.
10
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-K 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 operating results include:
demand for our products in the distribution and OEM channels
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
possible disruption in commercial activities or international transport or delivery caused by terrorist activity,
armed conflict or unexpected increases in the price or supply of oil, which could result in changes in logistics
and security arrangements, and reduced customer purchases relative to 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, 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.
Our operating results are also adversely affected when we operate at less than 100% capacity as was the case throughout
fiscal 2002. Lower capacity utilization results in certain costs being charged directly to expense and lower gross margins.
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 orders received in that quarter for shipment in that
quarter, which we refer to as turns orders, and shipments from backlog. 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 is dependent on overall semiconductor industry conditions and product lead
times. Shorter lead times have the effect of increasing turns orders as a percentage of our business in any given quarter and
reducing 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 60%. As of April 1, 2002, we required turns orders of approximately 57% in
order to achieve our revenue target for the first quarter of fiscal 2003. Because turns orders are difficult to predict, increased
levels of turns orders make our net sales more difficult to forecast.
11
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.
Intense competition in our markets may lead to 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 services and our ability to address the needs of our customers
our success in designing and manufacturing new products including those implementing new technologies
•
•
•
• manufacturing capacity utilization and manufacturing yields
•
•
•
•
•
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•
hiring and retention of qualified engineering and management personnel
adequate supplies of raw materials and other supplies at acceptable prices
the rate at which customers incorporate our products into their own products
product introductions by our competitors
the number, nature and success of our competitors in a given market
general market and economic conditions, and
protection of our products and processes by effective utilization of intellectual property laws.
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 products by continuing to introduce new products with more features and higher prices. We experienced
significant competitive pricing pressures in our Serial EEPROM product lines during the first half of fiscal 2002, which
moderated in the third and fourth quarters.
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.
12
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.
We are dependent on several third-party contractors in Asia to perform key manufacturing functions for us.
We depend on 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 seek to reduce our dependence on
these third-party contractors, disruption or termination of any of these sources could harm our business and operating results.
Our reliance on 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. An interruption of any raw materials or equipment sources could harm
our business.
Our business is highly dependent on selling through distributors.
Sales through distributors accounted for 62% of our net sales for the fiscal year ended March 31, 2002. Sales through
one distributor accounted for 13% of our total net sales for the fiscal year ended March 31, 2002. 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. Over the last 18 months, the
industry has experienced a significant economic downturn, characterized by diminished product demand and production
13
over-capacity. 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 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 may 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. We purchase a substantial portion of our raw
materials and equipment from foreign suppliers. In addition, we own product assembly and testing facilities located near
Bangkok, Thailand. We also use various third-party contractors located throughout Asia for a portion of our assembly and
testing and a portion of our analog product wafer fabrication requirements.
14
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 process. 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 may occur that could subject us to future costs or liabilities.
In 1993, TelCom 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.
On May 22, 2002, we announced that we had signed a definitive agreement to acquire PowerSmart, Inc. 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 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.
15
PowerSmart 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 are acquiring 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.
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 semiconductor 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 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 2.
PROPERTIES
Our current headquarters, an R&D center and Fab 1 are located in four buildings totaling approximately 415,000 square
feet situated on a 77-acre parcel of land in Chandler, Arizona.
A second U.S. manufacturing site, consisting of Fab 2, office and warehouse facilities and an R&D center, is located in
three buildings totaling approximately 379,000 square feet on a 22-acre parcel of land in Tempe, Arizona.
Our third U.S. manufacturing site, consisting of Fab 3, office and warehouse facilities and an R&D center, is located in
eight buildings totaling approximately 700,000 square feet on a 92-acre parcel of land in Puyallup, Washington. We acquired
this property in July 2000. We are currently maintaining Fab 3 at a minimum operating cost until we expect to require its
capacity for production. We currently plan to utilize Fab 3 for our future production requirements. However, as we begin to
plan for the mobilization of Fab 3, we continue to explore other, potentially more cost-effective, alternatives that may become
available to meet our future production requirements.
We own the Chandler, Tempe and Puyallup facilities.
We also own a final test and assembly facility located near Bangkok, Thailand. The Thailand final test and assembly
operations are housed in a 200,000 square foot facility that is owned by our Thailand subsidiary, and are located in the
Alphatechnopolis Industrial Park in Chacherngsao, Thailand, near Bangkok. During fiscal 2003, we will construct an
expansion of approximately 67,000 square feet at our Thailand facility. The expansion is currently scheduled to be completed
by February 2003. This area will house additional test capacity and will also be available for incremental assembly capacity.
The Thailand facility is situated on land to which we expect to acquire title in accordance with an agreement between the
16
landowner and us. To date, progress towards obtaining the full title has been hampered by the condition of the Thailand
financial industry and general economic conditions in Thailand. At this time it is not possible to estimate when full title
transfer will be completed.
To support our sales activities, we lease space for 32 sales and support centers in major metropolitan areas in the United
States, Europe and Asia, as well as three design centers (one each in California, Switzerland and India). Our aggregate
monthly rental payment for our leased facilities is approximately $242,000.
We currently believe that our existing facilities, together with the additional test capacity presently under construction at
our Thailand facility, will be adequate to meet our requirements for the next 12 months.
As conditions in the insurance market have become more difficult over the last fiscal year, our property 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 coverage have generally
fluctuated over time as the insurance industry reacts to various market forces and we will consider purchasing additional
coverage if and when the availability and pricing becomes more favorable.
The foregoing statements related to our continuing exploration of alternatives to meet our future production
requirements, the expected completion date of construction of additional test capacity at our Thailand facility, the
acquisition of title to the land on which the Thailand facility is situated, the adequacy of existing facilities for the next 12
months and changes in insurance coverage are forward-looking statements. Actual results could differ materially because of
the following factors, among others: the cyclical nature of the semiconductor industry and the markets addressed by our
products; demand for our products; the availability of equipment and other supplies; fluctuations in production yields,
production efficiencies and overall capacity utilization; competitive pressures on prices; political instability and
expropriation; cost and availability of insurance; and other economic conditions. See also the factors set forth under “Item
1 – Business – Additional Factors That May Affect Results of Operations,” beginning at page 10 of this report.
Item 3.
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). 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. Prior to filing suit, we had engaged in
good faith licensing negotiations with Philips for several years, but the discussions had reached a point of impasse when
Philips substantially increased its royalty demands. 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. Despite the litigation, it is possible that discussions between the parties could
resume for the purpose of resolving this matter by agreement, which could include a new license on commercially reasonable
terms. The litigation is in pre-trial stages. 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.
In the ordinary course of our business, we are involved in a limited number of legal actions, both as plaintiff and
defendant, and could incur uninsured liability in any one or more of them. Although the outcome of these actions is not
presently determinable, we believe that the ultimate resolution of these matters will not harm our business. Litigation relating
to the semiconductor industry is not uncommon, and we are, and from time to time have been, subject to such litigation. No
assurances can be given with respect to the extent or outcome of any such litigation in the future.
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
17
PART II
Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol "MCHP." Our common stock has been
quoted on the Nasdaq National Market since our initial public offering on March 19, 1993. The following table sets forth the
quarterly high and low closing prices of the common stock as reported by the Nasdaq National Market for the last two years,
adjusted to reflect a 3-for-2 stock split effected in May 2002 and a 3-for-2 stock split effected in September 2000:
Fiscal 2002
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$ 22.29
25.59
27.84
28.81
Low
$ 14.96
16.89
16.81
22.26
Fiscal 2001
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$ 32.33
31.94
24.79
20.71
Low
$ 22.22
22.04
13.33
14.54
On May 29, 2002, there were approximately 526 holders of record of our common stock. This figure does not reflect
beneficial ownership of shares held in nominee names.
We have not paid any cash dividends since our inception. We currently anticipate that we will retain all of our future
earnings for use in the expansion and operation of our business. Thus, we do not anticipate paying any cash dividends on our
capital stock in the foreseeable future.
Item 6.
SELECTED FINANCIAL DATA
You should read the following selected consolidated financial data for the five-year period ended March 31, 2002 in
conjunction with our Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Item 7 of this Form 10-K. Our consolidated income statement
data for each of the years in the three-year period ended March 31, 2002, and the balance sheet data as of March 31, 2002 and
2001, are derived from our audited consolidated financial statements, included in Item 8 of this Form 10-K.
We effected a 3-for-2 stock split, in the form of a stock dividend, on May 8, 2002. All references in this report to the
number of shares and earnings per share have been adjusted to reflect this stock split.
THE REMAINDER OF THIS PAGE IS LEFT BLANK INTENTIONALLY
18
Income Statement Data(1):
Net sales.............................................
Cost of sales .......................................
Research and development.................
Selling, general and administrative ....
Special charges (2).............................
Operating income...............................
Interest income (expense), net............
Other income (expense), net ..............
Net loss in equity investment (2)........
Gain on sale of investment (2) ...........
Income before income taxes...............
Provision for income taxes.................
Net income.........................................
Basic net income per share.................
Diluted net income per share..............
Basic common shares outstanding .....
Diluted common shares outstanding ..
Balance Sheet Data(1):
2002
$ 571,254
284,518
81,650
82,615
---
122,471
4,344
376
---
---
127,191
32,377
$ 94,814
0.48
$
0.45
$
199,184
208,907
Year Ended March 31,
2001
1999
2000
(in thousands, except per share data)
1998
$ 715,730
335,016
78,595
102,620
17,358
182,141
12,741
2,080
(2,190)
1,427
196,199
53,363
$ 142,836
0.74
$
0.70
$
193,632
205,190
$ 553,051
269,611
52,365
86,750
(2,131)
146,456
1,569
770
---
5,819
154,614
39,441
$ 115,173
0.63
$
0.59
$
183,471
195,509
$ 460,723
240,170
46,375
72,502
34,495
67,181
(1,824)
665
---
---
66,022
19,481
$ 46,541
0.25
$
0.24
$
185,250
193,323
$ 452,329
230,713
43,817
77,079
13,264
87,456
1,505
(71)
---
---
88,890
26,226
$ 62,664
0.32
$
0.31
$
193,011
202,925
Year Ended March 31,
2002
2001
2000
(in thousands)
1999
1998
Working capital..................................
Total assets.........................................
Long-term obligations, less current
portion ............................................
Stockholders' equity ...........................
$ 381,211
1,275,600
$ 176,936
1,161,349
$ 225,504
861,352
$ 110,888
546,396
$
79,852
578,427
---
1,075,779
---
942,848
---
662,878
27,678
384,715
12,230
403,729
(1) On January 16, 2001, we merged with TelCom and accounted for the merger as a pooling-of-interests.
Accordingly, the selected financial data has been restated to include the operations of TelCom for all periods
presented. TelCom had a December 31 fiscal year end, thus the selected financial data presented for March 31,
2000, 1999 and 1998 have been combined with the operations of TelCom as of and for the years ended
December 31, 1999, 1998 and 1997. We have conformed the TelCom financial data to a March 31 year end for
the March 31, 2001 fiscal year.
(2) There were no special charges during the fiscal year ended March 31, 2002. Detailed discussions of the special
charges, net loss in equity investment, and gain on sale of investment for the fiscal years ended March 31, 2001
and 2000 are contained in Note 2 to the Consolidated Financial Statements. Detailed explanations of the special
charges for the fiscal years ended March 31, 1999 and 1998 are provided below. The following table presents a
summary of special charges for the four-year period ended March 31, 2001:
19
Restructuring charges .....................
TelCom merger charges .................
Intellectual property settlement ......
Legal charges .................................
Keeloq acquisition..........................
Sales restructuring ..........................
Loss on foundry investment ...........
2001
$ 6,049
10,949
---
---
---
---
---
Year Ended March 31,
1999
2000
(in thousands)
$
269
---
(3,600)
1,200
---
---
---
$ 20,908
---
5,105
---
7,632
850
---
1998
$
---
---
5,000
---
---
---
8,264
Totals..............................................
$ 17,358
$ 2,131
$ 34.495
$ 13,624
Fiscal 1999
We implemented two restructuring actions during the quarter ended March 31, 1999. First, we eliminated our 5-inch
wafer fabrication line, which resulted in a restructuring charge of $7.6 million in the March 1999 quarter. We also decided to
restructure our test operations by closing our Taiwan facility and migrating that test capacity to our lower-cost Thailand
facility. This action resulted in a restructuring charge of $6.1 million in the March 1999 quarter. These two restructuring
actions were undertaken to improve manufacturing flexibility, close our least cost-effective production capacity, and thereby
reduce operating costs.
Included in the restructuring charges resulting from elimination of the 5-inch production capacity was:
•
•
•
$6.8 million related to equipment that was written off
$0.3 million related to employee severance costs, and
$0.5 million related to other restructuring costs.
Included in the restructuring charges resulting from the closure of the Taiwan facility was $5.6 million related to
employee severance costs and $0.5 million related to other restructuring costs.
Included in the special charge recorded in the quarter ended March 31, 1999 was $1.8 million related to two legal
settlements associated with intellectual property matters, and $0.4 million related to the restructure of a portion of our sales
infrastructure.
During the quarter ended June 30, 1998, we recognized a special charge of $3.8 million, which was comprised of a $3.3
million legal settlement with another company involving an intellectual property dispute and a $0.5 million charge associated
with the restructuring of a portion of our sales infrastructure. We also incurred charges of $1.7 million for the write-off of
obsolete products due to the introduction of newer products, charging this to cost of goods sold.
In August 1998, TelCom announced plans to shut down its 5-inch wafer fabrication facility in Mountain View, California
and use third party foundries for all of its wafer fabrication requirements. In conjunction with the shut-down of its wafer
fabrication facility, TelCom recorded fab closure charges totaling $6.5 million, predominately associated with the write-down
and write-off of manufacturing equipment and facilities improvements. TelCom recorded one-time charges associated with its
manufacturing restructuring of $0.7 million. All restructuring reserves relating to these charges have been fully utilized.
20
KEELOQ® Hopping Code
On November 17, 1995, we acquired the KEELOQ® hopping code technology and patents developed by Nanoteq Ltd. of
the Republic of South Africa, and marketing rights related thereto. The acquisition of KEELOQ was treated as an asset
purchase for accounting purposes. The amount paid for KEELOQ, including related costs, was $12.9 million. In December
1995, we wrote off $11.4 million, which represented the portion of the purchase price relating to in-process R&D costs, as
well as all acquisition-related expenses. The remaining $1.5 million was capitalized as purchased technology. The amount of
the purchased technology was determined by applying a discounted cash flow model to the expected future revenue stream of
the products acquired.
In March 1999, a second cash payment of $10.3 million was made in accordance with the terms of the original purchase
agreement, and was capitalized as purchased technology. In addition, $1.1 million of legal costs paid to defend the KEELOQ
intellectual property was also capitalized, resulting in a total net carrying amount of $11.9 million including the $0.5 million
of residual asset value capitalized a part of the initial payment, as of March 31, 1999. Although we were obligated to make
the second payment, we were concerned that the recoverability of the carrying amount of the technology asset might not be
recoverable due to change in the forecasted cash flows related to the KEELOQ products. In accordance with SFAS 121,
Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed Of, paragraphs 4 through 11,
we prepared an undiscounted cash flow analysis at March 31, 1999, which determined that the value of the KEELOQ
technology was impaired. We measured the impairment using a discounted cash flow analysis to determine the fair value of
the asset, which was deemed to be $4.3 million, resulting in an impairment write-down of $7.6 million. The value of the
purchased technology remaining at March 31, 1999 of $4.3 million was amortized over 3 years, the remaining life of the
technology.
All restructuring reserves relating to the fiscal 1999 actions have been fully utilized.
Fiscal 1998
On January 13, 1998, we finalized a settlement of patent litigation with Lucent Technologies Inc. resulting in a
$5.0 million special charge during the quarter ended December 31, 1997. This settlement is described in more detail at
page 27, below, and in Note 2 to the Consolidated Financial Statements.
In November 1995, TelCom entered into certain agreements with IC WORKS, Inc., a privately held company located in
San Jose, California under which TelCom purchased $3.0 million of IC WORKS preferred stock and provided $10.4 million
in capital equipment. In return for this investment, TelCom received a five-year guarantee of submicron wafer fabrication
capacity at specified prices, which was projected to start in late 1997. The shortage of wafer capacity that was projected in
late 1995 had diminished and following late 1995, substantial foundry capacity was available worldwide while the overall
demand had not increased proportionately. Consequently, wafer pricing had decreased dramatically, which changed the
economic viability of IC WORKS investment. As a result, in fiscal 1998, TelCom recorded a loss of $8.3 million on its IC
WORKS investment consisting of:
•
•
•
$3.0 million write-down of the preferred stock
$5.2 million loss on the sale of capital equipment, and
$0.1 million of costs associated with prepayment penalties on the financing of the capital equipment and legal
fees.
All restructuring reserves relating to the fiscal 1998 actions have been fully utilized.
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-
looking statements that involve risks and uncertainties, including statements regarding our strategy, financial performance
and revenue sources. We use words such as "anticipate," "believe," "plan," "expect," "future," "intend" and similar
expressions to identify forward-looking statements. Our actual results could differ materially from the results anticipated in
these forward-looking statements as a result of certain factors including those set forth in this Item 7, and under “Item 1 –
Business – Additional Factors That May Affect Results of Operations,” beginning at page 10, above, and elsewhere in this
Form 10-K. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot
21
guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these
forward-looking statements. We disclaim any obligation to update information contained in any forward-looking statement.
On January 16, 2001, we merged with TelCom and accounted for the merger as a pooling-of-interests. Accordingly, our
consolidated financial statements have been restated to include the operations of TelCom for all periods presented. TelCom
had a December 31 fiscal year end, thus the consolidated financial statements presented for March 31, 2000, 1999 and 1998
have been combined with the operations of TelCom as of and for the years ended December 31, 1999, 1998 and 1997. We
have conformed the TelCom financial data to a March 31 year end for the March 31, 2001 fiscal year.
Results of Operations
The following table sets forth certain operational data as a percentage of net sales for the years indicated:
Net sales................................................................................
Cost of sales..........................................................................
Gross profit ...........................................................................
Research and development ...................................................
Selling, general and administrative .......................................
Special charges .....................................................................
Operating income..................................................................
Net Sales
2002
100.0%
49.8%
50.2%
14.3%
14.5%
---
21.4%
Year Ended March 31,
2001
100.0%
46.8%
53.2%
11.0%
14.4%
2.4%
25.4%
2000
100.0%
48.7%
51.3%
9.5%
15.7%
(0.4%)
26.5%
We have one operating industry segment and engage primarily in the design, development, manufacture and marketing of
semiconductor products. We sell our products to distributors and OEMs in a broad range of market segments, perform on-
going credit evaluations of our customers and generally require no collateral.
Our net sales of $571.3 million in fiscal 2002 decreased by $144.5 million, or 20.2%, over fiscal 2001, and net sales of
$715.7 million in fiscal 2001 increased by $162.7 million, or 29.4%, over fiscal 2000. The decrease in net sales in fiscal
2002 compared to fiscal 2001 resulted primarily from slowing demand from end markets, and to a lesser extent from
inventory corrections at our customers, overall semiconductor industry conditions and Serial EEPROM pricing declines. We
believe that we have continued to grow our percentage of market share in the embedded control market over the last three
fiscal years.
Our sales increases prior to fiscal 2002 can be attributed to several factors including:
•
•
•
new product introductions
strong demand for new and existing products which address our customers’ requirements, and
focused technical resources that assist our customers in successfully bringing their products to market.
Our microcontroller product line represents the largest component of our total net sales. Microcontrollers and associated
application development systems accounted for approximately 78% of our total net sales in fiscal 2002, approximately 65%
of our total net sales in fiscal 2001 and approximately 72% of our total net sales in fiscal 2000. Net sales of our
microcontroller products decreased approximately 4% in fiscal 2002, compared to fiscal 2001. The decrease in net sales of
our microcontroller products was significantly lower than the decrease in our other product lines due to our continuing design
win performance and the overall positioning of our proprietary product offerings. Net sales of our microcontroller products
increased approximately 18% in fiscal 2001, compared to fiscal 2000, driven by increased end market demand, our continued
design win performance and increases in our overall market share. 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, due primarily to competitive
conditions. We have been able to moderate average selling price declines in our microcontroller product lines by introducing
new products with more features and higher prices.
22
Sales of our Serial EEPROM products accounted for approximately 14% of our total net sales in fiscal 2002,
approximately 25% of our total net sales in fiscal 2001 and approximately 18% of our total net sales in fiscal 1999. Net sales
of our Serial EEPROM products decreased approximately 54% in fiscal 2002, compared to fiscal 2001, driven by over supply
in the market and significant pricing pressures. Net sales of our Serial EEPROM products increased approximately 81% in
fiscal 2001, compared to fiscal 2000 driven primarily by customers’ real and perceived supply and demand conditions within
the market. Serial EEPROM product pricing responds to changes in supply and demand factors over time, being more
commodity than proprietary in nature. During the periods covered by this report, we have experienced various Serial
EEPROM product pricing trends due to market conditions. In fiscal 2000, Serial EEPROM product pricing trends showed
modest declines, while in fiscal 2001, pricing actually increased due to supply constraints. However, we experienced
significant competitive 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. We anticipate Serial EEPROM pricing to be flat to up 3% in the
first quarter of fiscal 2003.
Sales of mixed-signal analog and interface products accounted for approximately 7% of our total net sales in fiscal 2002,
approximately 10% of our total net sales in fiscal 2001 and approximately 11% of our total net sales in fiscal 2000. Net sales
of our analog and interface products decreased approximately 39% in fiscal 2002, compared to fiscal 2001. The decrease in
net sales of our analog and interface products can be attributed to decreased demand, primarily in the telecommunications
market. Net sales of our analog and interface products increased approximately 17% in fiscal 2001, compared to fiscal 2000
driven by customers’ real and perceived supply and demand conditions within the market. 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 of 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, similar to the pricing pressures experienced in our Serial
EEPROM product lines. During fiscal 2002, our analog and interface products experienced price reductions of approximately
25%. The price decreases experienced in fiscal 2002 can be attributed to the supply and demand environment as well as the
integration of the TelCom products into our pricing structure. We anticipate the proprietary portion of our analog and
interface products to increase over time.
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 adversely affect our operating results.
Sales by product line for the fiscal years ended March 31, 2002, 2001 and 2000 were as follows (in thousands):
2002
Microcontrollers ......................
$446,753
Serial EEPROM products ........
Analog and interface products .
81,982
42,519
Year Ended March 31,
%
78.2
14.4
7.4
2001
$467,661
178,912
69,157
%
65.3
25.0
9.7
2000
$395,510
98,658
58,883
%
71.5
17.8
10.7
Total Sales ...............................
$571,254
100.0% $715,730
100.0%
$553,051
100.0%
Our net sales in any given quarter depend upon a combination of orders received in that quarter for shipment in that
quarter, which we refer to as turns orders, and shipments from backlog. 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 with product lead times, which are currently between two and four weeks generally,
essentially unchanged from lead times a year ago. Shorter lead times have the effect of increasing turns orders as a percentage
of our business in any given quarter and reducing our visibility on future product shipments. With current lead times between
two and four weeks, customers do not place orders beyond their immediate requirements and therefore, we do not currently
have the order visibility we experienced throughout fiscal 2001. 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 approximately 20% and 60%. At April 1, 2002, we required turns orders of
approximately 57% in order to achieve our revenue target for the first quarter of fiscal 2003. At January 1, 2002, we required
turns orders of approximately 61% to achieve our revenue target for the fourth quarter of fiscal 2002.
23
Turns orders are difficult to predict, and we may not experience the combination of turns orders and shipments from
backlog in any particular 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 relative to our projections, our revenue and operating results will suffer.
The foregoing statements regarding average selling prices, pricing pressures in certain microcontroller product lines,
pricing fluctuations in our non-proprietary analog and interface products lines, the increase in the portion of our analog and
interface product line that is proprietary, pricing increases for Serial EEPROM products in the first quarter of fiscal 2003
and the level of turns orders required to meet our revenue target for the first 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; our inventory mix
and timing of customer orders; customers’ inventory levels, order patterns and seasonality; the level at which our design
wins become actual orders and sales; competition and competitive pressures on pricing and product availability; possible
disruption in commercial activities occasioned by terrorist activity and armed conflict, which could result in changes in
logistics and security arrangements, and reduced customer 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; fluctuations in production yields, production efficiencies and overall capacity utilization; changes in
product mix; absorption of fixed costs, labor and other fixed manufacturing costs; competitive factors, such as competing
architectures and manufacturing technologies and acceptance of new products in the markets we generally serve; and
general industry, economic and political conditions.
Distributors accounted for 62% of our net sales in fiscal 2002, 65% of our net sales in fiscal 2001 and 63% of our net
sales in fiscal 2000. Our largest distributor accounted for approximately 13% of our net sales in fiscal 2002, 14% of our net
sales in fiscal 2001 and 14% of our net sales in fiscal 2000. 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 product returns. At March 31, 2002, distributors were maintaining an average of 2.4 months of
inventory of our products. Over the past three fiscal years, the months of inventory maintained by our distributors have
fluctuated between approximately 2.4 and 3.7 months. We believe that distributor inventory levels are at or near
replenishment levels and that the dollar value and average months’ of distributor inventory will increase in future periods as
our business returns to a pattern of growth.
The foregoing statements regarding distributors’ inventory levels being at or near replenishment levels, the dollar value
and average months’ of distributor inventory increasing in future periods and our business returning to a pattern of growth
are forward-looking statements. Actual results could differ materially because of the following factors, among others:
inventory levels at our distributors and at the customers of our distributors; demand for our products and the products of our
customers; the level at which our design wins become actual orders and sales; our inventory mix and timing of customer
orders; order patterns and seasonality; competition and competitive pressures on pricing and product availability; possible
disruption in commercial activities occasioned by terrorist activity and armed conflict, which could result in changes in
logistics and security arrangements, and reduced customer 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; competitive factors, such as competing architectures and manufacturing technologies and
acceptance of new products in the markets we generally serve; and general industry, economic and political conditions.
Sales by geography for the fiscal years ended March 31, 2002, 2001 and 2000 were as follows (in thousands):
2002
%
2001
%
2000
%
Year Ended March 31,
Americas
Europe
Asia
$ 192,924
179,355
198,975
33.8
31.4
34.8
$ 236,295
219,302
260,133
33.0
30.6
36.4
$ 191,550
170,072
191,429
34.6
30.8
34.6
Total Sales
$ 571,254
100.0% $ 715,730
100.0% $ 553,051
100.0%
24
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 fiscal 2002 and approximately 68% of our net sales in each of fiscal
2001 and fiscal 2000. The majority of our foreign sales are U.S. Dollar denominated.
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. At March 31, 2002, we had no
significant foreign currency contracts outstanding.
Gross Profit
Our gross profit was $286.7 million in fiscal 2002, $380.7 million in fiscal 2001 and $283.4 million in fiscal 2000.
Gross profit as a percent of sales was 50.2% in fiscal 2002, 53.2% in fiscal 2001 and 51.3% in fiscal 2000.
The most significant factors affecting gross profit percentage in the periods covered by this report were:
•
•
reduced levels of manufacturing capacity utilization in fiscal 2002 compared to the previous two fiscal years
continued cost reductions in wafer fabrication and assembly and test manufacturing in all periods covered by
this report
•
• maintenance of average selling prices for our microcontroller products where moderate pricing pressures were
significantly offset by new product introductions with more features and higher selling prices in all periods
covered by this report
significant competitive pricing pressures in Serial EEPROM products in the first half of fiscal 2002 returning to
a pattern of more moderate prices declines in the second half of fiscal 2002, as discussed at page 22
•
pricing increases in Serial EEPROM products during fiscal 2001
• modest pricing declines in Serial EEPROM products during fiscal 2000
•
fluctuations in the product mix of microcontroller and analog products and related Serial EEPROM products as
illustrated in the chart in Net Sales on page 22, and
cost reductions associated with one-week plant shutdowns in each of the first three quarters of fiscal 2002.
•
By March 31, 2001, we reduced cumulative wafer capacity at Fab 1 and Fab 2 by approximately 24%, compared to our
December 31, 2000 levels, in response to business conditions that resulted in decreased product demand. During fiscal 2002,
Fab 1 and Fab 2 operated at approximately 70% of their capacity due to the capacity reductions implemented in the March
2001 quarter and a one-week plant shutdown in each quarter of fiscal 2002. Beginning with the March 2001 quarter, our
overall gross margins have been negatively impacted by these actions due to the relatively high fixed costs inherent in our
wafer fabrication manufacturing, which continue even at lower capacity levels. We expect capacity utilization in the first
quarter of fiscal 2003 to be approximately 80%. We are taking the necessary actions to increase our capacity utilization by
increasing variable spending such as direct labor and raw materials costs, and selectively placing orders for longer lead time
manufacturing equipment needed to achieve our projected manufacturing outputs.
Overall inventory levels have declined from $95.7 million as of March 31, 2001 to $88.6 million as of March 31, 2002,
confirming that capacity was reduced to a level aligned with market demand. We maintained 110 days of inventory on our
balance sheet as of March 31, 2002, compared to 114 days as of March 31, 2001. The highest number of days of inventory
that we had experienced for the period covered by this report was 127 days as of September 30, 2001.
Fab 3 is currently being maintained at minimal operating cost until we expect to require its capacity for production. We
currently plan to utilize Fab 3 for our future production requirements. However, as we begin to plan for the mobilization of
Fab 3, we continue to explore other, potentially more cost-effective, alternatives that may become available to meet our future
production requirements. When required for production, Fab 3 will produce 8-inch wafers. Upon commencement of
operations at Fab 3, our operating margins could suffer as production is brought on-line and depreciation on the buildings and
related equipment commences.
25
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, approximately 80% of our production was on 8-inch wafers. In fiscal 2001, products produced on 8-
inch wafers increased from approximately 55% at the beginning of fiscal 2001 to approximately 80% at the end of fiscal
2001. We anticipate that gross margins will fluctuate over time, driven primarily by the product mix of microcontroller
products and related memory products, 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 first quarter of fiscal 2003, confirmation
that our capacity reduction actions have aligned capacity with market demand, our continuing exploration of alternatives to
meet our future production requirements, the transition to higher yielding manufacturing processes to reduce future
operating 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: demand for our products; 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 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 industry and economic conditions.
At March 31, 2002, approximately 53% of our assembly requirements were being performed in our Thailand facility,
compared to approximately 45% as of March 31, 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
March 31, 2002, compared to approximately 95% as of March 31, 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 of these portions of the manufacturing process.
Our reliance on 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 (R&D)
R&D expenses for fiscal 2002 were $81.7 million, or 14.3% of sales, compared to $78.6 million, or 11.0% of sales fiscal
2001 and $52.4 million, or 9.5% of sales for fiscal 2000. We are committed to continuing our investment in new and
enhanced products, including development systems, 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, masks, prototype wafers, and expenses for the development of process
technologies, new packages, and software to support new products and design environments.
26
R&D expenses increased $3.1 million, or 3.9% for fiscal 2002 over fiscal 2001. R&D expenses increased $26.2 million, or
50.1% for fiscal 2001 over fiscal 2000. The primary reason for the dollar increase in R&D costs in fiscal 2002 over fiscal
2001 and fiscal 2000 was increased labor and professional service costs associated with expanding our technical resources.
R&D expenses would have increased more in fiscal 2002 if we had not implemented unpaid one-week plant shutdowns in
each of the first two quarters of fiscal 2002.
Selling, General and Administrative
Selling, general and administrative expenses for fiscal 2002 were $82.6 million, or 14.5% of sales, compared to $102.6
million, or 14.4% of sales for fiscal 2001 and $86.8 million, or 15.7% of sales for fiscal 2000. 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 and support centers worldwide to stimulate demand by
assisting customers in the use and proper selection of our products.
Selling, general and administrative expenses decreased $20.0 million, or 19.5%, for fiscal 2002 over fiscal 2001. The
primary reason for the dollar decrease in selling, general and administrative costs in fiscal 2002 over fiscal 2001 relate to
reductions in wages, bonuses and recruitment costs and unpaid one-week plant shutdowns in each of the first two quarters of
fiscal 2002. Selling, general and administrative expenses increased $15.9 million, or 18.3%, for fiscal 2001 over fiscal 2000.
The primary reason for the dollar increase in selling, general and administrative costs in fiscal 2001 over fiscal 2000 was the
labor and recruitment costs associated with expanding our employment base to support the growth of our business.
Selling, general and administrative expenses fluctuate over time, primarily due to revenue and operating expense levels.
Special Charges
There were no special charges in fiscal 2002.
The following table presents a summary of special charges for the fiscal years ended March 31, 2001 and 2000:
Year Ended March 31,
2000
2001
(in thousands)
Restructuring charges
TelCom merger charges
Intellectual property settlement
Legal charges
$
6,409
10,949
---
---
$
269
---
(3,600)
1,200
Totals
$ 17,358
$ (2,131)
Fiscal 2001
During the March 2001 quarter, we implemented capacity and cost reduction actions necessitated by the downturn in the
semiconductor industry. We reduced cumulative wafer fab capacity at Fabs 1 and 2 by approximately 24%, compared to our
December 31, 2000 levels. We also decided to close our Hong Kong test facility, acquired as part of the TelCom transaction,
and migrate these test requirements to our Thailand test facility. The capacity reduction at Fabs 1 and 2 was completed by the
end of the March 2001 quarter. The closure of the Hong Kong facility was completed by June 30, 2001. These actions
resulted in a restructuring charge of $6.4 million in the March 2001 quarter. These actions were undertaken to reduce both
manufacturing capacity and manufacturing costs. The reduction in wafer fab capacity was required due to reduced customer
demand. The closure of the Hong Kong facility was undertaken to rationalize our test manufacturing capacity and migrate the
test requirements to our more cost-effective test facility in Thailand.
27
Included in the restructuring charges resulting from these actions was:
•
•
•
$4.0 million related to equipment that was written off
$2.1 million related to employee severance costs, and
$0.3 million related to other restructuring costs.
On January 16, 2001, we completed our merger with TelCom. Under the terms of the merger agreement, we exchanged
each share of TelCom common stock for 0.795 of a share of Microchip common stock. We issued 14,702,184 shares of our
common stock and assumed all outstanding TelCom stock options. The transaction was structured as a tax-free
reorganization and is being accounted for as a pooling-of-interests.
During the March 2001 quarter, we recognized a special charge of $10.9 million for costs associated with the TelCom
transaction. These costs included:
• $7.3 million associated with investment banking fees
• $1.6 million associated with legal and accounting fees
• $0.9 million of severance costs, and
• $1.1 million related to other costs.
All reserves relating to the special charges for the fiscal 2001 actions have been fully utilized and there were no reversals
of previously provided amounts.
Fiscal 2000
TelCom recorded restructuring charges in its quarter ended March 31, 1999 of $0.3 million, primarily for employee
severance costs. These charges have been reflected in our fiscal 2000 operating results. All restructuring reserves relating to
these charges have been fully utilized.
Legal Settlement with Lucent Technologies Inc.
On January 13, 1998, we finalized a settlement of patent litigation with Lucent Technologies Inc. resulting in a
$5,000,000 special charge during the quarter ended December 31, 1997. Under the terms of the settlement, we made one-
time cash payment to Lucent and issued to Lucent a warrant to acquire 1,012,500 shares of our common stock at $7.48 per
share. We originally assigned a value of $3.3 million to the warrant and recorded the amount in accrued liabilities. The
warrant was exercised by the holder in fiscal 2002, and the $3.3 million was reclassified to additional paid-in capital and is
now reflected in our Statement of Stockholders’ Equity and Other Comprehensive Income. The terms of the settlement also
provided for a contingent payment to Lucent if our earnings per share performance for the three and one-half year period
ended June 30, 2001 did not meet certain targeted levels. Based on the estimate of earnings per share for the measurement
period as of March 31, 1999, we provided appropriate reserves to meet this liability. Due to the sale of the warrant by the
holder to a third party, the associated reserve became unnecessary and $3.6 million of the special charge was reversed in the
quarter ended September 30, 1999.
We also recorded a special charge related to other legal issues in the amount of $1.2 million in the quarter ended
September 30, 1999.
Additionally, we recorded a special charge related to other legal issues in the amount of $1.2 million in the quarter ended
September 30, 1999.
All reserves relating to the special charges for the fiscal 2000 actions have been fully utilized and there were no reversals
of previously provided amounts.
28
Other Income (Expense)
Interest income in fiscal 2002 decreased from interest income in fiscal 2001, although average invested cash balances
were higher in fiscal 2002. The decrease in interest income was primarily driven by significantly lower interest rates
applicable to our invested cash balances during fiscal 2002 compared to the interest rates applied during fiscal 2001. Interest
income in fiscal 2001 increased from fiscal 2000 as a result of higher invested cash balances due primarily to the receipt of
proceeds of $114.0 million from follow-on public offerings completed in March 2000.
Provision for Income Taxes
Provisions for income taxes reflect tax on foreign earnings and federal and state tax on U.S. earnings. Our effective tax
rate was 25.5% in fiscal 2002, 27.2% in fiscal 2001 and 25.5% in fiscal 2000, and is lower than statutory rates in the United
States due primarily to lower tax rates at our foreign locations and R&D tax credits. The decrease in our effective tax rate in
fiscal 2002 was primarily related to increased R&D tax credits that were available to us. Based on our current assumptions,
we anticipate that our effective tax rate for fiscal 2003 will be approximately 25.5%.
The foregoing statement regarding our anticipated effective tax rate for fiscal 2003 is a forward-looking statement.
Actual results could differ materially because of the following factors, among others: current tax laws and regulations;
taxation rates in geographic regions where we have significant operations; the portion of total income generated in each
taxing jurisdiction; and current tax holidays available in foreign locations.
Euro Conversion Issues
We operate in the European Market and currently generate approximately one-third 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 97.7% of our business in Europe in U.S. Dollars and approximately 2.1% 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.
The foregoing statement regarding the anticipated impact of the transition to the Euro currency is a forward-looking
statement. Actual results could differ materially because of the following factors, among others: levels of sales in Europe
that may be conducted in the Euro; and fluctuations in currency exchange rates.
Liquidity and Capital Resources
We had $280.6 million in cash and cash equivalents at March 31, 2002, an increase of $150.7 million from the March 31,
2001 balance. During the fiscal year ended March 31, 2002, we maintained 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 terminates on May 31, 2003. There were no borrowings against the
line of credit as of March 31, 2002. We are required to achieve certain financial ratios and operating results to maintain this
line of credit and were in compliance with these covenants as of March 31, 2002.
We also maintain an unsecured short-term line of credit with various financial institutions in Asia totaling $20.0 million
(U.S. dollar equivalent). There were no borrowings under the foreign line of credit as of March 31, 2002, but an allocation of
$0.8 million of the available line was made, related to import guarantees associated with our business in Thailand. There are
no covenants related to the foreign line of credit.
At March 31, 2002, an aggregate of $119.2 million of these facilities was available, subject to financial covenants and
ratios with which we were in compliance. Our ability to fully utilize these facilities is dependent on our remaining in
compliance with such covenants and ratios.
29
Net cash provided from operating activities was $178.8 million for fiscal 2002, $254.4 million for fiscal 2001 and $246.9
million for fiscal 2000. The principal changes in cash flow from operations during fiscal 2002 was related to decreased
profitability, offset by the impact of inventory valuation provisions, changes in inventories and changes in other assets and
liabilities.
Our level of capital expenditures varies from time to time as a result of actual and anticipated business conditions.
Capital expenditures were $44.7 million in fiscal 2002, $441.1 million in fiscal 2001 and $214.0 million in fiscal 2000. The
primary reason for the dollar decrease in capital expenditures from the prior year was the reduction in the level of capacity
expansion activities in response to reduced demand. Capital expenditures were primarily for the expansion of production
capacity and the addition of research and development equipment in each of these periods. We currently intend to spend
approximately $150.0 million during the next 12 months to invest in equipment to maintain and increase capacity at our
existing wafer fabrication and product assembly and test facilities.
We expect to finance capital expenditures through our cash flows from operations and available debt arrangements. 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
financing of such capital expenditures, are forward-looking statements. Actual results could differ materially because of the
following factors, among others: the cyclical nature of the semiconductor industry and the markets addressed by our
products; market acceptance of our products and of our customers’ products; demand for our products; utilization of current
manufacturing capacity; the availability and cost of raw materials, equipment and other supplies; and economic, political
and other conditions in the worldwide markets served by us.
Net cash provided by financing activities was $16.1 million for fiscal 2002, $109.5 million for fiscal 2001 and $123.4 for
fiscal 2000. Proceeds from the sale of stock and put options were $43.8 million for fiscal 2002, $118.5 million for fiscal
2001 and $151.2 million for fiscal 2000. Payments on long term debt and capital lease obligations were $5.5 million in fiscal
2000. Repayments on lines of credit were $9.0 million and $17.5 million for the years ended March 31, 2001 and 2000.
Cash expended for the purchase of our common stock was $27.8 million in fiscal 2002 and $4.8 million in fiscal 2000.
In connection with a stock repurchase program, during the year ended March 31, 2000 we purchased a total of 654,000
shares of our common stock in open market activities at a total cost of $4.8 million. We maintained a net shares settled
forward contract during the years ended March 31, 2002, 2001 and 2000. The table below contains a summary of the share
and cash activity under this contract:
2002
Year Ended March 31,
2001
(in thousands)
2000
Shares received
Shares delivered
Net shares received (delivered)
Cash received
Cash delivered
Net cash received (delivered)
---
(573)
(573)
14,084
$
---
$ 14,084
277
(996)
(719)
17,190
$
(128)
$ 17,062
4,122
---
4,122
10,243
$
---
$ 10,243
During fiscal 2002, we made a net delivery of 572,645 shares of our common stock. We also received approximately
$14.1 million in connection with an early termination covering 1,650,000 of the shares outstanding under the net shares
settled forward contract. 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 were used to fund stock option exercises and purchases under our employee stock
purchase plan through April 9, 2002.
We had no off balance sheet financings at March 31, 2002.
30
At March 31, 2002, we had contractual obligations of approximately $36.3 million for the purchase or construction of
property, plant and equipment.
On May 22, 2002, we signed a definitive agreement to acquire PowerSmart, Inc. We will pay approximately $54.0
million in cash for PowerSmart and will assume a balance sheet with approximately $4.0 million in cash and other net assets.
The transaction will be accounted for as a purchase and will be funded by our existing cash balances. The transaction is
expected to close by June 7, 2002, following approval by PowerSmart’s stockholders.
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, investments in or acquisitions of complimentary businesses, products or technologies or other purposes. The
timing and amount of any such capital 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 could result in incremental dilution to existing investors.
Critical Accounting Policies and Estimates
General
Our discussion and analysis of Microchip's financial condition and results of operations is based upon our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United
States of America. We review the accounting policies we use in reporting our financial results on a regular basis. The
preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, inventories, income
taxes, property plant and equipment and litigation. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Results may
differ from these estimates due to actual outcomes being different from those on which we based our assumptions. We review
these estimates and judgments on an ongoing basis. We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We recognize revenue from product sales upon shipment to OEMs and to distributors who have no, or limited, product
return rights and no price protection rights. For sales recorded upon shipment, we record reserves to cover the estimated
customer returns. Returns have historically been less than 1.5% of sales. To the extent rates of return change, our estimates
for the reserves necessary to cover such returns would also change. When distributors have broad rights to return products
and price protection rights, we defer revenue recognition until the distributor sells the product to the end customer. Upon
shipment, amounts billed to distributors with broad rights to return product and price protection rights are included as
accounts receivable, inventory is relieved, the sale is deferred and the gross margin is reflected as a current liability until the
product is sold by the distributor to their customers.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to
make required payments, which is included in bad debt expense. We determine the adequacy of this allowance by regularly
reviewing the composition of our accounts receivable aging and evaluating individual customer receivables, considering such
customer's financial condition, credit history and current economic conditions. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Write-offs of customer account balances have ranged between $0.3 million and $0.6 million annually during the periods
covered by this report.
31
Inventories
Inventories are valued at the lower of cost or market using the first-in, first-out (FIFO) method. We write down our
inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual
market conditions are less favorable than those we projected, additional inventory write-downs may be required. Inventory
impairment 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. In estimating our reserves for obsolescence, we
generally evaluate estimates of demand over a 12-month period and provide reserves for inventory on hand in excess of the
estimated 12-month demand.
Income Taxes
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 assets 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 assets 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 March 31,
2002, our gross deferred tax asset was $84.0 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 these countries. 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 the ultimate assessment, a future charge to
expense would result.
The foregoing statements regarding 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: results of
any audit conducted by the various taxing authorities in the countries in which we do business; the level of our taxable
income and whether our taxable income will be sufficient to utilize the deferred tax asset; current and future tax laws and
regulations; and taxation rates in geographic regions where we have significant operations.
Property Plant & Equipment
Property, plant and equipment are stated at cost. Major renewals and improvements are capitalized, while maintenance
and repairs are expensed when incurred. At March 31, 2002, the carrying value of our property and equipment totaled $716.0
million, which represents 56.1% of total assets. This carrying value reflects the application of our property and equipment
accounting policies, which incorporate estimates, assumptions and judgements relative to the useful lives of our property and
equipment. Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets, which range
from five to seven years on manufacturing equipment and approximately 25 years on buildings. We evaluate the carrying
value of our property and equipment when events or changes in circumstances indicate that the carrying value of such assets
may be impaired. Asset impairment evaluations are, by nature, highly subjective.
Fab 3 has not been placed in service and the related depreciation of the assets at the facility has not commenced. The
lives to be used for depreciating the equipment at Fab 3 will be evaluated at such time as the assets are placed in service. We
do not believe that the temporary idling of such assets has impaired the estimated life or values of the underlying assets.
The estimates, assumptions and judgments we use in the application of our property and equipment policies reflect both
historical experience and expectations regarding future industry conditions and operations. The use of different estimates,
assumptions and judgments regarding the useful lives of our property and equipment and expectations regarding future
industry conditions and operations, would likely result in materially different carrying values of assets and results of
operations.
32
We do not currently hold title to the land on which our Thailand facility resides. The land is subject to a complex
restructuring situation relating to the seller of the land. We have provided reserves that we estimate will be adequate to obtain
full title. Such reserves are set at the estimated fair value of the land. However, timing of the resolution and the ultimate
amount to be paid could change.
Litigation
Our current estimated range of liability related to certain pending litigation is based on claims for which we can estimate
the amount and range of loss, and recorded reserves were not significant at March 31, 2002. Because of the uncertainties
related to both the amount and range of loss on the remaining pending litigation, we are unable to make a reasonable estimate
of the liability that could result from an unfavorable outcome. As additional information becomes available, we will assess
the potential liability related to our pending litigation and revise our estimates. Revisions in our estimates of the potential
liability could materially impact our results of operation and financial position.
Recently Issued Accounting Pronouncements
SFAS 144
In August 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets.” This statement establishes a single accounting model for long-lived assets to
be disposed of by sale and resolves significant implementation issues related to SFAS No. 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” and is effective for fiscal years beginning
after December 15, 2001 with earlier adoption encouraged. We are currently evaluating the impact of adopting SFAS No.
144, and have not yet determined the effect, if any, such adoption would have on our results of operations or our financial
position.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our investment portfolio, consisting of fixed income securities, was $247.6 million as of March 31, 2002, and $130.1
million as of March 31, 2001. 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 March 31, 2002 and March 31, 2001, 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 any material adverse impact in 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 foreign currency rates fluctuate by 15% from the rates at March 31,
2002 and March 31, 2001, the effect on our financial position and results of operation would not be material.
During the normal course of 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 7A, and
collectability of accounts receivable. We continuously assess these risks and have established policies and procedures to
protect against the adverse effects of these and 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.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements listed in the index appearing under Item 14(a)(1) hereof are filed as part of this
Form 10-K. See also Index to Financial Statements, below.
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Following the close of fiscal 2001, our Board of Directors, upon the recommendation of the Audit Committee,
determined not to renew the engagement of KPMG LLP as Microchip’s independent auditors. KPMG had served as our
independent auditors for the fiscal years ended March 31, 1993 through and including March 31, 2001. The decision to not
renew KPMG’s engagement did not occur due to any existing or previous accounting disagreements with KPMG, and KPMG
33
did not express any disclaimer of opinion, adverse opinion, qualification or limitation regarding our financial statements or
the audit process, for the fiscal years ended March 31, 2001 or 2000, or the interim period that had commenced April 1, 2001.
Neither were there any accounting disagreements nor reportable events within the meaning of Item 304(a)(1)(iv) and Item
304(a)(1)(v) of Securities and Exchange Commission Regulation S-K for those periods. KPMG concurred with the foregoing
statements in this paragraph in a letter addressed to the Securities and Exchange Commission. That letter was included in our
Current Report on Form 8-K filed with the Securities and Exchange Commission on May 22, 2001, Exhibit 16.
Upon the recommendation of the Audit Committee, on June 6, 2001, the Board of Directors engaged Ernst & Young
LLP, independent auditors, to audit our consolidated financial statements for the fiscal year 2002. We did not seek the advice
of Ernst & Young on specific audit issues relating to our consolidated financial statements prior to engagement of that firm.
We reported the engagement of Ernst & Young in our Current Report on Form 8-K filed June 7, 2001.
PART III
Item 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on the members of our board of directors is incorporated herein by reference to our proxy statement for the
2002 annual meeting of stockholders under the caption "Proposal One - Election of Directors."
Information on our executive officers is provided in Item I, Part I of this Form 10-K under the caption "Executive
Officers" at page 9, above.
Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is
incorporated herein by reference to our proxy statement for the 2002 annual meeting of stockholders under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance."
Item 11.
EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated herein by reference to the information under the
caption "Executive Compensation" in our proxy statement for the 2002 annual meeting of stockholders.
Information with respect to director compensation is incorporated herein by reference to the information under the
caption “Proposal One – Election of Directors” in our proxy statement for the 2002 annual meeting of stockholders.
Information with respect to compensation committee interlocks and inside participation is incorporated herein by
reference to the information under the caption “Compensation Committee Interlocks and Insider Participation” in our proxy
statement for the 2002 annual meeting of stockholders.
Information with respect to changes in our cumulative shareholder return on our common stock is incorporated herein by
reference to the information under the caption “Performance Graph” in our proxy statement for the 2002 annual meeting of
stockholders.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners and management is incorporated herein by
reference to the information under the caption "Security Ownership of Principal Stockholders, Directors and Executive
Officers" in our proxy statement for the 2002 annual meeting of stockholders.
Information with respect to securities authorized for issuance under our equity compensation plans is incorporated herein
by reference to the information under the caption “Equity Compensation Plan Information” in our proxy statement for the
2002 annual meeting of stockholders.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
34
Item 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
PART IV
(1)
Financial Statements:
Report of Ernst & Young LLP, Independent Auditors
Report of KPMG LLP, Independent Auditors
Consolidated Balance Sheets as of March 31, 2002 and 2001
Consolidated Statements of Income for each of the years in the three-year
period ended March 31, 2002
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended March 31, 2002
Consolidated Statements of Stockholders' Equity and Other Comprehensive Income
for each of the years in the three-year period ended March 31, 2002
Notes to Consolidated Financial Statements
(2)
(3)
Financial Statement Schedules – Applicable schedules have been omitted because
information is included in the footnotes to the Financial Statements.
The Exhibits filed with this Form 10-K or incorporated herein by reference are set
forth in the Exhibit Index appearing on page E-1 hereof, which Exhibit Index is
incorporated herein by this reference.
(b) We did not file any current report on Form 8-K during the quarter ended March 31, 2002.
(c) See Item 14(a)(3) above.
(d) See "Index to Financial Statements" included under Item 8 to this Form 10-K.
Page No.
F-1
F-2
F-3
F-4
F-5
F-6
F-7
E-1
35
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
MICROCHIP TECHNOLOGY INCORPORATED
(Registrant)
By: /s/ Steve Sanghi
Steve Sanghi
President and Chief Executive Officer
Date: June 3, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name and Signature
Title
/s/ Steve Sanghi Director, President and
Chief Executive Officer
Steve Sanghi
Albert J. Hugo-Martinez*
L. B. Day*
Matthew W. Chapman*
Wade F. Meyercord*
Director
Director
Director
Director
/s/ Gordon W. Parnell Vice President and Chief Financial
Gordon W. Parnell
Officer (Principal Financial
and Accounting Officer)
Date
June 3, 2002
June 3, 2002
June 3, 2002
June 3, 2002
June 3, 2002
June 3, 2002
*By: /s/ Steve Sanghi
Steve Sanghi
Individually and as Attorney-in-fact
June 3, 2002
36
Exhibit No.
2.1
2.1.1
2.1.2
2.1.3
3.1
3.1.1
3.1.2
3.1.3
3.1.4
3.1.5
3.1.6
3.2
EXHIBIT INDEX
Description
Page No.
Purchase and Sale Agreement dated as of May 23, 2000 between Registrant
and Matsushita Semiconductor Corporation of America [Incorporated by
reference to Current Report on Form 8-K as filed with the Securities and
Exchange Commission as of July 26, 2000]
Addendum dated June 20, 2000 to Purchase and Sale Agreement dated as of
May 23, 2000 between Registrant and Matsushita Semiconductor Corporation
of America [Incorporated by reference to Current Report on Form 8-K as filed
with the Securities and Exchange Commission as of July 26, 2000]
Addendum dated July 10, 2000 to Purchase and Sale Agreement dated as of
May 23, 2000 between Registrant and Matsushita Semiconductor Corporation
of America [Incorporated by reference to Current Report on Form 8-K as filed
with the Securities and Exchange Commission as of July 26, 2000]
Agreement and Plan of Reorganization dated as of October 26, 2000 by and
among Registrant, Matchbox Acquisition Corp. and TelCom Semiconductor,
Inc. [Incorporated by reference to Current Report on Form 8-K as filed with
the Securities and Exchange Commission as of October 26, 2000]
Restated Certificate of Incorporation of Registrant [Incorporated by reference
to Exhibit 3.1 to Registration Statement No. 33-70608]
Certificate of Amendment to Registrant's Restated Certificate of Incorporation
[Incorporated by reference to Exhibit 3.3.1 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1994]
Certificate of Designation of Rights, Preferences and Privileges of Series A
Participating Preferred Stock of Registrant [Incorporated by reference to
Exhibit No. 3.1.2 to Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1995]
Certificate of Amendment to Registrant's Restated Certificate of Incorporation
[Incorporated by reference to Exhibit No. 1 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995]
Certificate of Amendment to Registrant's Certificate of Incorporation
[Incorporated by reference to Exhibit No. 3.1 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997]
Amended Certificate of Designations of Rights, Preferences and Privileges of
Series A Participating Preferred Stock of Registrant [Incorporated by
reference to Current Report on Form 8-K as filed with the Securities and
Exchange Commission as of October 12, 1999]
Certificate of Amendment to Registrant's Restated Certificate of Incorporation
[Incorporated by reference to Exhibit No. 3.1 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2000]
Amended and Restated By-Laws of Registrant, as amended through
August 20, 1999 [Incorporated by reference to Exhibit No. 3.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999]
E-1
Exhibit No.
EXHIBIT INDEX
Description
Page No.
3.3
3.4
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Certificate of Ownership and Merger Merging ASIC Technical Solutions, Inc.
into Microchip Technology Incorporated [Incorporated by reference to
Exhibit 3.3 to Registrant’s Annual Report on Form 10-K dated for the fiscal
year ending March 31, 2001.]
Certificate of Ownership and Merger Merging TelCom Semiconductor, Inc.
with and into Microchip Technology Incorporated [Incorporated by reference
to Exhibit 3.4 to Registrant’s Annual Report on Form 10-K dated for the fiscal
year ending March 31, 2001.]
Amended and Restated Preferred Shares Rights Agreement, dated as of
October 11, 1999, between Registrant and Norwest Bank Minnesota, N.A.,
including the Amended Certificate of Designations, the form of Rights
Certificate and the Summary of Rights, attached as exhibits thereto
[Incorporated by reference to Exhibit No. 1 to Registrant's Registration
Statement on Form 8-A as filed with the Securities and Exchange Commission
as of October 12, 1999]
Form of Indemnification Agreement between Registrant and its directors and
certain of its officers [Incorporated by reference to Exhibit No. 10.1 to
Registration Statement No. 33-57960]
Amended and Restated 1989 Stock Option Plan [Incorporated by reference to
Exhibit No. 10.14 to Registration Statement No. 33-57960]
1993 Stock Option Plan, as Amended Through May 6, 2002
Form of Notice of Grant For 1993 Stock Option Plan, with Exhibit A thereto,
Form of Stock Option Agreement; and Exhibit B thereto, Form of Stock
Purchase Agreement [Incorporated by reference to Exhibit No. 10.6
Registration Statement No. 333-872]
2001 Employee Stock Purchase Plan [Incorporated by reference to Exhibit
No. 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001]
Form of Enrollment Form For 2001 Employee Stock Purchase Plan
[Incorporated by reference to Exhibit No. 10.1 to Registration Statement No.
333-73506]
Form of Change Form For 2001 Employee Stock Purchase Plan [Incorporated
by reference to Exhibit No. 10.2 to Registration Statement No. 333-73506]
Form of Executive Officer Severance Agreement [Incorporated by reference
to Exhibit No. 10.7 to Registration Statement No. 333-872]
Credit Agreement dated as of May 31, 2000 among Registrant, the Banks
named therein, Bank One, NA, as LC Issuer and Administrative Agent, Wells
Fargo Bank, National Association, as Syndication Agent and Bank of
America, N.A., as Documentation Agent [Incorporated by reference to
Exhibit No. 10.10 to Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 2000]
E-2
Exhibit No.
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
21.1
23.1
23.2
EXHIBIT INDEX
Description
Page No.
Modification Agreement dated as of August 31, 2000 to the Credit Agreement
dated as of May 31, 2000 by and among Registrant, the Banks named therein,
Bank One, NA, as LC Issuer and Administrative Agent, Wells Fargo Bank,
National Association, as Syndication Agent and Bank of America, N.A., as
Documentation Agent [Incorporated by reference to Exhibit No. 10.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 2000]
Development Agreement dated as of August 29, 1997 by and between
Registrant and the City of Chandler, Arizona [Incorporated by reference to
Exhibit No. 10.1 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1997]
Development Agreement dated as of July 17, 1997 by and between Registrant
and the City of Tempe, Arizona [Incorporated by reference to Exhibit No.
10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1997]
Addendum to Development Agreement by and between Registrant and the
City of Tempe, Arizona, dated May 11, 2000 [Incorporated by reference to
Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarter
ended December 31, 1997]
1997 Nonstatutory Stock Option Plan, as Amended Through February 11,
2002
Form of Notice of Grant For 1997 Nonstatutory Stock Option Plan, with
Exhibit A thereto, Form of Stock Option Agreement [Incorporated by
reference to Exhibit No. 10.17 to Registrant’s Annual Report on Form 10-K
for the fiscal year ended March 31, 1998]
International Employee Stock Purchase Plan as Amended Through April 25,
1997 [Incorporated by reference to Exhibit No. 10 to Registration Statement
No. 333-40791]
TelCom Semiconductor, Inc. 1994 Stock Option Plan and forms of
agreements thereunder [Incorporated by reference to Exhibit No. 4.1 to
Registration Statement No. 333-53876]
TelCom Semiconductor, Inc. 1996 Director Option Plan and forms of
agreements used thereunder [Incorporated by reference to Exhibit No. 4.2 to
Registration Statement No. 333-53876]
TelCom Semiconductor, Inc. 2000 Nonstatutory Stock Option Plan and forms
of agreements used thereunder [Incorporated by reference to Exhibit 4.4 to
Registration Statement No. 333-53876]
Subsidiaries of Registrant
Consent of Ernst & Young LLP, Independent Auditors
Consent of KPMG LLP, Independent Auditors
E-3
Exhibit No.
24.1
EXHIBIT INDEX
Description
Page No.
Power of Attorney re: Microchip Technology Incorporated, the Registrant
[Incorporated by reference to Exhibit No. 24.1 to Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 2000]
E-4
Annual Report on Form 10-K
Item 8, Item 14(a)(1) and (2), (c) and (d)
_________________________________
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
EXHIBITS
_________________________________
YEAR ENDED MARCH 31, 2002
MICROCHIP TECHNOLOGY INCORPORATED
AND SUBSIDIARIES
CHANDLER, ARIZONA
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
Index to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
Report of KPMG LLP, Independent Auditors
Consolidated Balance Sheets as of March 31, 2002 and 2001
Consolidated Statements of Income for each of the years in the three-year
period ended March 31, 2002
Consolidated Statements of Cash Flows for each of the years in the three-year
period ended March 31, 2002
Consolidated Statements of Stockholders’ Equity and Other Comprehensive
Income for each of the years in the three-year period ended March 31, 2002
Notes to Consolidated Financial Statements
Page Number
F-1
F-2
F-3
F-4
F-5
F-6
F-7
i
F-1
F-2
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
ASSETS
Cash and cash equivalents
Accounts receivable, net
Inventories
Prepaid expenses
Deferred tax asset
Other current assets
Total current assets
Property, plant and equipment, net
Other assets
Total assets
March 31,
2002
March 31,
2001
$
280,647
80,747
88,615
6,154
83,980
9,033
549,176
$
129,909
76,543
95,699
7,572
47,508
14,328
371,559
715,960
$
10,464
780,016
$
9,774
$ 1,275,600
$ 1,161,349
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
Accrued liabilities
Deferred income on shipments to distributors
Total current liabilities
Pension accrual
Deferred tax liability
Stockholders' equity:
$
38,292
88,873
40,800
167,965
57,652
72,865
64,106
194,623
724
31,132
912
22,966
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 200,802,633 and outstanding 200,629,908 shares at March 31, 2002;
issued and outstanding 196,346,459 shares at March 31, 2001;
Additional paid-in capital
Retained earnings
Less shares of common stock held in treasury at cost; 172,725 shares
at March 31, 2002.
Net stockholders' equity
---
201
459,303
619,254
---
196
418,212
524,440
(2,979)
1,075,779
---
942,848
Total liabilities and stockholders' equity
$ 1,275,600
$ 1,161,349
See accompanying notes to consolidated financial statements
(Shares and per share amounts have been restated to reflect a 3-for-2 stock split effected May 8, 2002)
F-3
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except share amounts)
Net sales
Cost of sales
Gross profit
Operating expenses:
Research and development
Selling, general and administrative
Years Ending March 31,
2002
2001
2000
571,254
$
284,518
286,736
715,730
$
335,016
380,714
553,051
$
269,611
283,440
81,650
82,615
164,265
78,595
102,620
181,215
52,365
86,750
139,115
Operating income before special charges
Special charges
122,471
---
199,499
17,358
144,325
(2,131)
Operating income
122,471
182,141
146,456
Other income (expense):
Gain on sale of investment
Net loss in equity investment
Interest income
Interest expense
Other, net
---
---
4,911
(567)
376
1,427
(2,190)
13,494
(753)
2,080
5,819
---
2,816
(1,247)
770
Income before income taxes
127,191
196,199
154,614
Income taxes
Net income
32,377
53,363
39,441
$ 94,814
$ 142,836
$ 115,173
Basic net income per share
$ 0.48
$ 0.74
$ 0.63
Diluted net income per share
$ 0.45
$ 0.70
$ 0.59
Weighted average common
shares outstanding
Weighted average common and potential
common shares outstanding
199,184
193,632
183,471
208,907
205,190
195,509
See accompanying notes to consolidated financial statements
(Shares and per share amounts have been restated to reflect a 3-for-2 stock split effected May 8, 2002)
F-4
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income
Income adjustment for TelCom quarter ended March 31, 2000
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for doubtful accounts
Provision for inventory valuation
Provision for pension accrual
Gain on sale of fixed assets
Gain on sale of investment
Net loss in equity investment
Special charges
Depreciation and amortization
Amortization of purchased technology
Deferred income taxes
Tax benefit from exercise of stock options
(Increase) decrease in accounts receivable
(Increase) decrease in inventories
Increase (decrease) in accounts payable and accrued liabilities
Change in other assets and liabilities
Years Ending March 31,
2002
2001
2000
$
94,814
$
142,836
3,679
$
115,173
58
5,139
93
(242)
---
---
---
108,451
588
(28,306)
18,752
(4,262)
1,945
(52)
(18,152)
1,855
20,071
175
(1,285)
(3,091)
2,426
17,358
101,990
2,336
(8,002)
15,936
5,827
(47,446)
7,050
(7,351)
936
870
295
---
(5,819)
---
---
69,696
1,477
9,296
15,511
(15,672)
8,158
24,541
22,471
Net cash provided by operating activities
178,826
254,364
246,933
Cash flows from investing activities:
Investment in Silicon Aquarius Incorporated
Sales (purchases) of short term investments
Maturities of short term investments
Purchase of common stock of CSMC
Acquisition of common stock of MEAD Microelectronics,
net of cash acquired
Proceeds from sale of assets
Capital expenditures
---
---
---
---
---
(33,648)
34,916
(1,600)
(3,000)
6,730
---
---
---
537
(44,690)
(1 330)
2,292
(441,147)
---
1,511
(213,974)
Net cash used in investing activities
(44,153)
(440,517)
(208,733)
Cash flows from financing activities:
Repayment on lines of credit
Payments on long-term debt
Payments on capital lease obligations
Repurchase of common stock
Proceeds from sale of stock and put options
---
---
---
(27,777)
43,842
(9,000)
---
---
---
118,537
(17,509)
(5,099)
(413)
(4,772)
151,233
Net cash provided by financing activities
16,065
109,537
123,440
Net increase (decrease) in cash and cash equivalents
150,738
(76,616)
161,640
Cash and cash equivalents at beginning of period
129,909
206,525
44,885
Cash and cash equivalents at end of period
$ 280,647
$ 129,909
$ 206,525
Supplemental disclosure of non-cash financing and investing activities:
Net share settlement receipt of shares
Net share settlement delivery of shares
---
10,117
6,515
18,210
59,649
---
See accompanying notes to consolidated financial statements.
F-5
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND OTHER COMPREHENSIVE INCOME
(in thousands)
Balance March 31, 1999
Sale of Stock
Public offering (net of offering
costs of $456)
Exercise of stock options
Employee stock purchase plan
Purchase of treasury stock
Net share settled forward
Retirement of treasury stock
Tax benefit from exercise of options
Costless collar settlement
Other comprehensive income
Unrealized gain on
short-term investment
Net income
Comprehensive income
Balance March 31, 2000
Sale of Stock
Public offering (net of
offering costs of $494)
Exercise of stock options
Employee stock purchase plan
Net share settled forward
Retirement of treasury stock
Tax benefit from exercise of options
Other comprehensive income
Unrealized loss on
short-term investment
Net income
Comprehensive income
TelCom Equity adjustment
for the three months ended
March 31, 2000
Exercise of stock options
Employee stock purchase plan
Purchase of treasury stock
Net share settled forward
Retirement of treasury stock
Tax benefit from exercise of options
Reclassification of Lucent liability
Net income and comprehensive
income
Common
Stock and Additional
Paid-in Capital
Shares
Amount
Common
Stock held in
Treasury
Shares
Amount
Accumulated
Other
Comprehensive
Income
Retained
Earnings
Net
Stockholders’
Equity
195,252 $
196,668
10,771 $ (74,705)
$
---
$
262,752
$
384,715
4,271
114,011
---
---
4,228
720
---
---
(8,761)
---
---
---
---
---
17,358
5,021
---
10,243
(6,329)
15,511
4,600
---
---
---
---
---
654
4,122
(8,761)
---
---
---
---
---
---
---
(4,772)
---
6,329
---
---
---
---
---
195,710
357,083
6,786
(73,148)
2,687
79,543
3,067
951
995
(7,063)
---
14,530
7,402
17,062
(73,148)
15,936
---
---
---
---
---
---
277
(7,063)
---
---
73,148
---
---
---
---
---
---
---
---
---
1,018
---
---
1,018
---
---
---
---
---
---
---
---
---
---
---
---
---
---
114,011
17,358
5,021
(4,772)
10,243
---
15,511
4,600
---
1,018
115,173 115,173
116,191
---
377,925
662,878
---
---
---
---
---
---
79,543
14,530
7,402
17,062
---
15,936
---
---
---
---
---
---
---
---
4,753
568
---
573
(1,438)
---
---
22,279
7,479
---
14,084
(24,798)
18,752
3,300
---
---
---
---
---
---
---
---
---
---
---
---
---
---
1,611
---
(1,438)
---
---
(27,777)
---
24,798
---
---
---
---
---
---
(1,018)
---
---
---
142,836
---
(1,018)
142,836
141,818
---
---
---
---
---
---
---
---
---
---
---
3,679
3,679
524,440
942,848
---
---
---
---
---
---
---
22,279
7,479
(27,777)
14,084
---
18,752
3,300
94,814
94,814
$
619,254
$ 1,075,779
Balance March 31, 2001
196,347
418,408
Balance March 31, 2002
200,803 $
459,504
173 $
(2,979)
$
See accompanying notes to consolidated financial statements.
F-6
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Microchip develops and manufactures specialized semiconductor products used by its customers for a wide variety
of embedded control applications. Microchip’s product portfolio comprises field-programmable RISC-based
microcontrollers that serve 8- and 16-bit embedded control applications, and a broad spectrum of high-performance
linear and mixed-signal, power management and thermal management devices.
Microchip also offers
complementary microperipheral products including interface devices, Serial EEPROMS, and patented KEELOQ®
security devices. Products are marketed to the automotive, communications, computing, consumer and industrial
control markets.
Principles of Consolidation
The consolidated financial statements include the accounts of Microchip Technology Incorporated and its wholly-
owned subsidiaries (“Microchip” or the “Company"). All significant intercompany accounts and transactions have
been eliminated in consolidation.
On January 16, 2001, the Company merged with TelCom Semiconductor, Inc. ("TelCom"). The merger has been
accounted for as a pooling of interests. Accordingly, the consolidated financial statements have been restated to
include the operations of TelCom for all periods presented. TelCom had a December 31 fiscal year end, thus the
consolidated financial statements presented for March 31, 2000 have been combined with the operations of TelCom
as of and for the year ended December 31, 1999. The 2000 operations of TelCom have been conformed to a
March 31 year end, thus the consolidated statements of cash flows and stockholders’ equity for March 31, 2001
include an adjustment of $3,679,000 which represents the net income of TelCom for the quarter ended March 31,
2000.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment to OEMs and to distributors who have no, or
limited, product return rights and no price protection rights. For sales recorded upon shipment, the Company records
reserves for estimated customer returns. When distributors have broad rights to return products and price protection
rights, the Company defers revenue recognition until the distributor sells the product to the end customer. Upon
shipment, amounts billed to distributors with broad rights to return product and price protection rights are included
as accounts receivable, inventory is relieved, the sale is deferred and the gross margin is reflected as a current
liability until the product is sold by the distributor to its customers.
Research and Development
Research and development costs are expensed as incurred. Research and development expenses include
expenditures for labor, masks, prototype wafers, and expenses for development of process technologies, new
packages, and software to support new products and design environments.
Foreign Currency Translation and Forward Contracts
The Company's foreign subsidiaries are considered to be extensions of the U.S. company and any translation gains
and losses related to these subsidiaries are included in other income and expense. As the U.S. Dollar is utilized as
the functional currency, gains and losses resulting from foreign currency transactions (transactions denominated in a
currency other than the subsidiaries' functional currency) are also included in income. Gains and losses associated
with currency rate changes on forward contracts are recorded currently in income.
Income Taxes
As part of the process of preparing its consolidated financial statements, the Company is required to estimate its
income taxes in each of the jurisdictions in which it operates. This process involves estimating the Company’s 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 the
Company's consolidated balance sheet. The Company must then assess the likelihood that its deferred tax assets will
be recovered from future taxable income and to the extent it believes that recovery is not likely, it must establish a
valuation allowance. The Company has not provided for a valuation allowance because management believes that its
F-7
deferred tax assets will be recovered from future taxable income. Should the Company determine that it would not
be able to realize all or part of its 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.
Cash and Cash Equivalents
All highly liquid investments, including marketable securities purchased with an original maturity of three months or
less, are considered to be cash equivalents.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments, which is included in bad debt expense. The Company determines the
adequacy of this allowance by regularly reviewing the composition of its accounts receivable aging and evaluating
individual customer receivables, considering such customer’s financial condition, credit history and current
economic conditions. If the financial condition of the Company’s customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be required.
Inventories
Inventories are valued at the lower of cost or market using the first-in, first-out (FIFO) method. The Company writes
down its inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference
between the cost of inventory and the estimated market value based upon assumptions about future demand and
market conditions. If actual market conditions are less favorable than those projected by the Company, additional
inventory write-downs may be required. Inventory impairment 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. In estimating reserves for obsolescence, the Company generally evaluates estimates of demand over
a 12-month period and provides reserves for inventory on hand in excess of the estimated 12-month demand.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major renewals and improvements are capitalized, while
maintenance and repairs are expensed when incurred. The Company’s property and equipment accounting policies
incorporate estimates, assumptions and judgements relative to the useful lives of its property and equipment.
Depreciation is provided on a straight-line basis over the estimated useful lives of the relative assets, which range
from three to 25 years. The Company evaluates the carrying value of its property and equipment when events or
changes in circumstances indicate that the carrying value of such assets may be impaired. Asset impairment
evaluations are, by nature, highly subjective.
Litigation
The Company’s estimated range of liability related to certain pending litigation is based on claims for which it can
estimate the amount and range of loss. Because of the uncertainties related to both the amount and range of the loss
on the remaining pending litigation, the Company is unable to make a reasonable estimate of the liability that could
result from an unfavorable outcome. As additional information becomes available, the Company will assess the
potential liability related to its pending litigation and revise its estimates. Such revisions in estimates of the potential
liability could materially impact the Company’s results of operations and financial position.
Impairment of Long-Lived Assets
The Company periodically evaluates the recoverability of its long-lived assets in accordance with SFAS 121,
“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” based upon
the estimated cash flows to be generated by the related asset. The evaluation is performed at the lowest level for
which there are identifiable, independent cash flows.
Equity Derivative Instruments
The Company has utilized a net share settled forward contract for the sale and repurchase of common stock.
Amounts paid and proceeds received from this instrument are recorded as components of additional paid-in capital.
Stock Option Plans
Prior to April 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded only if, on the date of grant, the current market
F-8
price of the underlying stock exceeded the exercise price and would be recorded on a straight-line basis over the
vesting period. On April 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," (“SFAS No. 123”) which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in fiscal 1996 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and to provide the pro forma disclosure provisions of SFAS No. 123.
Use of Estimates
The Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities,
revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual results could differ from those
estimates.
SFAS 133
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.
133, “Accounting for Derivatives and Similar Financial Instruments for Hedging Activities,” to establish accounting
and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that an entity
recognizes all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair
value. This new standard, as amended by related SFAS Nos. 137 and 138, was effective for the Company for its
fiscal year ending March 31, 2002. The adoption of SFAS No. 133 had no material impact on the Company’s results
of operations.
SFAS 144
In August 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets.” This statement establishes a single accounting model for long-lived
assets to be disposed of by sale and resolves significant implementation issues related to SFAS No. 121,
“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” and is effective
for fiscal years beginning after December 15, 2001 with earlier adoption encouraged. The Company is currently
evaluating the impact of adopting SFAS No. 144, and has not yet determined the effect, if any, such adoption would
have on the Company's results of operations or financial position.
Stock Split
On April 11, 2002, the Company announced a 3-for-2 stock split to be effected as a stock dividend. The stock split
was effective on May 8, 2002 for stockholders of record on April 22, 2002. All references in this report to the
number of shares and earnings per share have been adjusted to reflect the stock split.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current period presentation.
2.
SPECIAL CHARGES
Year Ended March 31,
Summary of Special Charges
2001
2000
Restructuring charges
TelCom merger charges
Intellectual property settlement
Legal charges
$ 6,409,000
10,949,000
---
---
$
269,000
---
(3,600,000)
1,200,000
Totals
$ 17,358,000
$ (2,131,000)
Fiscal 2002
There were no special charges in fiscal 2002.
F-9
Fiscal 2001
During the March 2001 quarter, the Company implemented capacity and cost reduction actions related to adverse
business conditions in the semiconductor industry. The Company reduced cumulative wafer fab capacity at its
manufacturing locations in Chandler and Tempe, Arizona by approximately 24%, as compared to its December 31,
2000 levels. The Company also decided to close its Hong Kong test facility, acquired as part of the TelCom
transaction, and migrate these test requirements to its test facility located in Thailand. The capacity reduction at the
Company’s wafer fabs was completed by the end of the March 2001 quarter, and the closure of the Hong Kong
facility was completed by June 30, 2001. These actions resulted in a restructuring charge of $6,409,000 in the
March 2001 quarter.
Included in the restructuring charges resulting from these actions was $2,149,000 related to employee severance
costs and $305,000 related to other restructuring costs. The balance of the charges relating to restructuring costs was
non-cash items for $3,955,000, related to equipment that was written off.
F-10
On January 16, 2001, the Company completed its merger with TelCom. Under the terms of the merger agreement,
each share of TelCom common stock was exchanged for 0.795 of a share of Microchip common stock. The
Company issued 14,702,184 shares of its Common Stock and assumed all outstanding TelCom stock options. The
merger was structured as a tax-free reorganization and is being accounted for as a pooling of interests.
During the March 2001 quarter, the Company recognized a special charge of $10,949,000 for costs associated with
the TelCom transaction. These costs included: $7,306,000 associated with investment banking fees; $1,607,000
associated with legal and accounting fees; $912,000 related to severance costs; and $1,124,000 related to other
merger costs.
All reserves relating to the March 31, 2001 fiscal year special charges have been fully utilized.
Fiscal 2000
TelCom recorded restructuring charges in its quarter ended March 31, 1999 of $269,000 primarily for employee
severance costs. These charges are reflected in the Company’s fiscal 2000 operating results.
On January 13, 1998, the Company finalized a settlement of patent litigation with Lucent Technologies Inc. resulting
in the Company recording a $5,000,000 special charge during the quarter ended December 31, 1997. Under the
terms of the settlement, Microchip made a one-time cash payment to Lucent and issued to Lucent a warrant to
acquire 1,012,500 shares of Common Stock of the Company priced at $7.48 per share. The Company originally
assigned a value of $3.3 million to the warrant and recorded the amount in accrued liabilities. The warrant was
exercised by the holder in fiscal 2002 and the $3.3 million was reclassified to additional paid-in capital and is
reflected in the Company’s Statement of Stockholders’ Equity and Other Comprehensive Income. The terms of the
settlement also provided for the Company to make a contingent payment to Lucent if the Company’s earnings per
share performance for the three and one-half year period ending June 30, 2001 did not meet certain targeted levels.
Based on the estimate of earnings per share for the measurement period as of March 31, 1999, the Company
provided appropriate reserves to meet this liability. Due to the sale of the warrant by the holder, the associated
reserve became unnecessary and $3,600,000 of the special charge was reversed in the quarter ended September 30,
1999.
The Company also recorded a special charge related to other legal issues in the amount of $1,200,000 in the quarter
ended September 30, 1999.
All reserves relating to the March 31, 2000 fiscal year special charges have been fully utilized.
F-11
3.
ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (amounts in thousands):
Trade accounts receivable
Other
March 31,
2002
2001
$
84,336
348
84,684
$
79,966
768
80,734
Less allowance for doubtful accounts
3,937
4,191
$ 80,747
$ 76,543
4.
INVENTORIES
The components of inventories are as follows (amounts in thousands):
Raw materials
Work in process
Finished goods
March 31,
2002
2001
$
7,187
61,724
19,704
$ 88,615
$
9,945
51,197
34,557
$ 95,699
Inventory impairment 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.
5.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (amounts in thousands):
Land
Building and building improvements
Machinery and equipment
Projects in process
Less accumulated depreciation
and amortization
March 31,
2002
2001
$
23,685
191,186
722,049
211,098
1,148,018
$
23,685
167,297
688,096
225,172
1,104,250
432,058
324,234
$ 715,960
$ 780,016
Certain reclassifications have been made to the March 31, 2001 amounts to properly reflect the portion of the
Company’s property in Puyallup, Washington that has not been placed in service and is, accordingly, included in
Projects in process.
Depreciation and amortization expense attributed to property, plant and equipment was $108,451,000, $101,990,000
and $69,696,000 for the years ending March 31, 2002, 2001 and 2000, respectively.
F-12
6.
INVESTMENT IN SAI
On October 7, 1999, TelCom entered into a Common Stock Agreement and a Stockholder Purchase Agreement with
Silicon Aquarius Incorporated (SAI). In accordance with the Common Stock Agreement, TelCom purchased 1.3
million shares of common stock of SAI, representing an 18.67% ownership interest in SAI, for $3.0 million.
TelCom accounted for this investment on the equity method with a 90-day lag in recording its share of the operating
results for SAI. During the fiscal year ended March 31, 2001, TelCom recorded its equity in net loss of SAI of
$626,000 and wrote off its remaining investment in SAI of $1,564,000 because this investment was deemed to have
no value.
7.
ACCRUED LIABILITIES
Accrued liabilities consists of the following (amounts in thousands):
March 31,
2002
2001
Income taxes
Other accrued expenses
$
62,745
26,128
$
42,560
30,305
$ 88,873
$ 72,865
8.
INCOME TAXES
The provision for income taxes is as follows (amounts in thousands):
Current expense:
Federal
State
Foreign
Deferred expense (benefit):
Federal
State
Foreign
2002
Year Ended March 31,
2001
2000
$
44,391
3,860
12,162
$
34,127
3,792
23,446
$
19,618
2,342
8,185
60,413
61,365
30,145
(25,246)
(2,195)
(595)
(6,836)
(760)
(406)
6,996
777
1,523
(28,036)
(8,002)
9,296
$ 32,377
$ 53,363
$ 39,441
The tax benefit associated with the exercise of employee stock options reduced taxes currently payable by
$18,752,000, $15,936,000 and $15,511,000 for the years ended March 31, 2002, 2001 and 2000, respectively.
These amounts were credited to additional paid-in capital in each of the three fiscal years.
F-13
The provision for income taxes differs from the amount computed by applying the statutory federal tax rate to
income before income taxes. The sources and tax effects of the differences are as follows (amounts in thousands):
Computed expected provision
$
44,517
$
68,670
$
54,115
2002
Year Ended March 31,
2001
2000
State income taxes, net
of federal benefits
Foreign sales corporation benefit
Research and development
tax credits
Foreign income taxed at
lower than the federal rate
1,068
(1,961)
(3,481)
1,971
(3,230)
2,032
(2,968)
---
---
Change in valuation allowance
---
(900)
(7,766)
(13,148)
(10,454)
(3,141)
Other
---
---
(143)
$ 32,377
$ 53,363
$ 39,441
Pretax income from foreign operations was $92,216,000, $133,208,000 and $59,234,000 for the years ended
March 31, 2002, 2001 and 2000, respectively. Unremitted foreign earnings that are considered to be permanently
invested outside the United States, and on which no deferred taxes have been provided, amounted to approximately
$379,436,000 at March 31, 2002.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred
tax liabilities are as follows (amounts in thousands):
March 31,
2002
2001
Deferred tax assets:
Intercompany profit in inventory
Deferred income on shipments to distributors
Inventory reserves
Net operating loss carryforward
Tax credit carryforwards
Accrued expenses and other
Gross deferred tax assets
$
11,137
14,566
1,083
28,646
21,023
7,525
83,980
$
12,749
22,061
6,688
---
---
6,010
47,508
Deferred tax liabilities:
Property, plant and equipment, principally
due to differences in depreciation
Other
Gross deferred tax liability
Net deferred tax asset
(30,808)
(324)
(31,132)
$ 52,848
(22,966)
---
(22,966)
$ 24,542
F-14
Management believes that the results of future operations will generate sufficient taxable income to realize the
deferred tax assets.
The Company is currently benefiting from a tax holiday from its Thailand manufacturing operations. The aggregate
dollar benefits derived from the tax holiday approximated $30,686,000, $40,812,000 and $12,378,000 for the years
ended March 31, 2002, 2001 and 2000, respectively. The benefit the tax holiday had on net income per share
approximated $0.15, $0.20 and $0.03 for the years ended March 31, 2002, 2001 and 2000, respectively. The
Company's tax holiday status in Thailand will partially expire in September 2003.
9.
CONTINGENCIES
In the ordinary course of its business, the Company is involved in a limited number of legal actions, both as plaintiff
and defendant, and could incur uninsured liability in any one or more of them. Although the outcome of these
actions is not presently determinable, the Company believes that the ultimate resolution of these matters will not
harm its business. Litigation relating to the semiconductor industry is not uncommon, and the Company is, and from
time to time has been, subject to such litigation. In the Company's opinion, based on consultation with legal counsel,
as of March 31, 2002, the effect of such matters will not have a material adverse effect on the Company's financial
position.
10.
LONG-TERM DEBT
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 March 31, 2002. The credit facility requires the Company to achieve
certain financial ratios and achieve 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 March 31, 2002.
The Company has an additional unsecured line of credit with various financial institutions in Asia for up to
$20,000,000 (U.S. Dollar equivalent). These borrowings are predominantly denominated in U.S. Dollars, bearing
interest at the Singapore Interbank Offering Rate (SIBOR) of 3.012% at March 31, 2002 plus 0.5% (average) and
expiring on various dates through March 2003. There were no borrowings against this line of credit as of March 31,
2002, but an allocation of $849,000 of the available line was made, relating to import guarantees associated with the
Company’s business in Thailand. There are no covenants associated with the foreign line of credit.
11.
STOCKHOLDERS' EQUITY
Stockholder Rights Plan. Effective October 11, 1999, the Company adopted an Amended and Restated Preferred
Shares Rights Agreement (the “Amended Rights Agreement”). The Amended Rights Agreement amends and
restates the Preferred Share Rights Agreement adopted by the Company as of February 13, 1995 (the “Prior Rights
Agreement”). Under the Prior Rights Agreement, on February 13, 1995, the Company's Board of Directors declared
a dividend of one right (a "Right") to purchase one one-hundredth of a share of the Company's Series A Participating
Preferred Stock ("Series A Preferred") for each outstanding share of Common Stock, $.001 par value, of the
Company. The dividend was payable on February 24, 1995 to stockholders of record as of the close of business on
that date.
The Amended Rights Agreement supersedes the Prior Rights Agreement as originally executed. Under the Amended
Rights Agreement, each Right enables the holder to purchase from the Company one one-hundredth of a share of
Series A Preferred at a purchase price of seventy four dollars and seven cents ($74.07) (the “Purchase Price”),
subject to adjustment. The rights become exercisable and transferable upon the occurrence of certain events.
Stock Repurchase Activity. In connection with a stock repurchase program, during the year ended March 31, 2000,
the Company purchased a total of 654,000 shares of the Company's Common Stock in open market activities at a
total cost of $4,772,000. The Company maintained a net shares settled forward contract for the years ended March
31, 2002, 2001 and 2000. Under the original terms of this contract the Company could deliver or receive shares of
F-15
Common Stock or cash based on the fair market value of its Common Stock on periodic settlement dates. The
contract was subsequently amended in fiscal 2001 to only allow the Company to receive cash but to deliver shares or
cash based on the fair market value of its Common Stock on periodic settlement dates. The table below contains a
summary of the share and cash activity under this contract (amounts in thousands):
Shares received
Shares delivered
Net shares received (delivered)
Cash received
Cash delivered
Net cash received (delivered)
Year Ended March 31,
2002
2001
2000
---
(573)
(573)
$
14,084
---
$ 14,084
277
(996)
(719)
$
17,190
(128)
$ 17,062
4,122
---
4,122
$ 10,243
---
$ 10,243
During the years ended March 31, 2002 and 2001, the Company made a delivery of 572,645 and 995,511 shares,
respectively, in connection with the net shares settled forward contract. No shares were delivered in respect to the
net shares settled forward contract for the year ended March 31, 2000. During the years ended March 31, 2001 and
2000, the Company received 276,890 and 4,122,327 shares, respectively, in conjunction with the net share settled
forward contract. No shares were received in respect of the net shares settled forward contract for the year ended
March 31, 2002. During the year ended March 31, 2002, the Company received $14,083,638 in connection with an
early termination covering 1,650,000 of the shares outstanding in the net shares settled forward contract. No such
early terminations occurred in the years ending March 31, 2001 and 2000. During the years ended March 31, 2001
and 2000, the Company also received $17,190,026 and $10,243,299, respectively, in conjunction with the quarterly
net share settled forward contact. During the year ended March 31, 2001, the Company delivered $128,449 in
conjunction with the net shares settled forward contract. All amounts received or delivered under the net shares
settled forward contract have been recorded to additional paid-in-capital. The Company closed out the net shares
settled forward contract in its entirety on January 15, 2002 and made a cash payment of $27,776,610 to purchase the
remaining 1,610,606 shares of its Common Stock outstanding under the contract. These shares were recorded as
treasury shares. As of March 31, 2002, the Company did not have any open derivative contracts.
12.
EMPLOYEE BENEFIT PLANS
The Company maintains a contributory profit-sharing plan for its domestic employees meeting certain eligibility and
service requirements. The plan qualifies under Section 401(k) of the Internal Revenue Code of 1986, as amended,
and allowed employees to contribute up to 20% of their base salary up through March 31, 2002, subject to maximum
annual limitations prescribed by the Internal Revenue Service. The plan was amended and as of April 1, 2002
employees can contribute up to 60% of their base salary, subject to maximum annual limitations prescribed by the
Internal Revenue Service. The Company shall make a matching contribution of up to 25% of the first 4% of the
participant's eligible compensation and may award up to an additional 25% under the discretionary match. All
matches are provided on a quarterly basis and require the participant to be an active employee at the end of each
quarter. For the fiscal years ended March 31, 2002, 2001 and 2000, the Company contributions to the plan totaled
$677,000, $1,111,000 and $921,000, respectively.
The Company’s 2001 Employee Stock Purchase Plan (the “2001 Purchase Plan”) became effective on March 1,
2002. The Board of Directors approved the 2001 Purchase Plan in May 2001 and the stockholders approved it in
August 2001. Under the 2001 Purchase Plan, eligible employees of the Company may purchase shares of Common
Stock at semi-annual intervals through periodic payroll deductions. The purchase price in general will be 85% of the
lower of the fair market value of the Common Stock on the first day of any semi-annual offering period or 85% of
the fair market value on the semi-annual purchase date. Depending upon a participant's entry date into the 2001
Purchase Plan, purchase periods under the 2001 Purchase Plan consist of overlapping periods of either 24, 18, 12 or
6 months in duration. 1,950,000 shares of Common Stock have been initially reserved for issuance under the 2001
Purchase Plan, comprised of 1,800,000 newly authorized shares and 150,000 shares which were rolled over to the
F-16
2001 Purchase Plan from a predecessor purchase plan (described below) which terminated effective February 28,
2002. In May 2002, the Board of Directors, subject to stockholder approval, reserved an additional 500,000 shares
of Common Stock for issuance under the 2001 Purchase Plan.
Prior to March 1, 2002, the Company maintained an employee stock purchase plan that allowed eligible employees
of the Company to purchase shares of Common Stock at semi-annual intervals through periodic payroll deductions.
The purchase price per share, in general, was 85% of the lower of the fair market value of the Common Stock on the
participant’s entry date into the offering period or 85% of the fair market value on the semi-annual purchase date.
On May 1, 2001, the Board of Directors approved the termination of this employee stock purchase plan immediately
following the close of the February 2002 purchase period. During the term of this employee stock purchase plan,
12,957,750 shares of Common Stock were reserved for issuance, and through the February 2002 purchase period,
12,717,729 shares had been issued under this employee stock purchase plan.
During fiscal 1995, a purchase plan was adopted for employees in non-U.S. locations. Such plan allows for the
purchase price per share to be 100% of the lower of the fair market value of the Common Stock on the beginning or
end of the semi-annual purchase plan period. Since the inception of this purchase plan, 223,594 shares of Common
Stock have been reserved for issuance and 192,485 shares have been issued under this purchase plan.
Effective January 1, 1997, the Company adopted a non-qualified deferred compensation arrangement. This plan is
unfunded and is maintained primarily for the purpose of providing deferred compensation for a select group of
highly compensated employees as defined in ERISA Sections 201, 301 and 401. There are no Company matching
contributions made under this plan.
Employees in certain foreign locations are covered by statutory pension plans, none of which are defined benefit
plans. Contributions are accrued based on an actuarially determined percentage of compensation and are funded in
amounts sufficient to meet statutory requirements. Pension expense amounted to $93,000, $175,000 and $295,000
for the years ended March 31, 2002, 2001 and 2000, respectively.
The Company has a management incentive compensation plan which provides for bonus payments, based on a
percentage of base salary, from an incentive pool created from operating profits of the Company, at the discretion of
the Board of Directors. The Company did not make any payments under its management incentive compensation
plan during fiscal 2002. During the years ended March 31, 2001 and 2000, $6,706,000 and $5,137,000,
respectively, were charged against operations for this plan.
The Company also has a plan that, at the discretion of the Board of Directors, provides a cash bonus to all employees
of the Company based on the operating profits of the Company. During the years ended March 31, 2002, 2001 and
2000, $970,000, $2,899,000 and $2,556,000, respectively, were charged against operations for this plan.
TelCom had various bonus plans in place for their employees for the periods covered by this report. During the
years ended March 31, 2001 and 2000, $1,674,000 and $1,824,000 respectively, were charged against operations for
these plans. The Company terminated TelCom’s bonus plans and all of TelCom's former employees that are now
employed by the Company are now eligible to participate in the Company’s existing plans.
13.
STOCK OPTION PLANS
Under the Company’s stock option plans (the “Plans”), officers, key employees, non-employee directors and
consultants may be granted non-statutory stock options to purchase shares of Common Stock at a price not less than
100% of the fair value of the option shares on the grant date. Options granted under the Plans vest over the period
determined by the Board of Directors at the date of grant, at periods ranging from one year to four years. The
maximum term of options granted under the Plans is 10 years. The Company did not make any stock option grants
to consultants during the years ended March 31, 2002, 2001 and 2000. At March 31, 2002, there were 18,605,577
shares available for grant under the Plans. The per share weighted average fair value of stock options granted under
the Plans for the years ended March 31, 2002, 2001 and 2000 was $10.28, $15.15 and $7.18, respectively, based on
the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
F-17
Expected life (years)
Risk-free interest rate
Volatility
Dividend yield
2002
4.65
4.50%
71%
0%
Year Ended March 31,
2001
4.35
5.50%
72%
0%
2000
4.29
6.00%
67%
0%
Under the Plans, 90,295,986 shares of Common Stock had been reserved for issuance since the inception of the
Plans.
The stock option activity is as follows:
Outstanding at March 31, 1999
23,447,965
$
4.96
Options Outstanding
Shares
Weighted Average
Exercise Price
Granted
Exercised
Canceled
6,329,324
(4,228,875)
(982,041)
Outstanding at March 31, 2000
24,566,373
Granted
Exercised
Canceled
TelCom adjustment
5,788,059
(2,707,982)
(1,930,680)
(359,737)
Outstanding at March 31, 2001
25,356,033
Granted
Exercised
Canceled
4,706,454
(4,083,182)
(1,312,494)
12.21
4.09
7.80
6.93
24.02
4.62
15.23
----
10.45
16.93
5.41
17.88
Outstanding at March 31, 2002
24,666,811
$ 12.12
The TelCom adjustment of 359,737 shares relates to TelCom’s net stock option activity for the three months ended
March 31, 2000, which has been included to conform to the Company’s March 31 fiscal year end.
F-18
The following table summarizes information about the stock options outstanding at March 31, 2002:
Range
Exercise Price
Options
Outstanding
$ 0.009 - $ 4.066
$ 4.088 - $ 6.074
$ 6.090 - $ 6.370
$ 6.525 - $ 8.963
$ 9.167 - $ 10.037
$ 10.407 - $ 15.860
$ 15.917 - $ 15.917
$ 16.167 - $ 23.360
$ 23.389 - $ 23.389
$ 23.700 - $ 31.722
$ 0.009 - $ 31.722
3,126,073
2,671,300
3,339,540
1,902,122
3,180,030
1,864,041
2,924,943
1,267,213
2,558,775
1,832,774
24,666,811
Weighted
Average
Remaining
Life
Weighted
Average
Exercise Price
Options
Exercisable
Weighted
Average
Exercise Price
1.89
4.46
5.93
5.17
7.02
8.30
8.99
8.37
8.04
8.58
6.42
$
2.90
5.11
6.29
8.28
10.02
14.81
15.92
19.27
23.39
26.87
$ 12.12
3,114,893
2,615,290
982,498
1,512,182
689,733
524,757
0
428,109
70,732
591,585
10,529,779
$
$
2.89
5.10
6.31
8.18
9.99
13.37
0.00
18.90
23.39
27.68
7.69
At March 31, 2002 and 2001, the number of options exercisable was 10,529,779 and 11,076,738, respectively, and
the weighted-average exercise price of those options was $7.69 and $5.79, respectively.
The Company received a tax benefit of $18,752,000, $15,936,000 and $15,511,000 for the years ended March 31,
2002, 2001 and 2000, respectively, from the exercise of non-qualified stock options and the disposition of stock
acquired with incentive stock options or through the Company's employee stock purchase plan. For financial
reporting purposes, the tax effect of this deduction is accounted for as a credit to additional paid-in capital rather
than as a reduction of income tax expense.
The Company applies APB Opinion No. 25 in accounting for its various stock plans and, accordingly, no
compensation cost has been recognized for the Plans or the employee stock purchase plan in the financial statements.
Had the Company determined compensation cost in accordance with SFAS No. 123, the Company’s net income per
share would have been reduced to the pro forma unaudited amounts indicated below (in thousands except per share
amounts):
Net income
As reported
Pro forma
Basic net income
Per share
As reported
Pro forma
Diluted net income As reported
Per share
Pro forma
2002
Year Ended March 31,
2001
2000
94,814
58,235
$ 142,836
116,625
$ 115,173
94,431
0.48
0.29
0.45
0.28
$
$
0.74
0.60
0.70
0.57
$
$
0.63
0.51
0.59
0.48
$
$
$
The above pro forma disclosure is not necessarily representative of the effects on reported net income for future
years.
F-19
14.
LEASE COMMITMENTS
The Company leases office space, transportation and other equipment under capital and operating leases, which
expire at various dates through March 31, 2008. The future minimum lease commitments under these leases are
payable as follows (amounts in thousands):
Year Ending
March 31,
Operating
Leases
2003
2004
2005
2006
2007
Thereafter
Total minimum payments
$
2,402
1,263
619
449
391
161
$ 5,285
Rental expense under operating leases totaled $4,600,000, $4,472,000 and $4,369,000 for the years ended March 31,
2002, 2001 and 2000, respectively.
15.
GAIN ON SALE OF INVESTMENTS
During the quarter ended March 31, 1999, TelCom recognized a gain of $5,000,000 on the sale of its investment in
IC WORKS. This gain is reported in the Company’s March 31, 2000 financial statements because TelCom’s 1999
calendar year results are combined with Microchip’s March 31, 2000 fiscal year results for purposes of this report.
IC WORKS was purchased by Cypress Semiconductor, Inc., a publicly held company and, as part of the purchase
agreement between IC WORKS and Cypress Semiconductor, TelCom’s preferred shares, with a book value of
$1,500,000, were exchanged for common shares of Cypress Semiconductor with a fair market value of $6,500,000.
During the quarter ended June 30, 1999, the Company sold all of the shares it held, except shares held in escrow, for
$6,700,000 and recognized an additional gain on the sale of $819,000 representing the increase in the fair value
between the date the shares were received and the date the shares were sold. The value of the shares held in escrow
at December 31, 1999 was $2,286,000 and was classified as short-term investments. During TelCom’s year ended
December 31, 2000, it sold its remaining shares of Cypress Semiconductor and recognized an additional gain of
$3,091,000, representing the increase in the fair value between the date the shares were received and the date they
were sold. $1,427,000 of the $3,091,000 gain occurred during the Company’s fiscal year ending March 31, 2001.
16.
GEOGRAPHIC INFORMATION
The Company operates in one operating segment and engages primarily in the design, development, manufacture and
marketing of semiconductor products. The Company sells its products to distributors and original equipment
manufacturers (OEMs) in a broad range of market segments, performs on-going credit evaluations of its customers
and generally requires no collateral. The Company's operations outside the United States consist of product
assembly and final test facilities in Thailand, sales and support centers and design centers in certain foreign
countries. Domestic operations are responsible for the design, development and wafer fabrication of all products, as
well as the coordination of production planning and shipping to meet worldwide customer commitments. The
Thailand test facility is reimbursed in relation to value added with respect to assembly and test operations and other
functions performed, and certain foreign sales offices receive a commission on export sales within their territory.
Accordingly, for financial statement purposes, it is not meaningful to segregate sales or operating profits for the test
and foreign sales office operations. Identifiable assets by geographic area are as follows (amounts in thousands):
F-20
United States
Thailand
Taiwan
Hong Kong
Other
March 31,
2002
2001
$ 946,925
163,937
51,594
593
112,551
$ 824,801
187,690
63,510
15,677
69,671
Total Assets
$1,275,600
$1,161,349
Sales to unaffiliated customers located outside the United States, primarily in Asia and Europe, aggregated
approximately 69%, 68% and 68% of consolidated net sales for the years ended March 31, 2002, 2001 and 2000,
respectively. Sales to customers in Europe represented 31% of consolidated net sales for the years ended March 31,
2002, 2001 and 2000. Sales to customers in Asia represented 35%, 36% and 34% of consolidated net sales for the
years ended March 31, 2002, 2001 and 2000, respectively. Sales into any individual foreign country did not exceed
10% of the Company's net sales.
17.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents approximates fair value because their maturity is less than three months.
The carrying amount of accounts receivable, accounts payable and accrued liabilities approximates fair value due to
the short-term maturity of the amounts. The fair value of capital lease obligations, long-term debt and lines of credit
approximate their carrying value as they are estimated by discounting the future cash flows at rates currently offered
to the Company for similar debt instruments.
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to reduce
its exposure to fluctuations in foreign exchange rates. These financial instruments include standby letters of credit
and foreign currency forward contracts. When engaging in forward contracts, risks arise from the possible inability
of counterparties to meet the terms of their contracts and from movements in securities values, interest rates and
foreign exchange rates. At March 31, 2002 and 2001, the Company held contracts totaling $1,949,000 and
$4,235,000, respectively, which were entered into and hedged the Company's foreign currency risk. The value of the
contracts is based on quoted market prices. The contracts matured May 2002 and May 2001, respectively.
Unrealized gains and losses as of the balance sheet dates and realized gains and losses for the years ending
March 31, 2002, 2001 and 2000 were not material.
18.
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):
2002
Year Ended March 31,
2001
2000
Net income
$ 94,814
$ 142,836
$ 115,173
Weighted average common
shares outstanding
199,184
193,632
183,471
Dilutive effect of stock options
9,723
11,558
12,038
Weighted average common and
common equivalent shares outstanding
208,907
205,190
195,509
Basic net income per share
Diluted net income per share
$ 0.48
$ 0.45
$ 0.74
$ 0.70
$ 0.63
$ 0.59
F-21
Weighted average shares exclude the effect of antidilutive options. As of March 31, 2002, 2001 and 2000, the
weighted average number of options that were antidilutive were 402,000, 199,000 and 11,000, respectively.
During the years ended March 31, 2001 and 2000, the Company received 276,890 and 4,122,327 shares,
respectively, in conjunction with the net share settled forward contract. No shares were received in conjunction with
the net shares settled forward contract during the year ended March 31, 2002. During the years ended March 31,
2002 and 2001, the Company delivered 572,645 and 995,511 shares, respectively, in conjunction with the net share
settled forward contract. No shares were delivered in conjunction with the net share settled forward contract during
the year ended March 31, 2000. During the year ended March 31, 2000, the Company purchased a total of 654,000
shares of its Common Stock in open market activities. During the years ended March 31, 2002 and 2001, there were
no purchases of Common Stock in open market activities.
Both basic and diluted net income per share incorporate the affects of the Company’s stock repurchase program,
shares received and delivered in connection with the net share settled forward contract and stock purchased in open
market transactions as outlined above.
19.
QUARTERLY RESULTS (UNAUDITED)
The following table presents the Company’s selected unaudited quarterly operating results for eight quarters ended
March 31, 2002. The Company believes that all necessary adjustments have been made to present fairly the related
quarterly results (in thousands except per share amounts):
Fiscal 2002
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
Net sales
Gross profit
Operating income
Net income
Diluted net income per share
$ 138,894
69,406
28,429
21,773
0.11
$ 141,662
70,869
30,536
23,148
0.11
$ 141,857
71,139
29,861
23,577
0.11
$ 148,841
75,322
33,645
26,316
0.12
$ 571,254
286,736
122,471
94,814
0.45
Fiscal 2001
Net sales
Gross profit
Special charges
Operating income
Net income
Diluted net income per share
$ 177,749
95,847
---
52,397
42,132
0.21
$ 194,481
106,681
---
59,921
46,235
0.22
$ 190,134
101,622
---
54,259
42,247
0.21
$ 153,366
76,564
17,358
15,564
12,222
0.06
$ 715,730
380,714
17,358
182,141
142,836
0.70
20.
SUPPLEMENTAL FINANCIAL INFORMATION
Cash paid for income taxes amounted to $12,695,000, $24,763,000 and $10,378,000 during the years ended
March 31, 2002, 2001 and 2000, respectively. Cash paid for interest amounted to $522,000, $771,000 and
$1,196,000 during the years ended March 31, 2002, 2001 and 2000, respectively. Included in the special charge for
the year ended March 31, 2001 was a non-cash amount of $3,955,000, which pertained to the write-down of fixed
assets due to the restructuring of the Company’s manufacturing facilities.
F-22
A summary of additions and deductions related to the allowance for doubtful accounts for the years ended March 31,
2002, 2001 and 2000 follows (amounts in thousands):
Balance at
beginning
of year
Charged to
costs and
expenses
Deductions
Balance at
end of year
Allowance for doubtful accounts:
2002
2001
2000
$
4,191
2,932
2,555
58
1,855
936
(312)
(596)
(559)
$ 3,937
4,191
2,932
21.
SUBSEQUENT EVENT
On May 22, 2002, the Company signed a definitive agreement to acquire PowerSmart, Inc. ("PowerSmart"), a
privately held fabless semiconductor company that develops and sells high-accuracy field-programmable integrated
circuits and battery sensors based on such integrated circuits. The Company will pay approximately $54.0 million in
cash for PowerSmart and it will assume a balance sheet with approximately $4.0 million in cash and other net assets,
and assume certain employee stock options. The transaction will be accounted for as a purchase. The transaction is
expected to close by June 7, 2002, following approval by PowerSmart’s stockholders.
F-23
BOARD OF DIRECTORS AND OFFICERS
Board of Directors
Corporate Officers
Steve Sanghi,
Chairman of the Board, President &
Chief Executive Officer
Microchip Technology Inc.
Matthew W. Chapman
President and CEO
Centrisoft Corporation
L.B. Day
President
L.B. Day & Co., Inc.
Albert J. Hugo-Martinez
Chief Executive Officer
Hugo-Martinez Associates
Steve Sanghi
President, Chief Executive Officer and
Chairman of the Board
David S. Lambert
Vice President, Fab Operations
Mitchell R. Little
Vice President, Worldwide Sales and Applications
Gordon W. Parnell
Vice President, Chief Financial Officer
Wade F. Meyercord
Senior Vice President and Chief Financial Officer
Rioport.com
Richard J. Simoncic
Vice President, Analog and Interface Products
Division
Appointed Officers
Richard A. Bosshardt
Vice President, Worldwide Distribution Sales
Steven V. Drehobl
Vice President, Security, Microcontroller, and
Technology Division
Michael A. Finley
Vice President, Fab 2 Operations
Michael J. Jones
Vice President, Human Resources
Bryan J. Liddiard
Vice President, Analog and Interface
Products Division Marketing
Robert J. Lloyd
Vice President, Site Services and
Facilities Management
Ganesh Moorthy
Vice President, Advanced Microcontroller and
Automotive Division
John F. Oatley
Vice President, Pacific Rim Manufacturing
Robert H. Owen
Vice President, Information Services
Lawrence G. Ross
Vice President, Asia Pacific Sales
Mary K. Simmons
Vice President, General Counsel and Secretary
Howard C. Teeter
Vice President, Europe Sales
Edward D. Mitchell
Vice President, Analog Product Development
Dan L. Termer
Vice President, Automotive Products Group
Sumit K. Mitra
Vice President, Digital Signal Controller Division
William Yang
Vice President, Finance – Pacific Rim
David R. Yeskey
Vice President, Microcontroller Product Marketing
Corporate Information
Independent Auditors
Common Stock
Ernst & Young LLP
Phoenix, Arizona
Legal Counsel
Wilson Sonsini Goodrich & Rosati
Palo Alto, California
Transfer Agent & Registrar
Wells Fargo Bank Minnesota, N.A.
Shareowner Services
161 North Concord Exchange
P.O. Box 64854
St. Paul, MN 55075-1139
800-468-9716
Form 10-K
Microchip Technology’s common stock is traded on the
Nasdaq National Market under the symbol “MCHP.” The
following table sets forth the quarterly high and low closing
prices of the common stock as reported by the Nasdaq
National Market for the last two years, adjusted to reflect a
3-for-2 stock split effected in May 2002 and a 3-for-2 stock
split effected in September 2000.
Fiscal 2002
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2001
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$22.29
$25.59
$27.84
$28.81
High
$32.33
$31.94
$24.79
$20.71
Low
$14.96
$16.89
$16.81
$22.26
Low
$22.22
$22.04
$13.33
$14.54
A copy of the Company’s Form 10-K as filed
with the Securities and Exchange Commission
is available upon request to:
Internet Address
Investor Relations
Microchip Technology Incorporated
2355 West Chandler Boulevard
Chandler, Arizona 85224-6199
480-792-7761
Annual Meeting
The annual meeting of the stockholders of
Microchip Technology Inc. will be held at
the Company’s Chandler facility, 2355 West
Chandler Boulevard, Chandler, Arizona on
Friday, August 16, 2002 at 9:00 a.m.
©2002 Microchip Technology Inc. All rights reserved. The
Microchip name and logo, PIC, PICmicro, MPLAB and KEELOQ are
registered trademarks and dsPIC, In-Circuit Serial Programming,
ICSP and Select Mode are trademarks of Microchip Technology Inc.
IrDA is a registered trademark of the Infrared Data Association. All
other trademarks are the property of their respective owners.
Printed in the U.S.A. 6/02
Printed on recycled paper
Additional Company information, along with the most
recent financial and product information and press
releases, can be accessed at: www.microchip.com
Corporate Facilities
Microchip Technology Incorporated
2355 West Chandler Boulevard
Chandler, Arizona 85224-6199
Microchip Technology Incorporated
1200 South 52nd Street
Tempe, Arizona 85281
Microchip Technology Incorporated
1111 39th Avenue S.E.
Puyallup, Washington 98374
Microchip Technology (Thailand) Co., Ltd.
14 Moo 1 T. Wangtakien
A. Muangchachoengsao
Chachoengsao, 24000, Thailand
Americas • Asia • Europe • Japan
www.microchip.com