10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended December 30, 2001 ------------------------------------------------ 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 No. 0-8866 MICROSEMI CORPORATION --------------------- (Exact name of registrant as specified in its charter) Delaware 95-2110371 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2381 Morse Avenue, Irvine, California 92614 ------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (949) 221-7100 ----------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The number of shares of the issuer's Common Stock, $.20 par value, outstanding on January 14, 2002 was 28,505,107. PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS The unaudited consolidated financial information for the quarter ended December 30, 2001 of Microsemi Corporation and Subsidiaries ("Microsemi" or the "Company") and the comparative unaudited consolidated financial information for the corresponding period of the prior year, together with the balance sheet as of September 30, 2001, are attached hereto and incorporated herein. 2 MICROSEMI CORPORATION AND SUBSIDIARIES Unaudited Consolidated Balance Sheets (amounts in thousands, except par value per share)
September 30, December 30, 2001 2001 ------------- ------------ ASSETS Current assets: Cash and cash equivalents .............................................. $ 24,808 $ 23,003 Accounts receivable less allowance for doubtful accounts, $3,584 at September 30, 2001 and $3,712 at December 30, 2001 ......... 37,950 37,149 Inventories ............................................................ 58,889 60,436 Deferred income taxes .................................................. 12,277 12,277 Other current assets ................................................... 2,072 1,749 ---------- ---------- Total current assets ................................................... 135,996 134,614 Property and equipment, net .............................................. 63,380 67,823 Deferred income taxes 1,671 1,671 Goodwill and other intangible assets, net ................................ 37,306 36,336 Other assets ............................................................. 1,818 1,874 ---------- ---------- TOTAL ASSETS ............................................................. $ 240,171 $ 242,318 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable .......................................................... $ 9,766 $ 9,766 Current maturities of long-term debt ................................... 3,573 3,315 Accounts payable ....................................................... 11,385 8,948 Accrued liabilities .................................................... 22,158 21,047 Income taxes payable ................................................... 6,862 6,515 ---------- ---------- Total current liabilities .............................................. 53,744 49,591 ---------- ---------- Long-term debt ........................................................... 6,078 6,051 ---------- ---------- Other long-term liabilities .............................................. 4,960 4,876 ---------- ---------- Commitments and contingencies (Note 3) Stockholders' equity: Preferred stock ........................................................ - - Common stock, $.20 par value; authorized 100,000 shares; issued and outstanding 28,248 and 28,500 shares at September 30, 2001 and December 30, 2001, respectively ..................................... 5,650 5,700 Capital in excess of par value of common stock ......................... 110,729 112,835 Retained earnings ...................................................... 60,096 64,358 Accumulated other comprehensive loss ................................... (1,086) (1,093) ---------- ---------- Total stockholders' equity ............................................. 175,389 181,800 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................... $ 240,171 $ 242,318 ========== ==========
The accompanying notes are an integral part of these statements. 3 MICROSEMI CORPORATION AND SUBSIDIARIES Unaudited Consolidated Income Statements (amounts in thousands, except earnings per share)
Quarter Ended ------------------------------- December 31, December 30, 2000 2001 --------------- -------------- Net sales ................................................. $ 63,005 $ 57,018 Cost of sales ............................................. 43,031 35,198 ---------- --------- Gross profit .................................. 19,974 21,820 ---------- --------- Operating expenses: Selling, general and administrative .................... 9,940 9,119 Amortization of goodwill and other intangible assets ... 673 1,092 Research and development ............................... 3,423 5,154 ---------- --------- Total operating expenses ...................... 14,036 15,365 ---------- --------- Operating income .............................. 5,938 6,455 ---------- --------- Other income (expense): Interest, net .......................................... 158 (161) Other, net ............................................. 22 67 ---------- --------- Total other income (expense) .................. 180 (94) ---------- --------- Income before income taxes ................................ 6,118 6,361 Provision for income taxes ................................ 2,019 2,099 ---------- --------- Net income ................................................ $ 4,099 $ 4,262 ========== ========= Earnings per share: -Basic ............................................... $ 0.15 $ 0.15 ========== ========= -Diluted ............................................. $ 0.14 $ 0.14 ========== ========= Weighted average common shares outstanding: -Basic ............................................... 27,608 28,331 ========== ========= -Diluted ............................................. 29,112 30,120 ========== =========
The accompanying notes are an integral part of these statements. 4 MICROSEMI CORPORATION AND SUBSIDIARIES Unaudited Consolidated Statements of Cash Flows (amounts in thousands)
Quarter Ended ------------------------------ December 31, December 30, 2000 2001 -------------- -------------- Cash flows from operating activities: Net income ....................................................... $ 4,099 $ 4,262 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................. 2,880 3,673 Provision for doubtful accounts ............................... 313 128 Loss on retirement of assets .................................. -- 23 Changes in assets and liabilities: Accounts receivable ...................................... (1,742) 673 Inventories .............................................. 1,339 (1,547) Other current assets ..................................... (1,279) 323 Accounts payable ......................................... (849) (2,438) Accrued liabilities ...................................... 2,528 (1,111) Income taxes payable ..................................... (644) (347) -------- -------- Net cash provided by operating activities ........... 6,645 3,639 -------- -------- Cash flow from investing activities: Purchases of property and equipment .......................... (2,865) (7,054) Other assets ................................................. 140 (171) -------- -------- Net cash used in investing activities ............... (2,725) (7,225) -------- -------- Cash flows from financing activities: Decrease in notes payable .................................... (21) -- Payments on long-term debt ................................... (286) (285) Increase (decrease) in other long-term liabilities ........... 8 (83) Proceeds from exercise of stock options ...................... 269 2,156 -------- -------- Net cash (used in) provided by financing activities... (30) 1,788 -------- -------- Effect of exchange rate changes on cash .......................... (29) (7) -------- -------- Net increase (decrease) in cash and cash equivalents ............. 3,861 (1,805) Cash and cash equivalents at beginning of period ................. 30,460 24,808 -------- -------- Cash and cash equivalents at end of period ....................... $ 34,321 $ 23,003 ======== ========
The accompanying notes are an integral part of these statements. 5 MICROSEMI CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS December 30, 2001 1. PRESENTATION OF FINANCIAL INFORMATION The financial information furnished herein is unaudited, but in the opinion of management of Microsemi Corporation includes all adjustments (all of which are normal, recurring adjustments) necessary for a fair presentation of the results of operations for the periods indicated. The results of operations for the first quarter of the current fiscal year are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q, and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The unaudited consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto in the Annual Report on Form 10-K for the fiscal year ended September 30, 2001. 2. INVENTORIES Inventories used in the computation of cost of goods sold were (amounts in thousands): September 30, December 30, 2001 2001 -------------------- -------------------- Raw materials $ 14,751 $ 16,008 Work in process 23,565 24,113 Finished goods 20,573 20,315 ------------- ---------------- $ 58,889 $ 60,436 ============= ================ 3. CONTINGENCY In Broomfield, Colorado, the owner of a property located adjacent to a manufacturing facility owned by a subsidiary of the Company had notified the subsidiary and other parties, claiming that contaminants migrated to his property, thereby diminishing its value. In August 1995, the subsidiary, together with former owners of the manufacturing facility, agreed to settle the claim and to indemnify the owner of the adjacent property for remediation costs. Although TCE and other contaminants previously used at the facility are present in soil and groundwater on the subsidiary's property, the Company vigorously contests any assertion that the subsidiary is the cause of the contamination. In November 1998, the Company signed an agreement with three former owners of this facility whereby the former owners 1) reimbursed the Company for $530,000 of past costs, 2) will assume responsibility for 90% of all future clean-up costs, and 3) indemnify and protect the Company against any and all third-party claims relating to the contamination of the facility. An Integrated Corrective Action Plan has been submitted to the State of Colorado. Sampling and free phase management plans are in preparation for the Colorado Department of Public Heath & Environment. State and local agencies in Colorado are reviewing current data and considering study and cleanup options, and it is not yet possible to predict costs for remediation. In the opinion of management, the final outcome of the Broomfield, Colorado environmental matter will not have a material adverse effect on the Company's financial position, results of operations or cash flows. The Company is involved in various pending litigation matters, arising out of the normal conduct of its business, including from time to time litigation relating to commercial transactions, contracts, and environmental matters. In the opinion of management, the final outcome of these matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows. 6 4. COMPREHENSIVE INCOME Comprehensive income is defined as the change in equity (net assets) of a business enterprise during the period from transactions and other events and circumstances from non-owner sources. Accumulated other comprehensive loss consists of the change in the cumulative translation adjustment. Total comprehensive income of the Company for the quarters ended December 31, 2000 and December 30, 2001 was $4,070,000 and $4,255,000, respectively. 5. EARNINGS PER SHARE Basic earnings per share have been computed based upon the weighted average number of common shares outstanding during the respective periods. Diluted earnings per share have been computed, when the result is dilutive, using the treasury stock method for stock options outstanding and giving effect to issuance of shares upon conversion of debt during the respective periods. Earnings per share for the respective quarters ended December 31, 2000 and December 30, 2001 were calculated as follows (amounts in thousands, except per share data): Quarter Ended -------------------------- December 31, December 30, 2000 2001 ------------ ------------ BASIC Net income ......................................... $ 4,099 $ 4,262 ======= ======= Weighted-average common shares outstanding ..................................... 27,608 28,331 ======= ======= Basic earnings per share ........................... $ 0.15 $ 0.15 ======= ======= DILUTED Net income ......................................... $ 4,099 $ 4,262 Interest savings from assumed conversions of convertible debt, net of income taxes ........... 29 29 ------- ------- Net income assuming conversions .................... $ 4,128 $ 4,291 ======= ======= Weighted-average common shares outstanding for basic ........................................... 27,608 28,331 Dilutive effect of stock options ................... 1,170 1,455 Dilutive effect of convertible debt ................ 334 334 ------- ------- Weighted-average common shares outstanding on a diluted basis .................. 29,112 30,120 ======= ======= Diluted earnings per share ......................... $ 0.14 $ 0.14 ======= ======= Approximately 26,000 and 618,000 options in the first quarters of fiscal years 2001 and 2002, respectively, were not included in the computation of diluted EPS because the exercise price was greater than the average market price of the common stock, thereby resulting in an antidilutive effect. 7 6. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 establishes new accounting and reporting standards for business combinations and requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. Use of the pooling-of-interest method is prohibited. The acquisitions of New England Semiconductor Corp. and Compensated Devices, Inc. (see Note 10 to the consolidated financial statements) were accounted for under the provisions of SFAS No. 141. Further, goodwill and other intangible assets acquired in these acquisitions will be subject immediately to the provisions of SFAS No. 142. SFAS No. 142, which changes the accounting for goodwill from an amortization method to an impairment-only approach, will be effective on a Company-wide basis at the beginning of the first quarter of fiscal year 2003. The Company is currently evaluating the Company-wide impact of adopting SFAS No. 142. In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement will be effective for the Company no later than the first quarter of fiscal year 2003. The Company is currently evaluating the impact of adopting SFAS No. 143. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement will be effective for the Company no later than the first quarter of fiscal year 2003. The Company is currently evaluating the impact of adopting SFAS No. 144. 8 7. SEGMENT INFORMATION The Company's reportable operating segments are based on geographic location and the measure of segment profit is income from operations. The Company operates predominantly in a single industry segment as a manufacturer of discrete semiconductors and whole-circuit solutions. Geographic areas in which the Company operates include the United States, Europe and Asia. Inter-geographic sales primarily represent intercompany sales which are accounted for based on established sales prices between the related companies and are eliminated in consolidation. Financial information by geographic segments is as follows (amounts in thousands):
Quarter Ended ------------------------------------- December 31, 2000 December 30, 2001 ----------------- ----------------- Net sales: United States Sales to unaffiliated customers ........... $ 55,876 $ 51,025 Intergeographic sales ..................... 6,377 5,704 Europe Sales to unaffiliated customers ........... 6,160 5,939 Intergeographic sales ..................... 1,094 1,175 Asia Sales to unaffiliated customers ........... 969 54 Intergeographic sales ..................... 1,058 294 Eliminations of intergeographic sales .......... (8,529) (7,173) --------- --------- $ 63,005 $ 57,018 ========= ========= Income (loss) from operations: United States ................................ $ 5,572 $ 6,169 Europe ....................................... 323 385 Asia ......................................... 43 (99) --------- --------- Total ..................................... $ 5,938 $ 6,455 ========= ========= Capital expenditures: United States ................................ $ 2,832 $ 7,034 Europe ....................................... 32 20 Asia ......................................... 1 -- --------- --------- Total ..................................... $ 2,865 $ 7,054 ========= ========= Depreciation and amortization: United States ................................ $ 2,768 $ 3,584 Europe ....................................... 56 59 Asia ......................................... 56 30 --------- --------- Total ..................................... $ 2,880 $ 3,673 ========= ========= September 30, 2001 December 30, 2001 ------------------ ----------------- Identifiable assets: United States ................................ $ 224,271 $ 226,935 Europe ....................................... 10,609 10,765 Asia ......................................... 5,291 4,618 --------- --------- Total ..................................... $ 240,171 $ 242,318 ========= =========
9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q includes current beliefs, expectations and other forward looking statements, the realization of which may be adversely impacted by any of the factors discussed below or the additional factors referenced under the heading "Important Factors Related to Forward-Looking Statements and Associated Risks," found below. This Management's Discussion and Analysis of Financial Condition and Results of Operations and the accompanying unaudited consolidated financial statements and notes should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto in the Annual Report on Form 10-K for the fiscal year ended September 30, 2001. INTRODUCTION ------------ Microsemi Corporation is a global supplier of commercial and high-reliability analog and mixed-signal integrated circuits ("IC") and power and signal discrete semiconductors serving the satellite, telecommunications, digital media, computer and peripherals, military/aerospace, industrial/commercial, and medical markets. The Company's IC products offer light, sound and power management for desktop and mobile computing platforms as well as other power control applications. Power management generally refers to a class of standard linear integrated circuits ("SLICs") which perform voltage regulation and reference in most electronic systems. The definition of power management has broadened in recent years to encompass other devices and modules, often application specific standard products ("ASSPs"), which address particular aspects of power management, such as audio or display related ICs. This business is composed of both a core platform of traditional SLICs, such as low dropout regulators ("LDOs") and pulse width modulators ("PWMs"), and differentiated ASSPs such as backlight inverters, audio amplification ICs and small computer standard interface ("SCSI") terminators. The Company's integrated circuit products are used in computer and data storage, lighting, automotive, telecommunications, test instruments, defense and aerospace equipment, high-quality sound reproduction and data transfer. Major discrete products are silicon rectifiers, zener diodes, low leakage and high voltage diodes, temperature compensated zener diodes, transistors and a family of subminiature high power transient suppressor diodes. The Company also manufactures discrete semiconductors for commercial applications, such as automatic surge protectors, transient suppressor diodes used for telephone applications and computer switching diodes used in computer systems. A partial list of applications of the Company's discrete semiconductor products includes: heart pacer transient shock protector diodes (where the Company believes it is the leading supplier in that market), low leakage diodes, transistors used in jet aircraft engines and high performance test equipment, high temperature diodes used in oil drilling sensing elements operating at 200 degrees centigrade, temperature compensated zener or rectifier diodes used in missile systems, power transistors and other electronic systems. The Company currently serves a broad group of customers including Boeing, Guidant/Cardiac Pace Makers, Seagate Technology, Astrium, Universal Semiconductor, Motorola, Alcatel, and Medtronic. 10 The Company closed Microsemi PPC Inc. ("PPC") in March 2001 and ceased the operations at Microsemi (H.K.) Ltd. ("Hong Kong") in June 2001. On August 2, 2001, Microsemi NES, Inc. ("MNES"), a wholly-owned subsidiary of the Company, acquired the assets of New England Semiconductor Corp. and its wholly-owned subsidiary, of Lawrence, Massachusetts ("NES"). On August 15, 2001, Microsemi CDI, Inc. ("MCDI"), a wholly-owned subsidiary of the Company, acquired the assets of Compensated Devices, Inc., of Melrose, Massachusetts ("CDI"). Results Of Operations For The Quarter Ended December 31, 2000 Compared To The Quarter Ended December 30, 2001. Net sales decreased $6.0 million, from $63.0 million for the first quarter of fiscal year 2001 to $57.0 million for the first quarter of fiscal year 2002. The decrease was primarily attributable to a decline in lower gross margin products sold to the PC, mobile telephone and industrial markets and by the reduction or elimination of revenues generated by subsidiaries that were closed, partially offset by higher sales of the military and medical products and by the additions of MNES and MCDI. For the first quarter of fiscal year 2001, PPC and Hong Kong had revenues of $1.2 million and $1.0 million, respectively. For the first quarter of fiscal year 2002, MNES and MCDI had revenues of $3.6 million and $2.9 million, respectively. Gross profit increased $1.8 million, from $20.0 million for the first quarter of fiscal year 2001 to $21.8 million for the first quarter of fiscal year 2002. As a percentage of sales, gross profit was 31.7% for the first quarter of fiscal year 2001, compared to 38.3% for the first quarter of fiscal year 2002. This increase was due primarily to higher capacity utilization, a shift in revenues from lower-margin commodity products in the computer/peripherals and industrial markets to higher-margin application-specific products in the defense mobil connectivity and medical markets and the consolidation of certain operations into other locations. In the first quarter of fiscal year 2001, PPC and Hong Kong had gross profit of $0.3 million and $0.2 million, respectively. In the first quarter of fiscal year 2002, both MNES and MCDI had gross profit of $1.0 million each. Selling, general and administrative expenses decreased from $9.9 million for the first quarter of fiscal year 2001 to $9.1 million for the first quarter of fiscal year 2002, primarily due to lower commission and other selling expenses. Research and development expense increased $1.8 million, from $3.4 million for the first quarter of fiscal year 2001 to $5.2 million for the first quarter of fiscal year 2002. The increase was primarily due to higher spending to develop new higher-margin application-specific products. Amortization of goodwill and other intangible assets increased $0.4 million, due to the increase of non-goodwill intangible assets related to the acquisitions of NES and CDI. The Company earned less interest income in the first quarter of fiscal year 2002 compared to the first quarter of fiscal year 2001 and incurred additional interest expense from the notes payable related to the acquisitions of NES and CDI. The effective tax rate for each of the quarters ended December 31, 2000 and December 30, 2001 was 33.0%. 11 Capital Resources And Liquidity Net cash provided by operating activities was $6.6 million and $3.6 million for the first quarters of fiscal years 2001 and 2002, respectively. The $3.0 million decrease in net cash provided by operating activities was a result of the combined effect of differences in depreciation and amortization, accounts receivable, inventories, other current assets, accounts payable and accrued liabilities. The decreases in accounts receivable, accounts payable and accrued liabilities and the increase in inventories were primarily due to lower sales. Net cash used in investing activities was $2.7 million and $7.2 million for the first quarters of fiscal years 2001 and 2002, respectively. The $4.5 million increase of net cash used in investing activities was primarily due to a higher amount of purchases of property and equipment. Net cash (used in) provided by financing activities was ($0.03) million and $1.8 million for the first quarters of fiscal years 2001 and 2002, respectively. The increase was primarily due to proceeds from exercises of employee stock options. Microsemi's operations in the quarter ended December 30, 2001 were funded with internally generated funds. The Company has maintained a credit line with a bank, from which it can borrow up to $30 million. The credit line is secured by substantially all of the assets of the Company. This credit line expires in March 2003. As of December 30, 2001, there were no funds borrowed under this credit facility. The credit line includes a facility to issue letters of credit, and $4.1 million was outstanding in the form of letters of credit as of December 30, 2001. At December 30, 2001, Microsemi had $23.0 million in cash and cash equivalents. As of December 30, 2001, Microsemi was in compliance with the covenants required by its banks and lessors. Based upon information currently available, management believes that Microsemi can meet its current operating cash, debt service requirements and capital commitments with internally generated funds together with its available borrowings. Outlook There has been a broad slowdown affecting the technology sector, including many end-markets which the Company's products address; however the military/defense and medical business were strong in the first quarter of fiscal year 2002, partially offsetting a downward trend in revenues in the other end markets. The Company continues to see long-term strength in the military/aerospace end markets. However, in the near term, including the second quarter, the Company is affected by an abrupt significant decline in commercial aircraft product sales due to events of September 11th. Order activity following September 11th for commercial aircraft products, those used by Boeing subcontractors, were halted as customers rationalized the long-term effects of September 11th. While this did not significantly affect the first quarter shipment stream, it is a major component of the decline in revenues that the Company is forecasting for the second quarter. The Company estimates that commercial aircraft business is approximately 5% of its overall business. Opening backlog for the second quarter of fiscal year 2002 was lower than what it was at the beginning of the first quarter. Book-to-bill ratio for the first quarter was 0.89. 12 In the Mobile Connectivity end market, the Company continues to see pricing pressure on the Powermite products. Management is attempting to reposition these products into new products for this end market in an effort to achieve higher gross margins. The Telecommunications end market has historically been comprised of customers in the transoceanic fiber optic space including Alcatel, Tycom, and Pirelli, as well as base-station and infrastructure customers like Ericsson, Nortel, and Motorola. Business in these two areas has been hit hard. The Company sees no significant upside in the long haul fiber optic and base-station market for at least another two to three quarters. The Automotive end market has grown to 5% as a percentage of the whole of the Company's business through OEM's. The Company expects a further increase in revenues in the latter part of fiscal year 2002 as automobile makers plan to launch several new multimedia systems this fall. The first quarter was, and the Company foresees that the second quarter will continue to be, weak for general purpose linear regulator products that were used in low end desktop computers. Competitors in this market have opted to seize market share at the expense of appreciably lower gross margins. Microsemi has selected not to participate in this business. The Company's strategy in the computer/peripherals end market is to focus on higher gross margin LoadShare regulators for Digital Media applications as well as our LED Driver and Class D audio circuits. The Company is accelerating its facility consolidations to help improve capacity utilization and gross margins. Management intends to continue to consolidate its facilities and to dispose of low-growth businesses within Microsemi's operating units. As the Company foregoes sources of low-gross margin revenues, or dispose of business operations, Management expects revenues to be adversely impacted. The Company announced recently its intentions to close the Watertown, Massachusetts, facility and move its production to other facilities in order to improve capacity utilization and gross-margins. 13 IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS ---------------------------------------------------------------------------- Some of the statements in this report or incorporated by reference are forward-looking, including, without limitation, the statements under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations". These statements include those that contain words like "may," "will," "could," "should," "project," "believe," "anticipate," "expect," "plan," "estimate," "forecast," "potential," "intend," "maintain," "continue" and variations of these words or comparable words. In addition, all of the non-historical information herein is forward-looking, include any statement or implication about a future time, result or other circumstance. Forward-looking statements are not a guarantee of future performance and involve risks and uncertainties. Actual results may differ substantially from the results that the forward-looking statements suggest for various reasons. These forward-looking statements are made only as of the date of this report. Microsemi does not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements included in this report are based on, among other items, current assumptions that Microsemi will be able to meet its current operating cash and debt service requirements, that Microsemi will be able to successfully resolve disputes and other business matters as anticipated, that competitive conditions within the analog, mixed signal and discrete semiconductor, integrated circuit or custom component assembly industries will not affect the Company materially or adversely, that Microsemi will retain existing key personnel, that Microsemi's forecasts will reasonably anticipate market demand for its products, and that there will be no other material adverse change in its operations or business. Other factors that could cause results to vary materially from current expectations are referred to elsewhere in this report. Assumptions relating to the foregoing involve judgments that are difficult to make and future circumstances that are difficult to predict accurately or correctly. Forecasting and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause Microsemi to alter its internal forecasts, which may in turn affect results or expectations. Microsemi Corporation does not undertake to announce publicly these changes that may occur in our expectations after the periods presented herein. Readers are cautioned against giving undue weight to any of the forward-looking statements. Adverse changes to our results could result from any number of factors, including for example fluctuations in economic conditions, potential effects of inflation, lack of earnings visibility, dependence upon certain customers or markets, dependence upon suppliers, future capital needs, rapid technological changes, difficulties in integrating acquired businesses, ability to realize cost savings or productivity gains, potential cost increases, dependence on key personnel, difficulties regarding hiring and retaining qualified personnel in a competitive labor market, risks of doing business in international markets, and problems of third parties. The inclusion of forward-looking information should not be regarded as a representation by Microsemi or any other person that its objectives or plans will be achieved. Additional factors that could cause results to vary materially from current expectations are discussed under the heading "Important Factors Related to Forward-Looking Statements and Associated Risks" in the Annual Report in the Form 10-K as filed with the Securities and Exchange Commission on December 24, 2001, and elsewhere in that Form 10-K, including but not limited to, under the headings, "Legal Proceedings," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the notes to the financial statements included therein. 14 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to various market risks, including changes in foreign currency exchange rates and changes in interest rates. Market risk is the potential loss arising from adverse changes in exchange rates and prices. The Company conducts business in a number of foreign currencies, principally those of Europe and Asia, directly or in its foreign operations. The Company may receive some revenues in foreign currencies and purchase some inventory in foreign currencies. Accordingly, Microsemi is exposed to transaction gains and losses that could result from changes in exchange rates of foreign currencies relative to the U.S. dollar. Transactions in foreign currencies have represented a relatively small portion of the Company's business. Also these currencies have been relatively stable against the U.S. dollar for the past several years. As a result, foreign currency fluctuations have not had a material impact historically on Microsemi's revenues or results of operations. There can be no assurance that those currencies will remain stable relative to the U.S. dollar or that future fluctuations in the value of foreign currencies will not have material adverse effects on the results of operations, cash flows and financial condition of the Company. The largest foreign currency exposure of the Company results from activity in British pounds and the European Union Euro. The Company has not conducted a foreign currency hedging program thus far. The Company has and may continue to consider the adoption of a foreign currency hedging program. The Company did not enter into derivative financial instruments and did not enter into any other financial instruments for trading, speculative purposes or to manage its interest rate risk. The Company's other financial instruments consist primarily of cash, accounts receivable, accounts payable, and long-term obligations. The Company's exposure to market risk for changes in interest rates relates primarily to short-term investments and short-term obligations. As a result, the Company does not expect fluctuations in interest rates to have a material impact on the fair value of these instruments. The Company does not engage in transactions intended to hedge its exposure to changes in interest rates. The Company maintains a $30,000,000 revolving line of credit, which expires in March 2003. The line of credit is collateralized by substantially all of the assets of the Company. It bears interest at the bank's prime rate plus 0.75% to 1.5% per annum or, at the Company's option, at the Eurodollar rate plus 1.75% to 2.5% per annum. The interest rate is determined by the ratio of total funded debt to Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"). On August 2, 2001, in connection with an acquisition of operating assets, the Company issued a one-year promissory note in the original principal amount of approximately $5.8 million structured in such a way that the interest expense on the maturity date will be in a range of a minimum of approximately $0.2 million or up to a maximum of approximately $1.4 million. Within that range, the interest rate is related linearly to the market price of the Company's Common Stock on the maturity date divided by its price on the issuance date. An increase in the market price of the Company' Common Stock over the period will result in an increase in the related interest payable. The Company is recording interest expense at the Company's market rate at the date of acquisition. 15 PART II - OTHER INFORMATION Item 1. Legal Proceedings ----------------- Inapplicable. Item 2. Changes in Securities --------------------- None Item 3. Defaults Upon Senior Securities ------------------------------- Inapplicable Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- Inapplicable Item 5. Other information ----------------- Inapplicable Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: None (b) Reports on Form 8-K: On November 7, 2001, the Company filed a report on Form 8-K/A, Amendment No. 2 to the Current Report on Form 8-K that was filed August 16, 2001, reporting under Item 5 that the acquisition of assets of Compensation Devices, Inc., previously filed under Item 2, is being reported only under Item 5, Item 7 and Item 9. In addition, Regulation FD Disclosure was made under Item 9 concerning two acquisitions and revised financial guidance. On November 7, 2001, the Company filed a report on Form 8-K, reporting cautionary language under Item 5, attaching an exhibit under item 7, and under Item 9 reporting as to the Registrant's presentations to securities analysts and others at the AEA Classic Financial Conference and subsequently at the Registrant's corporate headquarters. On November 13, 2001, the Company filed a report on Form 8-K/A, Amendment No. 1 to the Current Report on Form 8-K that was filed November 7, 2001, reporting cautionary language under Item 5, attaching exhibits under item 7, and reporting under Item 9 as to the Registrant's presentations to securities analysts and others at the Registrant's corporate headquarters. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MICROSEMI CORPORATION By: /s/ DAVID R. SONKSEN -------------------- David R. Sonksen Executive Vice President and Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer and duly authorized to sign on behalf of the Registrant) DATED: February 11, 2002 17