0000950147-01-501817.txt : 20011128 0000950147-01-501817.hdr.sgml : 20011128 ACCESSION NUMBER: 0000950147-01-501817 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROCHIP TECHNOLOGY INC CENTRAL INDEX KEY: 0000827054 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 860629024 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21184 FILM NUMBER: 1776863 BUSINESS ADDRESS: STREET 1: 2355 W CHANDLER BLVD CITY: CHANDLER STATE: AZ ZIP: 85224-6199 BUSINESS PHONE: 4807867200 MAIL ADDRESS: STREET 1: 2355 WEST CHANDLER BLVD CITY: CHANDLER STATE: AZ ZIP: 85224-6199 10-Q 1 e-7644.txt QUARTERLY REPORT FOR THE QTR ENDED 09/30/2001 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 Number: 0-21184 MICROCHIP TECHNOLOGY INCORPORATED (Exact Name of Registrant as Specified in Its Charter) DELAWARE 86-0629024 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2355 W. CHANDLER BLVD., CHANDLER, AZ 85224-6199 (480) 792-7200 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) The registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes [X] No [ ] Number of shares of common stock, $.001 Par Value, outstanding as of November 2, 2001: 133,312,842 shares. ================================================================================ MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES INDEX Page ---- PART I. FINANCIAL INFORMATION. Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - September 30, 2001 and March 31, 2001...........................3 Condensed Consolidated Statements of Income - Three and Six Months Ended September 30, 2001 and September 30, 2000..........................................4 Condensed Consolidated Statements of Cash Flows - Six Months Ended September 30, 2001 and September 30, 2000..............................................5 Notes to Condensed Consolidated Financial Statements - September 30, 2001..............................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................9 Item 3. Quantitative and Qualitative Disclosures about Market Risk.......22 PART II. OTHER INFORMATION. Item 4. Submission of Matters to a Vote of Security Holders..............23 Item 6. Exhibits and Reports on Form 8-K.................................23 SIGNATURES....................................................................24 2 MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands except share amounts) ASSETS
September 30, March 31, 2001 2001 ---------- ---------- (Unaudited) (Note 1) Cash and cash equivalents $ 171,143 $ 129,909 Accounts receivable, net 69,977 76,543 Inventories 94,155 95,699 Prepaid expenses 38,339 19,072 Deferred tax asset 36,485 47,508 Other current assets 2,781 2,828 ---------- ---------- Total current assets 412,880 371,559 Property, plant and equipment, net 755,693 780,016 Other assets 8,801 9,774 ---------- ---------- Total assets $1,177,374 $1,161,349 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 35,877 $ 57,652 Accrued liabilities 58,925 72,865 Deferred income on shipments to distributors 44,198 64,106 ---------- ---------- Total current liabilities 139,000 194,623 Pension accrual 800 912 Deferred tax liability 23,493 22,966 Stockholders' equity: Preferred stock, $.001 par value; authorized 5,000,000 shares; no shares issued or outstanding -- -- Common stock, $.001 par value; authorized 300,000,000 shares; issued and outstanding 133,171,373 shares at September 30, 2001; 133 131 issued and outstanding 130,897,639 shares at March 31, 2001; Additional paid-in capital 444,607 418,277 Retained earnings 569,341 524,440 ---------- ---------- Total stockholders' equity 1,014,081 942,848 Total liabilities and stockholders' equity $1,177,374 $1,161,349 ========== ==========
See accompanying notes to condensed consolidated financial statements 3 MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands except per share amounts) (Unaudited)
Three Months Ended September 30, Six Months Ended September 30, -------------------------------- ------------------------------ 2001 2000 2001 2000 --------- --------- --------- --------- Net sales $ 141,662 $ 194,481 $ 280,556 $ 372,230 Cost of sales 70,793 87,800 140,281 169,702 --------- --------- --------- --------- Gross profit 70,869 106,681 140,275 202,528 Operating expenses: Research and development 20,168 19,514 39,702 36,948 Selling, general and administrative 20,165 27,246 41,608 53,262 --------- --------- --------- --------- 40,333 46,760 81,310 90,210 Operating income 30,536 59,921 58,965 112,318 Other income (expense): Gain on sale of investment -- -- -- 1,427 Net loss in equity investment -- (205) -- (413) Interest income 1,284 3,690 2,546 7,802 Interest expense (125) (176) (332) (315) Other, net 20 209 363 335 --------- --------- --------- --------- Income before income taxes 31,715 63,439 61,542 121,154 Income taxes 8,567 17,204 16,621 32,787 --------- --------- --------- --------- Net income $ 23,148 $ 46,235 $ 44,921 $ 88,367 ========= ========= ========= ========= Basic net income per share $ 0.17 $ 0.36 $ 0.34 $ 0.69 ========= ========= ========= ========= Diluted net income per share $ 0.17 $ 0.34 $ 0.32 $ 0.64 ========= ========= ========= ========= Weighted average common shares outstanding 132,806 128,528 132,120 128,254 ========= ========= ========= ========= Weighted average common and potential common shares outstanding 139,058 137,430 138,338 137,286 ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements 4 MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Six Months Ended September 30, ------------------------------ 2001 2000 --------- --------- Cash flows from operating activities: Net income $ 44,921 $ 88,367 Adjustments to reconcile net income to net cash provided by operating activities: Provision for doubtful accounts 28 870 Provision for inventory valuation 3,968 3,589 Provision for pension accrual 77 93 Gain on sale of fixed assets (242) -- Gain on sale of investment -- (1,427) Net loss in equity investment -- 413 Depreciation and amortization 54,431 48,673 Amortization of purchased technology 184 1,529 Deferred income taxes 11,550 (6,043) Tax benefit from exercise of stock options 9,390 13,545 (Increase) decrease in accounts receivable 6,538 (13,194) Increase in inventories (2,424) (10,161) Increase (decrease) in accounts payable and accrued liabilities (38,548) 42,809 Change in other assets and liabilities (35,715) 10,177 --------- --------- Net cash provided by operating activities 54,158 179,240 --------- --------- Cash flows from investing activities: Capital expenditures (30,895) (261,493) Acquisition of common stock of MEAD Microelectronics, net of cash acquired -- (1,330) Proceeds from sale of assets 1,029 148 --------- --------- Net cash used in investing activities (29,866) (262,675) --------- --------- Cash flows from financing activities: Repayment of lines of credit -- (9,000) Proceeds from sale of stock and put options 16,942 28,755 --------- --------- Net cash provided by financing activities 16,942 19,755 --------- --------- Net increase (decrease) in cash and cash equivalents 41,234 (63,680) Cash and cash equivalents at beginning of period 129,909 294,407 --------- --------- Cash and cash equivalents at end of period $ 171,143 $ 230,727 ========= =========
See accompanying notes to condensed consolidated financial statements 5 MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (UNAUDITED) (1) BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements include the accounts of Microchip Technology Incorporated and its wholly-owned subsidiaries (the "Company"). All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments of a normal recurring nature which are necessary for a fair presentation have been included. Certain information and footnote disclosures normally included in audited consolidated financial statements have been condensed or omitted pursuant to such Securities and Exchange Commission rules and regulations. It is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended March 31, 2001. The results of operations for the three and six months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ended March 31, 2002. On January 16, 2001, we merged with TelCom Semiconductor, Inc. The merger has been accounted for as a pooling of interests. Accordingly, the condensed consolidated financial statements have been restated to include the operations of TelCom for all periods presented. (2) ACCOUNTS RECEIVABLE Accounts receivable consists of the following (amounts in thousands): September 30, March 31, 2001 2001 ---------- ---------- Trade accounts receivable $ 73,243 $ 79,966 Other 953 768 ---------- ---------- 74,196 80,734 Less allowance for doubtful accounts 4,219 4,191 ---------- ---------- $ 69,977 $ 76,543 ========== ========== 6 (3) INVENTORIES The components of inventories consist of the following (amounts in thousands): September 30, March 31, 2001 2001 ---------- ---------- Raw materials $ 8,060 $ 9,945 Work in process 63,506 51,197 Finished goods 22,589 34,557 ---------- ---------- $ 94,155 $ 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. (4) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following (amounts in thousands): September 30, March 31, 2001 2001 ---------- ---------- Land $ 23,685 $ 23,685 Building and building improvements 183,840 167,297 Machinery and equipment 712,187 688,096 Projects in process 214,172 225,172 ---------- ---------- 1,133,884 1,104,250 Less accumulated depreciation and amortization 378,191 324,234 ---------- ---------- $ 755,693 $ 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. This reclassification had no effect on the Company's results of operations. Depreciation and amortization expense attributed to property and equipment was $54.4 million and $48.7 million for the six months ended September 30, 2001 and September 30, 2000, respectively. (5) LINES OF CREDIT The Company has an unsecured revolving credit facility with a syndicate of banks totaling $100,000,000, bearing interest at LIBOR plus 0.625%. The Company can elect to increase the facility to $150,000,000, subject to certain conditions set forth in the credit agreement. This facility has a termination date of May 31, 2003. The Company had no borrowings against this line of credit as of September 30, 2001. 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 September 30, 2001. 7 The Company has an additional unsecured line of credit with various financial institutions in Asia for up to $24,600,000 (U.S. Dollar equivalent). These borrowings are predominantly denominated in U.S. Dollars, bearing interest at the Singapore Interbank Offering Rate (SIBOR) of 2.70% at September 30, 2001 plus 0.5% (average) and expiring on various dates through September 2002. There were no borrowings against this line of credit as of September 30, 2001, but an allocation of $911,000 of the available line was made, relating to import guarantees associated with the Company's business in Thailand. (6) STOCKHOLDERS' EQUITY The Company had a net shares settled forward contract outstanding as of September 30, 2001. In connection with this contract, the Company made a net delivery of 381,763 shares of its common stock during the six months ended September 30, 2001, and received 184,893 shares of its common stock during the six months ended September 30, 2000. The net shares settled forward contract could obligate the Company to make a delivery of common stock in the future if the price of its common stock is below the strike price of the contract. The final settlement date of the net shares settled forward contract is May 2002. (7) NET INCOME PER SHARE The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts): Three Months Ended Six Months Ended September 30, September 30, -------- -------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Net income $ 23,148 $ 46,235 $ 44,921 $ 88,367 Weighted average common shares outstanding 132,806 128,528 132,120 128,254 Dilutive effect of stock options 6,252 8,902 6,218 9,032 -------- -------- -------- -------- Weighted average common and potential common shares outstanding 139,058 137,430 138,338 137,286 ======== ======== ======== ======== Basic net income per share $ 0.17 $ 0.36 $ 0.34 $ 0.69 ======== ======== ======== ======== Diluted net income per share $ 0.17 $ 0.34 $ 0.32 $ 0.64 ======== ======== ======== ======== 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth certain operational data as a percentage of net sales for the periods indicated: Three Months Ended Six Months Ended September 30, September 30, (Unaudited) (Unaudited) ------------------ ------------------ 2001 2000 2001 2000 ------ ------ ------ ------ Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 50.0% 45.1% 50.0% 45.6% ------ ------ ------ ------ Gross profit 50.0% 54.9% 50.0% 54.4% Research and development 14.2% 10.1% 14.2% 9.9% Selling, general and administrative 14.2% 14.0% 14.8% 14.3% ------ ------ ------ ------ Operating income 21.6% 30.8% 21.0% 30.2% ====== ====== ====== ====== NET SALES We operate in one industry segment and engage primarily in the design, development, manufacture and marketing of semiconductor products. We sell our products to distributors and original equipment manufacturers, referred to as OEMs, in a broad range of market segments, perform on-going credit evaluations of our customers and generally require no collateral. Our net sales for the quarter ended September 30, 2001 were $141.7 million, an increase of 2.0% from the previous quarter's sales of $138.9 million, and a decrease of 27.1% from net sales of $194.5 million in the quarter ended September 30, 2000. Our net sales for the six months ended September 30, 2001 were $280.6 million, a decrease of 24.6% from our net sales of $372.2 million for the six months ended September 30, 2000. The decrease in our net sales in the three and six month periods ended September 30, 2001, as compared to the three and six month periods ended September 30, 2000, is the result of inventory corrections at our customers, slowing demand from end markets and overall semiconductor industry conditions. Net sales of our microcontroller products increased approximately 2% in the three months ended September 30, 2001, as compared to the three months ended June 30, 2001. The growth in net sales of our microcontroller products can be attributed to our strong design win performance and the overall positioning of our product offering. Net sales of our analog and interface products increased approximately 18% in the three months ended September 30, 2001 as compared to the three months ended June 30, 2001. The growth in net sales of our analog and interface products can be attributed to our sales focus of designing our analog products into the applications of our existing microcontroller customers. Net sales of our Serial EEPROM memory products decreased approximately 6% in the three months ended September 30, 2001, as compared to the three months ended June 30, 2001. Unit volume sales of our Serial EEPROM memory products increased in the three months ended September 30, 2001 over the three months ended June 30, 2001, however, average pricing decreases for these products of approximately 10% in the September quarter resulted in the decrease in net sales. 9 Sales by product line for the three and six months ended September 30, 2001 and 2000 were as follows (in thousands):
Three Months Ended Six Months Ended September 30, September 30, (Unaudited) (Unaudited) --------------------------------------------- --------------------------------------------- 2001 % 2000 % 2001 % 2000 % -------- -------- -------- -------- -------- -------- -------- -------- Microcontrollers $109,749 77.5% $120,385 61.9% $217,289 77.4% $236,692 63.6% Serial EEPROM memories $ 19,990 14.1% $ 54,133 27.8% $ 41,207 14.7% $ 94,123 25.3% Analog and interface products $ 11,923 8.4% $ 19,963 10.3% $ 22,058 7.9% $ 41,415 11.1% -------- -------- -------- -------- -------- -------- -------- -------- Total sales $141,662 100.0% $194,481 100.0% $280,556 100.0% $372,230 100.0% ======== ======== ======== ======== ======== ======== ======== ========
Our net sales in any given quarter depend upon a combination of shipments from backlog and orders received in that quarter for shipment in that quarter, which we refer to as turns orders. We measure turns orders at the beginning of a quarter based on the orders needed to meet the revenue targets that we set entering the quarter. We have emphasized our ability to respond quickly to customer orders as part of our competitive strategy, resulting in customers placing orders with shorter delivery schedules. Turns orders directly correlate to product lead times, which are currently between two and four weeks generally, as compared to four to 12 weeks generally 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 in advance and therefore, we do not currently have the order visibility we experienced in the first half of 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 years between 20% and 65%. At October 1, 2001, we required turns orders of approximately 51% in order to achieve our projected net sales for the third quarter of fiscal 2002. At July 1, 2001, we required turns orders of approximately 45% to achieve our projected net sales for the second quarter of fiscal 2002. Turns orders are difficult to predict, and we may not experience the combination of turns orders and shipments from backlog in any quarter that would be sufficient to achieve anticipated net sales. If we do not achieve a sufficient level of turns orders in a particular quarter, our net sales and operating results will suffer. 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, while average selling prices of our memory products have declined over time. During the fiscal year ended March 31, 2001, we initially experienced price increases in our Serial EEPROM products, but in the fourth quarter of fiscal 2001 we experienced pricing and competitive pressures which resulted in price reductions averaging approximately 10% as compared to the third quarter of fiscal 2001. Pricing for Serial EEPROM products declined by an average of approximately 15% in the first quarter of fiscal 2002, as compared to the fourth quarter of fiscal 2001. Pricing for Serial EEPROM products declined by an average of approximately 10% in the second quarter of fiscal 2002, as compared to the first quarter of fiscal 2002. We expect that pricing pressures affecting Serial EEPROM products will continue throughout fiscal 2002. 10 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 maintain average selling prices for microcontroller products by introducing new products with more features and higher prices, thereby offsetting price declines in older products. 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. THE FOREGOING STATEMENTS REGARDING THE LEVEL OF TURNS ORDERS REQUIRED TO MEET OUR REVENUE TARGETS FOR THE THIRD QUARTER OF FISCAL 2002, AVERAGE SELLING PRICES, PRICING PRESSURES AFFECTING OUR SERIAL EEPROM PRODUCTS THROUGHOUT FISCAL 2002, AND PRICING PRESSURES IN CERTAIN MICROCONTROLLER PRODUCT LINES 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; INVENTORY MIX AND TIMING OF CUSTOMER ORDERS; COMPETITION AND COMPETITIVE PRESSURES ON PRICING AND PRODUCT AVAILABILITY; CUSTOMERS' INVENTORY LEVELS, ORDER PATTERNS AND SEASONALITY; POSSIBLE DISRUPTION IN COMMERCIAL ACTIVITIES OCCASIONED BY TERRORIST ACTIVITY AND ARMED CONFLICT, SUCH AS CHANGES IN LOGISTICS AND SECURITY ARRANGEMENTS, AND REDUCED END-USER PURCHASES RELATIVE TO EXPECTATIONS; IMPACT OF EVENTS OUTSIDE THE UNITED STATES, SUCH AS THE BUSINESS IMPACT OF FLUCTUATING CURRENCY RATES OR UNREST OR POLITICAL INSTABILITY; THE CYCLICAL NATURE OF BOTH THE SEMICONDUCTOR INDUSTRY AND THE MARKETS ADDRESSED BY OUR PRODUCTS; MARKET ACCEPTANCE OF OUR NEW PRODUCTS AND THOSE OF OUR CUSTOMERS; FLUCTUATIONS IN PRODUCTION YIELDS, PRODUCTION EFFICIENCIES AND OVERALL CAPACITY UTILIZATION; CHANGES IN PRODUCT MIX; AND ABSORPTION OF FIXED COSTS, LABOR AND OTHER FIXED MANUFACTURING COSTS. Distributors accounted for approximately 61% of our net sales in the three months ended September 30, 2001, and approximately 62% of our net sales in the three months ended September 30, 2000. Distributors accounted for approximately 62% of our net sales in the six months ended September 30, 2001, and approximately 64% of our net sales in the six months ended September 30, 2000. Our largest distributor accounted for approximately 13% of our total net sales for the three and six months ended September 30, 2001, and approximately 14% of our total net sales for the three and six months ended September 30, 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 inventory returns. Sales by geography for the three and six months ended September 30, 2001 and 2000 were as follows (in thousands):
Three Months Ended Six Months Ended September 30, September 30, (Unaudited) (Unaudited) --------------------------------------------- --------------------------------------------- 2001 % 2000 % 2001 % 2000 % -------- -------- -------- -------- -------- -------- -------- -------- Americas $ 48,563 34.3% $ 64,389 33.1% $ 96,470 34.4% $120,362 32.3% Europe 41,726 29.4% 53,005 27.3% 89,611 31.9% 108,751 29.2% Asia 51,373 36.3% 77,087 39.6% 94,475 33.7% 143,117 38.5% -------- -------- -------- -------- -------- -------- -------- -------- Total Sales $141,662 100.0% $194,481 100.0% $280,556 100.0% $372,230 100.0% ======== ======== ======== ======== ======== ======== ======== ========
Our sales to foreign customers have been predominately in Asia and Europe, which we attribute to the manufacturing strengths 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 11 and South America. Sales to foreign customers accounted for approximately 68% of our net sales in the three months ended September 30, 2001 and approximately 67% of our net sales in the three months ended September 30, 2000. Sales to foreign customers accounted for approximately 69% of our net sales in each of the six month periods ending September 30, 2001 and September 30, 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. GROSS PROFIT Our gross profit was $70.9 million in the three months ended September 30, 2001, and $106.7 million in the three months ended September 30, 2000. Our gross profit was $140.3 million in the six months ended September 30, 2001 and $202.5 million in the six months ended September 30, 2000. Gross profit as a percent of sales was 50.0% in the three months ended September 30, 2001, and 54.9% in the three months ended September 30, 2000. Gross profit as a percent of sales was 50.0% in the six months ended September 30, 2001, and 54.4% in the six months ended September 30, 2000. The most significant factors affecting gross profit percentage in the periods covered by this report were: * reduced levels of manufacturing capacity utilization in the June 2001 and September 2001 quarters * continued cost reductions in wafer fabrication and assembly and test manufacturing in all periods covered by this report * the ability to maintain average selling prices for our microcontroller products where moderate pricing pressures have been offset by new product introductions with more features and higher selling prices * declines in Serial EEPROM memory product pricing in the June 2001 and September 2001 quarters * fluctuations in the product mix of proprietary microcontroller and analog products and related commodity memory products as illustrated in the chart in Net Sales on page 10, and * cost reductions associated with one-week plant shutdowns in April 2001 and July 2001. As of March 31, 2001, we had reduced cumulative wafer capacity at our wafer fabs by approximately 24% in response to business conditions that resulted in decreased product demand. During the June and September 2001 quarters our wafer fabs operated at approximately 70% of their capacity due to the capacity reductions implemented in the March 2001 quarter and the one-week plant shutdowns in April 2001 and July 2001. We believe that these capacity reductions have aligned our capacity with our current assessment of demand. 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. The start-up date of our Puyallup, Washington semiconductor manufacturing complex has been delayed until December 2002, subject to business conditions and capacity requirements. We currently intend to maintain the Puyallup facility at a minimum cost basis until it is required for capacity expansion. 12 We continue to transition products to our 0.7-micron and 0.5-micron process technologies to reduce future manufacturing costs. In the three and six months ended September 30, 2001, 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 BELIEF THAT OUR CAPACITY REDUCTION ACTIONS HAVE ALIGNED CAPACITY WITH OUR CURRENT ASSESSMENT OF DEMAND, THE ANTICIPATED START-UP DATE OF THE PUYALLUP FACILITY, 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: FLUCTUATIONS IN PRODUCTION YIELDS, PRODUCTION EFFICIENCIES AND OVERALL CAPACITY UTILIZATION; ABSORPTION OF FIXED COSTS, LABOR AND OTHER DIRECT MANUFACTURING COSTS; DEMAND FOR OUR PRODUCTS; COMPETITION AND COMPETITIVE PRESSURE ON PRICING; POSSIBLE DISRUPTION IN COMMERCIAL ACTIVITIES OCCASIONED BY TERRORIST ACTIVITY AND ARMED CONFLICT, SUCH AS CHANGES IN LOGISTICS AND SECURITY ARRANGEMENTS, AND REDUCED END-USER PURCHASES RELATIVE TO EXPECTATIONS; IMPACT OF EVENTS OUTSIDE THE UNITED STATES, SUCH AS THE BUSINESS IMPACT OF FLUCTUATING CURRENCY RATES OR UNREST OR POLITICAL INSTABILITY; THE ABILITY TO INCREASE MANUFACTURING CAPACITY AS NEEDED; COST AND AVAILABILITY OF RAW MATERIALS; CHANGES IN PRODUCT MIX; AND OTHER INDUSTRY AND ECONOMIC CONDITIONS. Currently, approximately half of our assembly operations are performed by third-party contractors located throughout Asia. The balance of our assembly operations is performed at our Thailand facility. As of September 30, 2001, approximately 48% of our assembly requirements were being performed in our Thailand facility, as compared to approximately 32% as of September 30, 2000. Substantially all of our test requirements were being performed in our Thailand facility as of September 30, 2001, as compared to approximately 82% as of September 30, 2000. 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 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 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 * 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. 13 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 operations performance could suffer. RESEARCH AND DEVELOPMENT Research and development expenses for the three months ended September 30, 2001 were $20.2 million, or 14.2% of sales, compared to $19.5 million, or 10.0% of sales for the three months ended September 30, 2000. Research and development expenses for the six months ended September 30, 2001 were $39.7 million, or 14.2% of sales, compared to $36.9 million, or 9.9% of sales for the six months ended September 30, 2000. We are committed to investing in new and enhanced products, including development systems software, and in our design and manufacturing process technologies. We believe these investments are significant factors in maintaining our competitive position. We expense all research and development costs as incurred. Research and development 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. Research and development expenses increased $0.7 million, or 3.4% for the three months ended September 30, 2001 over the same period last year. Research and development expenses increased $2.8 million, or 7.5% for the six months ended September 30, 2001 over the same period last year. Research and development expenses increased $0.7 million, or 3.2% for the three months ended September 30, 2001 over the three months ended June 30, 2001. The primary reason for the dollar increase in research and development costs in each of these periods was the increased labor costs associated with expanding our technical resources. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses for the three months ended September 30, 2001 were $20.2 million, or 14.2% of sales, compared to $27.2 million, or 14.0% of sales for the three months ended September 30, 2000. Selling, general and administrative expenses for the six months ended September 30, 2001 were $41.6 million, or 14.8% of sales, compared to $53.3 million, or 14.3% of sales in the six months ended September 30, 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 direct sales force and field applications engineers who work in sales offices worldwide to stimulate demand by assisting customers in the use and proper selection of our products. Selling, general and administrative expenses fluctuate over time, primarily due to revenue and operating expense investment levels. Selling, general and administrative expenses decreased $1.3 million, or 6.0% for the three months ended September 30, 2001 over the June 30, 2001 quarter. The primary reason for the dollar decrease in selling, general, and administrative costs in the September 2001 quarter as compared to the June 2001 quarter relate to reductions in travel and sales meeting expenses. Selling, general and administrative expenses decreased $7.1 million, or 26.0% for the three months ended September 30, 2001 over the same period last year. Selling, general and administrative expenses decreased $11.7 million, or 21.9%, for the six months ended September 30, 2001 over the same period last year. The primary reason for the dollar decreases in selling, general and administrative costs in these periods relate to reductions in bonuses and recruitment costs and one-week plant shutdowns in April 2001 and July 2001. 14 OTHER INCOME (EXPENSE) Interest income in the three months ended September 30, 2001 decreased from the corresponding period of the previous fiscal year as a result of lower invested cash balances due primarily to the significant levels of capital expenditures incurred. Additionally, the interest rates applicable to our invested cash balances were significantly lower during the three months ended September 30, 2001, as compared to the rates applying during the corresponding period of the previous fiscal year. Although we will have higher invested cash balances in the third quarter of fiscal 2002, we expect interest income to remain relatively flat because the interest rates applying to these cash balances will be lower. THE FOREGOING STATEMENT REGARDING OUR ANTICIPATED INTEREST INCOME IN THE THIRD QUARTER OF FISCAL 2002 IS A FORWARD-LOOKING STATEMENT. ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: ACTUAL LEVELS OF CASH INVESTED; INTEREST RATE FLUCTUATIONS; REVENUE LEVELS; RESULTS OF OPERATIONS; AND GENERAL ECONOMIC CONDITIONS. PROVISION FOR INCOME TAXES Provisions for income taxes reflect tax on foreign earnings and federal and state tax on U.S. earnings. We had an effective tax rate of 27.0% for the six months ended September 30, 2001, and 27.1% for the six months ended September 30, 2000. We believe that our tax rate for the foreseeable future will be approximately 27.0% due primarily to lower tax rates at our foreign locations. THE FOREGOING STATEMENT REGARDING OUR ANTICIPATED FUTURE TAX RATE 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; 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 converting to a common currency. We currently conduct 97.7% of our business in Europe in U.S. Dollars and 0.4% of our business in Europe in Pounds Sterling. The balance of our net sales in Europe is conducted in currencies which will eventually be replaced by the Euro. We will monitor the potential commercial impact of converting 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 STATEMENTS REGARDING THE ANTICIPATED IMPACT OF THE TRANSITION TO THE EURO CURRENCY ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: LEVELS OF SALES IN EUROPE THAT MAY BE CONDUCTED IN THE EURO CURRENCY; AND FLUCTUATIONS IN CURRENCY EXCHANGE RATES. LIQUIDITY AND CAPITAL RESOURCES We had $171.1 million in cash and cash equivalents at September 30, 2001, an increase of $41.2 million from the March 31, 2001 balance. The increase in cash and cash equivalents over this time period is primarily attributable to cash generated from operating activities. We maintain an unsecured revolving 15 credit facility with a syndicate of banks totaling $100.0 million. We can elect to increase the facility to $150.0 million, subject to certain conditions set forth in the credit agreement. This facility has a termination date of May 31, 2003. There were no borrowings against this line of credit as of September 30, 2001. We are required to achieve certain financial ratios and operating results to maintain this line of credit and were in compliance with these requirements at September 30, 2001. We also maintain an unsecured short-term line of credit for up to $24.6 million with various financial institutions in Asia. There were no borrowings under the foreign line of credit as of September 30, 2001, but an allocation of $911,000 of the available line was made, relating to import guarantees associated with our business in Thailand. There are no covenants related to the foreign line of credit. At September 30, 2001, an aggregate of $123.7 million of our credit facilities was available, subject to financial covenants and ratios with which we were in compliance. Our ability to fully utilize our credit facilities is dependent on our remaining in compliance with such covenants and ratios. During the six months ended September 30, 2001, we generated $54.2 million of cash from operating activities, a decrease of $125.1 million from the six months ended September 30, 2000. The decrease in cash flow from operations was primarily due to decreased profitability and the impact of changes in accounts payable and accrued liabilities, depreciation and 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 in the six months ended September 30, 2001 were $30.9 million, as compared to $261.5 million for the six months ended September 30, 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 in the six months ended September 30, 2001 were primarily for the addition of research and development equipment. We currently intend to spend approximately $80.0 million during the next 12 months to invest in equipment to maintain, and selectively increase, capacity to meet our currently anticipated needs. We expect to finance capital expenditures through our existing cash balances, cash flows from operations, available debt arrangements and other sources of financing, including issuance of equity and debt securities depending on market conditions. We believe that the capital expenditures anticipated to be incurred over the next 12 months will provide sufficient manufacturing capacity to meet our currently anticipated needs. THE FOREGOING STATEMENTS REGARDING THE ANTICIPATED LEVEL OF CAPITAL EXPENDITURES OVER THE NEXT 12 MONTHS AND THE FINANCING AND SUFFICIENCY 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; DEMAND FOR OUR PRODUCTS; UTILIZATION OF CURRENT MANUFACTURING CAPACITY; MARKET ACCEPTANCE OF OUR PRODUCTS AND OF OUR CUSTOMERS' PRODUCTS; THE AVAILABILITY AND COST OF RAW MATERIALS, EQUIPMENT AND OTHER SUPPLIES; AND THE ECONOMIC, POLITICAL AND OTHER CONDITIONS IN THE WORLDWIDE MARKETS SERVED BY US. Net cash provided by financing activities was $16.9 million for the six months ended September 30, 2001, as compared to $19.8 million for the six months ended September 30, 2000. Repayments on lines of credit were $9.0 million for the six months ended September 30, 2000. Proceeds from the sale of stock and put options were $16.9 million in the six months ended September 30, 2001 and $28.8 million in the six months ended September 30, 2000. 16 We had a net shares settled forward contract outstanding as of September 30, 2001. In connection with this contract we made a net delivery of 381,763 shares of our common stock during the six months ended September 30, 2001, and received 184,893 shares of our common stock during the six months ended September 30, 2000. The net shares settled forward contract could obligate us to make a delivery of common stock in the future if the price of our common stock is below the strike price of the contract. The final settlement date of the net shares settled forward contract is May 2002. We believe that our existing sources of liquidity combined with cash generated from operations will be sufficient to meet our currently anticipated cash requirements for at least the next 12 months. However, the semiconductor industry is capital intensive. In order to remain competitive, we must constantly evaluate the need to make significant investments in capital equipment for both production and research and development. We may seek additional equity or debt financing during the next 12 months for the capital expenditures required to maintain or expand our wafer fabrication and product assembly and test facilities, or other purposes. The timing and amount of any such 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. ADDITIONAL FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS When evaluating Microchip and its business, you should give careful consideration to the factors listed below, in addition to the information provided elsewhere in this Form 10-Q and in other documents that we file with the Securities and Exchange Commission. OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE DUE TO FACTORS THAT COULD REDUCE OUR NET SALES AND PROFITABILITY. Our quarterly operating results are affected by a wide variety of factors that could reduce our net sales and profitability, many of which are beyond our control. Some of the factors that may affect our 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 both of our products and our customers' products * customer order patterns and seasonality * possible disruption in commercial activities occasioned by terrorist activity and armed conflict, such as changes in logistics and security arrangements, and reduced end-user purchases relative to expectations * impact of events outside the United States, such as the business impact of fluctuating currency rates or unrest or political instability * disruption in the supply of wafers or assembly services * availability of manufacturing capacity and fluctuations in manufacturing yields * the availability and cost of raw materials, equipment and other supplies * 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 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. 17 OUR OPERATING RESULTS WILL SUFFER IF WE 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 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. 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 have 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. In addition, 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 * 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. We may be unable to compete successfully in the future, which could harm our business. 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. The industry is currently experiencing a significant economic downturn, characterized by diminished product demand and production 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 in recent quarters and may, in the future, experience period-to-period fluctuations in operating results due to general industry or economic conditions. 18 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. 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 which 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 research and development expenditures. Companies in the industry have 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 reduced if our transition to advanced 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. 19 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 demand for semiconductor products 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. 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 quarter ended September 30, 2001, and for the fiscal year ended March 31, 2001, approximately 68% 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 assembly and test facilities located near Bangkok, Thailand. We also use various third-party contractors located throughout Asia for a portion of our assembly and test requirements and a portion of our analog product wafer fabrication requirements. POTENTIAL INTELLECTUAL PROPERTY CLAIMS AND LITIGATION COULD SUBJECT US TO SIGNIFICANT LIABILITY FOR DAMAGES AND COULD INVALIDATE OUR PROPRIETARY RIGHTS. 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. 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 patents or other intellectual property rights on certain of our products and 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. Litigation, which could result in substantial cost to us and a diversion of our resources, may also be necessary to enforce our patents or other intellectual property rights or to defend us against claimed infringement of the rights of others. An unfavorable outcome in any such suit could harm our business, financial condition or results of operations. OUR MANUFACTURING FACILITIES MAY BE SUBJECT TO DISRUPTION FOR REASONS BEYOND OUR CONTROL. 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, fire, earthquake, floods, or other natural disasters. If operations at any of our facilities or by any of 20 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 the cancellation of orders or loss of customers. WE ARE SUBJECT TO STRINGENT ENVIRONMENTAL REGULATION, WHICH MAY FORCE US TO INCUR SIGNIFICANT EXPENSES. We must comply with many different federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing processes. Although we believe that our activities conform to presently applicable environmental regulations, our failure to comply with present or future regulations could result in the imposition of fines, suspension of production or a cessation of operations. Any such regulation could require us to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. Any failure by us to control the use of or adequately restrict the discharge of hazardous substances could subject us to future liabilities. Environmental problems 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. 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. 21 RECENT ACCOUNTING PRONOUNCEMENTS SFAS 144 The Financial Accounting Standards Board, or FASB, recently issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," that is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB's new rules on the asset impairment supersede FASB Statement 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and portions of APB Opinion 30, "Reporting the Results of Operations." SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that must be met to classify an asset as "held-for-sale." Classification as "held-for-sale" is an important distinction since such assets are not depreciated and are stated at the lower of fair value and carrying amount. SFAS No. 144 also requires expected future operating losses from discontinued operations to be displayed in the period(s) in which the losses are incurred, rather than as of the measurement date as presently required. The provisions of SFAS No. 144 are not expected to have an effect on our financial position or operating results. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our investment portfolio, consisting of fixed income securities, was $164.0 million as of September 30, 2001, 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 September 30, 2001 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 an adverse impact on income or cash flows. We have international operations and are thus subject to foreign currency rate fluctuations. To date, our exposure related to exchange rate volatility has not been significant. If the foreign currency rates fluctuate by 15% from the rates at September 30, 2001 and March 31, 2001, the effect on our financial position and results of operations would not be material. During the normal course of our business, we are routinely subjected to a variety of market risks, examples of which include, but are not limited to, interest rate movements and foreign currency fluctuations, as we discuss in this Item 3, and collectability of accounts receivable. We constantly assess these risks and have established policies and procedures to protect against the adverse affects of these other potential exposures. Although we do not anticipate any material losses in these risk areas, no assurance can be made that material losses will not be incurred in these areas in the future. We believe that our market risk, as discussed in this Item 3, has not materially changed from March 31, 2001. 22 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) We held our Annual Meeting of Stockholders on August 17, 2001. (b) Steve Sanghi, Albert J. Hugo-Martinez, L.B. Day, Matthew W. Chapman and Wade F. Meyercord were elected as Directors at the Annual Meeting. (c) The results of the vote on the matters voted upon at the Annual Meeting were as follows: (i) ELECTION OF DIRECTORS: DIRECTOR FOR WITHHELD/ABSTAIN -------- --- ---------------- Steve Sanghi 99,873,318 19,182,316 Albert J. Hugo-Martinez 118,901,038 154,596 L.B. Day 118,904,059 151,575 Matthew W. Chapman 118,915,451 140,183 Wade F. Meyercord 118,906,147 149,487 (ii) APPROVAL OF THE 2001 MICROCHIP EMPLOYEE STOCK PURCHASE PLAN: FOR AGAINST WITHHELD/ABSTAIN BROKER NON VOTES --- ------- ---------------- ---------------- 117,042,422 1,933,246 79,966 -0- (iii) RATIFICATION OF APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING MARCH 31, 2002: FOR AGAINST WITHHELD/ABSTAIN BROKER NON VOTES --- ------- ---------------- ---------------- 118,500,589 485,805 69,240 -0- The foregoing matters are described in more detail in our definitive proxy statement dated July 9, 2001 relating to the Annual Meeting. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibit 10.1 2001 Microchip Employee Stock Purchase Plan. (b) Reports on Form 8-K. None. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MICROCHIP TECHNOLOGY INCORPORATED Date: NOVEMBER 7, 2001 By: /s/ GORDON W. PARNELL ---------------- ------------------------------------------ Gordon W. Parnell Vice President and Chief Financial Officer (Duly Authorized Officer, and Principal Financial and Accounting Officer) 24 EX-10.1 3 ex10-1.txt 2001 EMPLOYEE STOCK PURCHASE PLAN Exhibit 10.1 MICROCHIP TECHNOLOGY INCORPORATED 2001 EMPLOYEE STOCK PURCHASE PLAN The following constitute the provisions of the 2001 Employee Stock Purchase Plan of Microchip Technology Incorporated. 1. PURPOSE. The purpose of the Plan is to provide employees of the Company and one or more of its Corporate Affiliates an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a uniform and nondiscriminatory basis consistent with the requirements of Section 423. 2. DEFINITIONS. (a) "ADMINISTRATOR" shall mean the Committee designated by the Board to administer the Plan pursuant to Section 14. (b) "BOARD" shall mean the Board of Directors of the Company. (c) "CHANGE OF CONTROL" shall mean the occurrence of any of the following events: (i) a merger or other reorganization in which the Company will not be the surviving corporation (other than a reorganization effected primarily to change the State in which the Company is incorporated); or (ii) the consummation of the sale or disposition by the Company of all or substantially all of the Company's assets; or (iii) a reverse merger in which the Company is the surviving corporation but in which more than fifty percent (50%) of the Company's outstanding voting stock is transferred to a person or persons different from those who held the stock immediately prior to such merger. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (e) "COMMITTEE" means a committee of the Board appointed by the Board in accordance with Section 14 hereof. (f) "COMMON STOCK" shall mean the common stock of the Company, par value $0.001. (g) "COMPANY" shall mean Microchip Technology Incorporated, a Delaware corporation. (h) "COMPENSATION" shall mean the following items paid to an Eligible Employee by the Company and/ or one or more Corporate Affiliates during such individual's period of participation in the Plan: (i) regular base salary, and (ii) any pre-tax contributions made by the Eligible Employees to any Code Section 401(k) plan, any Code Section 125 Plan, any unfunded non-qualified deferred compensation plan described in Sections 201(2), 301(a)(3) or 401(a)(1) of ERISA, and (iii) all overtime payments, bonuses, commissions, profit-sharing distributions and other incentive type payments. There shall be excluded any contributions (except 401(k) and 125 contributions) made on the Eligible Employee's behalf by the Company or Corporate Affiliate. (i) "CORPORATE AFFILIATE" shall mean any parent or subsidiary of the Company (as defined in Section 424 of the Code) which is incorporated in the United States, including any parent or subsidiary corporation which becomes such after the Effective Date. (j) "EFFECTIVE DATE" shall mean March 1, 2002. (k) "ELIGIBLE EMPLOYEE" shall mean any individual who is a common law employee of any Participating Company and whose customary employment with the Participating Company is at least 20 hours per week and more than five (5) months in any calendar year. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's right to reemployment is not guaranteed either by statute or in writing signed by a duly authorized officer of the Company, the employment relationship shall be deemed to have terminated on the 91st day of such leave. (l) "ENTRY DATE" shall mean the first Trading Day of any Offering Period. An Entry Date occurs on the first Trading Day in March or September. (m) "ERISA" shall mean the Employee Retirement Income Security of 1974, as amended. (n) "EXERCISE DATE" shall mean the first Trading Day of March and September. (o) "FAIR MARKET VALUE" shall mean the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the date of determination, as reported in THE WALL STREET JOURNAL or such other source as the Board deems reliable; provided, however, that if there is no closing sales price (or closing bid price, if applicable) for such date, then the closing sales price (or closing bid price, if applicable) for the next day for which such quotation exists. (p) "OFFERING PERIODS" shall mean a period of time during which an option granted pursuant to the Plan may be exercised. The Plan shall be implemented by a series of Offering Periods ("Series of Offering Periods"). Each Series of Offering Periods shall contain four (4) Offering Periods. The first Offering Period in the Series shall commence on the first Trading Day on or after March 1, 2002, and shall end on the first Trading Day on or after March 1, 2004 (the "Last Day of the Series"). The second Offering Period in the Series shall commence on the next following Entry Date, shall last approximately 18 months and shall end on the Last Day of the Series. The third Offering Period in the Series shall commence on the next following Entry Date, shall last approximately 12 months and shall end on the Last Day of the Series. The fourth Offering Period in the Series shall commence on the next following Entry Date, 2 shall last approximately six (6) months and shall end on the Last Day of the Series. A new Series of Offering Periods shall commence on the Last Day of the Series. The duration and timing of Offering Periods may be changed pursuant to Section 19 of this Plan. (q) "PARTICIPATING COMPANY" shall mean the Company and such Corporate Affiliates as may be designated from time to time by the Board to extend the benefits of the Plan to their Eligible Employees. (r) "PLAN" shall mean this Employee Stock Purchase Plan. (s) "PURCHASE PERIOD" shall mean the approximately six (6) month period commencing on one Exercise Date and ending with the next Exercise Date, except that the first Purchase Period of any Offering Period shall commence on the first Entry Date and end with the next Exercise Date. (t) "PURCHASE PRICE" shall mean 85% of the Fair Market Value of a share of Common Stock on the Entry Date or on the Exercise Date, whichever is lower; provided, however, that the Purchase Price may be adjusted by the Administrator pursuant to Section 20. (u) "TRADING DAY" shall mean a day on which national stock exchanges and the Nasdaq System are open for trading. 3. ELIGIBILITY. (a) GENERALLY. Any Eligible Employee on a given Entry Date shall be eligible to participate in the Plan. (b) LIMITATIONS. Any provisions of the Plan to the contrary notwithstanding, no Eligible Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Eligible Employee (or any other person whose stock would be attributed to such Eligible Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Subsidiary, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries accrues at a rate which exceeds $25,000.00 worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. OFFERING PERIODS. The Plan shall be implemented by a series of Offering Periods ("Series of Offering Periods"). Each Series of Offering Periods shall contain four (4) Offering Periods. The first Offering Period in the Series shall commence on the first Trading Day on or after March 1, 2002, and shall end on the first Trading Day on or after March 1, 2004 (the "Last Day of the Series"). The second Offering Period in the Series shall commence on the next following Entry Date, shall last approximately 18 months and shall end on the Last Day of the Series. The third Offering Period in the Series shall commence on the next following Entry Date, shall last approximately 12 months and shall end on the Last Day of the Series. The fourth Offering Period in the Series shall commence on the next following Entry Date, shall last approximately six (6) months and shall end on the Last Day of the Series. A new Series of Offering 3 Periods shall commence on the Last Day of the Series. The duration and timing of Offering Periods may be changed pursuant to Section 19 of this Plan. 5. PARTICIPATION. An Eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions in the form of EXHIBIT A to this Plan and filing it with the Company's stock plan administrator, on a date determined by such administrator, which shall be no later than five (5) Trading Days prior to the applicable Entry Date. 6. PAYROLL DEDUCTIONS. (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made on each pay day during the Offering Period in any multiple of one-percent (1%), but not exceeding ten-percent (10%) of the Compensation which he or she receives during each Purchase Period; provided, however, that should a payday occur on an Exercise Date, a participant shall have the payroll deductions made on such day applied to his or her account under the new Offering Period or Purchase Period, as the case may be. A participant's subscription agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 10 hereof. (b) Payroll deductions for a participant shall commence on the first payday following the Entry Date and shall end on the last payday in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in Section 10 hereof. All payroll deductions made for a participant shall be credited to his or her account under the Plan and shall be withheld in whole percentages only. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in Section 10 hereof, or may decrease (but not increase) the rate of his or her payroll deductions during the Offering Period by completing or filing with the Company a new subscription agreement authorizing a change in payroll deduction rate. No more than one (1) such reduction shall be allowed in any Purchase Period. A participant may only increase the rate of his or her payroll deductions beginning with the next Offering Period which lasts 24 months. The change in rate shall be effective as soon as administratively practicable. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's payroll deductions may be decreased to zero percent (0%) at any time during a Purchase Period. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Purchase Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10 hereof. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding 4 obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Eligible Employee. 7. GRANT OF OPTION. On the Entry Date of each Offering Period, each Eligible Employee participating in such Offering Period shall be granted an option to purchase on each Exercise Date during such Offering Period (at the applicable Purchase Price) up to a number of shares of the Company's Common Stock determined by dividing such Eligible Employee's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price; provided that in no event shall an Eligible Employee be permitted to purchase during each Purchase Period more than 5,000 shares of the Company's Common Stock (subject to any adjustment pursuant to Section 19), and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 6 hereof. The Eligible Employee may accept the grant of such option by turning in a completed Subscription Agreement (attached hereto as EXHIBIT A) to the stock plan administrator, on a date determined by such administrator, which shall be no later than five (5) Trading Days prior to an applicable Entry Date. The Administrator may, for future Offering Periods, increase or decrease, in its absolute discretion, the maximum number of shares of the Company's Common Stock an Eligible Employee may purchase during each Purchase Period of such Offering Period. Exercise of the option shall occur as provided in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The option shall expire on the last day of the Offering Period. 8. EXERCISE OF OPTION. (a) Unless a participant withdraws from the Plan as provided in Section 10 hereof, his or her option for the purchase of shares shall be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. No fractional shares shall be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the participant's account for the subsequent Purchase Period or Offering Period, subject to earlier withdrawal by the participant as provided in Section 10 hereof. Any other funds left over in a participant's account after the Exercise Date shall be returned to the participant. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. (b) If the Administrator determines that, on a given Exercise Date, the number of shares with respect to which options are to be exercised may exceed (i) the number of shares of Common Stock that were available for sale under the Plan on the Entry Date of the applicable Offering Period, or (ii) the number of shares available for sale under the Plan on such Exercise Date, the Administrator may in its sole discretion (x) provide that the Company shall make a pro rata allocation of the shares of Common Stock available for purchase on such Entry Date or Exercise Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Exercise Date, and continue all Offering Periods then in effect, or (y) provide that the Company shall make a pro rata allocation of the shares available for purchase on such Entry Date or Exercise Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion 5 to be equitable among all participants exercising options to purchase Common Stock on such Exercise Date, and terminate any or all Offering Periods then in effect pursuant to Section 20 hereof. The Company may make pro rata allocation of the shares available on the Entry Date of any applicable Offering Period pursuant to the preceding sentence, notwithstanding any authorization of additional shares for issuance under the Plan by the Company's shareholders subsequent to such Entry Date. 9. DELIVERY. As soon as reasonably practicable after each Exercise Date on which a purchase of shares occurs, the Company shall arrange the delivery to each participant the shares purchased upon exercise of his or her option in a form determined by the Administrator. 10. WITHDRAWAL. (a) At any time prior to the last five (5) Trading Days of a Purchase Period, a participant may withdraw from the Plan by giving written notice to the Company in the form of EXHIBIT B to this Plan. The participant shall elect to either have (i) all of the participant's payroll deductions credited to his or her account used to purchase shares at the next Exercise Date or (ii) all payroll deductions credited to his or her account refunded. In neither event will any further payroll deductions for the purchase of shares be made for such Offering Period. If a participant withdraws from an Offering Period, the participant may not re-enroll in the Plan until the next Offering Period which lasts 24 months, and payroll deductions shall not resume at the beginning of such Offering Period unless the participant delivers to the Company a new subscription agreement in a manner provided for in Section 5. (b) A participant's withdrawal from an Offering Period shall not have any effect upon his or her eligibility to participate in any similar plan which may hereafter be adopted by the Company. 11. TERMINATION OF EMPLOYMENT. In the event a participant ceases to be an Eligible Employee of the Company or any Participating Company (other than as a result of death or Permanent Disability), any payroll deductions credited to such participant's account during the Offering Period but not yet used to purchase shares under the Plan shall be returned to such participant and such participant's option shall be automatically terminated. In the event a participant ceases to be an Employee of the Company or any Participating Company as a result of death or Permanent Disability, then such participant (or personal representative of the estate of the deceased participant) may elect at any time prior to the last five (5) Trading Days of a Purchase Period in which such termination occurs, to (i) have all of such participant's payroll deductions for such Purchase Period refunded to the Participant or (ii) have all such payroll deductions used to purchase the Company's common stock on the Exercise Date following such termination. 12. INTEREST. No interest shall accrue on the payroll deductions of a participant in the Plan. 13. STOCK. (a) Subject to adjustment upon changes in capitalization of the Company as provided in Section 19 hereof, the number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be 1,200,000 shares plus any remaining unissued shares available as of the 6 Effective Date under the Company's previous ESPP; provided, however, that the shares under the Company's previous ESPP shall not be available for issuance under the Plan to the extent that such reservation would, in the opinion of the Company's independent auditors, result in a compensation expense to the Company under either EITF 97-12 or FIN 44 and; provided, further, that in no event shall the total number of shares available under the Plan exceed 1,300,000. (b) Until the shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), a participant shall only have the rights of an unsecured creditor with respect to such shares, and no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to such shares. (c) Shares to be delivered to a participant under the Plan shall be held in a brokerage account in street name. 14. ADMINISTRATION. The Administrator shall administer the Plan and shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Administrator shall, to the full extent permitted by law, be final and binding upon all parties. 15. DESIGNATION OF BENEFICIARY. (a) A participant may file a written designation of a beneficiary who is to receive any payroll deductions, if any, from the participant's account under the Plan in the event of such participant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such payroll deductions. In addition, a participant may file a written designation of a beneficiary who is to receive any payroll deductions from the participant's account under the Plan in the event of such participant's death prior to exercise of the option. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such payroll deductions to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such payroll deductions to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. (c) All beneficiary designations shall be in such form and manner as the Administrator may designate from time to time. 16. TRANSFERABILITY. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 15 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without 7 effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 10 hereof. 17. USE OF FUNDS. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. Until shares are issued, participants shall only have the rights of an unsecured creditor. 18. REPORTS. Individual accounts shall be maintained for each participant in the Plan. Statements of account shall be given to participating Eligible Employees at least annually, which statements shall set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. 19. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, LIQUIDATION, MERGER OR CHANGE OF CONTROL. (a) CHANGES IN CAPITALIZATION. Subject to any required action by the shareholders of the Company, the maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan, the maximum number of shares each participant may purchase each Purchase Period (pursuant to Section 7), as well as the price per share and the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other change in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. (b) CHANGE IN CONTROL. In the event of a Change of Control, each outstanding option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the option, any Purchase Periods then in progress shall be shortened by setting a New Exercise Date and any Offering Periods then in progress shall end on the New Exercise Date. The New Exercise Date shall be before the date of the Company's proposed Change of Control. The Administrator shall notify each participant in writing, at least 10 business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. 8 20. AMENDMENT OR TERMINATION. (a) The Administrator may at any time and for any reason terminate or amend the Plan. Except as otherwise provided in the Plan, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Administrator on any Exercise Date if the Administrator determines that the termination of the Offering Period or the Plan is in the best interests of the Company and its shareholders. Except as provided in Section 19 and this Section 20 hereof, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. To the extent necessary to comply with Section 423 of the Code (or any successor rule or provision or any other applicable law, regulation or stock exchange rule), the Company shall obtain shareholder approval in such a manner and to such a degree as required. (b) Without shareholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Administrator shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Administrator determines in its sole discretion advisable which are consistent with the Plan. (c) In the event the Administrator determines that the ongoing operation of the Plan may result in unfavorable financial accounting consequences, the Board may, in its discretion and, to the extent necessary or desirable, modify or amend the Plan to reduce or eliminate such accounting consequence including, but not limited to: (i) increasing the Purchase Price for any Offering Period including an Offering Period underway at the time of the change in Purchase Price; (ii) shortening any Offering Period so that Offering Period ends on a new Exercise Date, including an Offering Period underway at the time of the Board action; and (iii) allocating shares. Such modifications or amendments shall not require stockholder approval or the consent of any Plan participants. 21. NOTICES. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form and manner specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 9 22. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 23. TERM OF PLAN. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the shareholders of the Company. It shall continue in effect until terminated under Section 20 hereof. 24. AUTOMATIC TRANSFER TO LOW PRICE OFFERING PERIOD. To the extent permitted by any applicable laws, regulations, or stock exchange rules if the Fair Market Value of the Common Stock on any Exercise Date in an Offering Period is lower than the Fair Market Value of the Common Stock on the Entry Date of such Offering Period, then all participants in such Offering Period shall be automatically withdrawn from such Offering Period immediately after the exercise of their option on such Exercise Date and automatically re-enrolled in the immediately following Offering Period. 10