-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Iu2onQfIxslNz+UghaCtOYQPpRXDuVvg6hnTSH6Sss91Gm+x9VDHXixA8qrRqwQE TzNw+UfPucY3cYfeMU4ovg== 0000898430-02-002309.txt : 20020611 0000898430-02-002309.hdr.sgml : 20020611 20020611170913 ACCESSION NUMBER: 0000898430-02-002309 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020428 FILED AS OF DATE: 20020611 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEMTECH CORP CENTRAL INDEX KEY: 0000088941 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 952119684 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06395 FILM NUMBER: 02676675 BUSINESS ADDRESS: STREET 1: 652 MITCHELL RD CITY: NEWBURY PARK STATE: CA ZIP: 91320 BUSINESS PHONE: 8054982111 MAIL ADDRESS: STREET 1: 652 MITCHELL ROAD STREET 2: 652 MITCHELL ROAD CITY: NEWBURY PARK STATE: CA ZIP: 91320 10-Q 1 d10q.txt FORM 10-Q DATED APRIL 28, 2002 UNITED STATES 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 April 28, 2002 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _______________ to ________________ Commission file number 1-6395 SEMTECH CORPORATION (Exact name of registrant as specified in its charter Delaware 95-2119684 (State or other jurisdiction (I.R.S. Employer incorporation or organization) identification No.) 200 Flynn Road, Camarillo, California, 93012-8790 (Address of principal executive offices, Zip Code) Registrant's telephone number, including area code: (805) 498-2111 Indicate by check mark, whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant has required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ Number of shares of Common Stock, $0.01 par value, outstanding at April 30, 2002: 73,039,368. ----------- 1 PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. FINANCIAL STATEMENTS -------------------- The consolidated condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. In the opinion of the Company, these unaudited statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of Semtech Corporation and subsidiaries as of April 28, 2002, and the results of their operations and their cash flows for the three months then ended. 2 SEMTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (in thousands, except per share data) (Unaudited)
Three Months Ended ------------------ April 28, April 29, 2002 2001 -------------------------------------------------------------------------- Net sales $49,188 $60,528 Cost of sales 21,108 25,442 ------- ------- Gross profit 28,080 35,086 ------- ------- Operating costs and expenses - Selling, general and administrative 8,412 9,922 Product development and engineering 7,524 8,048 One-time costs - 951 ------- ------- Total operating costs and expenses 15,936 18,921 ------- ------- Operating income 12,144 16,165 Interest and other income, net 1,179 2,451 ------- ------- Income before provision for taxes 13,323 18,616 Provision for taxes 3,331 5,399 ------- ------- Net income $ 9,992 $13,217 ======= ======= Earnings per share: Earnings per share - Basic $ 0.14 $ 0.19 Diluted $ 0.13 $ 0.17 Weighted average number of shares - Basic 72,681 68,467 Diluted 78,997 77,120
3 SEMTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except share data)
April 28, January 27, 2002 2002 (Unaudited) - ------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 55,869 $ 46,300 Temporary investments 360,956 324,870 Receivables, less allowances 25,575 19,181 Inventories 20,854 22,728 Income taxes refundable - 2,019 Deferred income taxes 11,878 11,786 Other current assets 4,018 3,372 -------- -------- Total current assets 479,150 430,256 Property, plant and equipment, net 50,793 51,516 Investments with maturities in excess of 1 year 125,704 172,332 Deferred income taxes 26,755 27,659 Other assets 8,023 8,638 -------- -------- TOTAL ASSETS $690,425 $690,401 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,001 $7,341 Accrued liabilities 11,042 16,845 Deferred revenue 1,690 1,936 Income taxes payable 1,241 1,099 Other current liabilities 74 65 -------- -------- Total current liabilities 22,048 27,286 Convertible subordinated notes 354,170 364,320 Commitments and contingencies Stockholders' equity: Common stock, $0.01 par value, 250,000,000 authorized, 73,039,993 issued and outstanding on April 28, 2002 and 72,148,573 issued and outstanding on January 27, 2002 731 722 Additional paid-in capital 170,341 162,856 Retained earnings 141,451 131,459 Accumulated other comprehensive income 1,684 3,758 -------- -------- Total stockholders' equity 314,207 298,795 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $690,425 $690,401 ======== ========
4 SEMTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Three Months Ended ------------------ April 28, April 29, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 9,992 $ 13,217 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,825 1,981 Deferred income taxes 812 (8,428) Tax benefit of stock option exercises 1,997 11,317 Loss (gain) on repurchase of long-term debt 50 (372) Loss on disposition of property, plant and equipment 324 - Changes in assets and liabilities, net of acquisition: Receivables (6,394) 4,479 Inventories 1,874 (4,692) Other assets (592) (473) Accounts payable and accrued liabilities (5,143) (10,098) Deferred revenue (246) - Income taxes refundable/payable 2,161 2,098 Other liabilities 9 576 -------- --------- Net cash provided by operating activities 7,669 9,605 -------- --------- Cash flows from investing activities: Temporary investments, net (37,537) (97,877) Purchase of long-term investments 46,008 (112,690) Proceeds on sale of assets - 1,174 Additions to property, plant and equipment (2,084) (3,940) -------- --------- Net cash provided (used) in investing activities 6,387 (213,333) -------- --------- Cash flows from financing activities: Exercise of stock options 5,497 4,373 Cost of buyback of convertible subordinated notes (9,981) (2,290) Reissuance of treasury stock - 1,283 Stock repurchase - (9,692) -------- --------- Net cash used in financing activities (4,484) (6,326) -------- --------- Effect of exchange rate changes on cash and cash equivalents (3) (83) Net increase (decrease) in cash and cash equivalents 9,569 (210,137) Cash and cash equivalents at beginning of period 46,300 323,182 -------- --------- Cash and cash equivalents at end of period $ 55,869 $ 113,045 ======== =========
5 SEMTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. Earnings Per Share Basic earnings per common share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per common share incorporates the incremental shares issuable upon the assumed exercise of stock options. The weighted average number of shares used to compute basic earnings per share in the first quarters of fiscal years 2003 and 2002 were 72,681,000 and 68,467,000, respectively. Diluted earnings per share is computed by dividing net income for the period by the weighted average number of common shares outstanding plus the dilutive effect of its outstanding stock options ("common stock equivalents"), or 78,997,000 and 77,120,000 in the first quarters of fiscal years 2003 and 2002, respectively. Options to purchase approximately 76,000 and 257,000 shares, respectively, were not included in the computation of first quarter of fiscal years 2003 and 2002 diluted net income per share because such options were considered anti-dilutive. Shares associated with the Company's outstanding convertible subordinated notes are not included in the computation of net income per share as they are anti-dilutive. 2. Business Segments and Concentrations of Risk The Company operates in three reportable segments: Standard Semiconductor Products, Rectifier and Assembly Products, and Other Products. Included in the Standard Semiconductor Products segment are the Power Management, Protection, High Performance, Advanced Communications, Human Interface/System Management product lines. The Rectifier and Assembly Products segment includes the Company's line of assembly and rectifier products. The Other Products segment is made up of other custom integrated circuit (IC) and foundry sales. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Form 10-K for the year ended January 27, 2002. The Company evaluates segment performance based on net sales and operating income of each segment. Management does not track segment data or evaluate segment performance on additional financial information. As such, there are no separately identifiable segment assets nor is there any separately identifiable statements of income data (below operating income). The Company does not track or assign assets to individual reportable segments. Likewise, depreciation expense and capital additions are also not tracked by reportable segments.
Three Months Ended Net Sales April 28, April 29, --------- 2002 2001 -------------------------- Standard Semiconductor Products ...... $46,382 $54,300 Rectifier and Assembly Products ...... 2,603 3,313 Other Products ....................... 203 2,915 ------- ------- Total Net Sales ................... $49,188 $60,528 ======= =======
Three Months Ended Operating Income April 28, April 29, ---------------- 2002 2001 --------------------------- Standard Semiconductor Products ...... $11,201 $15,462 Rectifier and Assembly Products ...... 827 1,090 Other Products ....................... 116 564 Non-segment specific one-time costs .. - (951) ------- ------- Total Operating Income ............ $12,144 $16,165 ======= =======
6 Operating income for the first quarter of fiscal year 2002 includes one-time costs of $951,000 for the reduction in workforce at the Company's Santa Clara, California wafer fab and the consolidation of the Company's New York, New York location into the Newbury Park, California location. No end customer accounted for 10% or greater of net sales in the first quarter of fiscal year 2003. In the first quarter of fiscal year 2003, one of the Company's Asian distributors accounted for approximately 14% of net sales. During the first quarter of fiscal year 2002, one automated test equipment (ATE) end customer, including its subcontractors, accounted for greater than 10% of net sales. A summary of net external sales by region follows. The Company does not track customer sales by region for each individual reporting segment. Three Months Ended Net Sales April 28, April 29, --------- 2002 2001 ------------------------- Domestic ......................... $14,461 $29,538 Asia-Pacific ..................... 29,808 24,211 European ......................... 4,919 6,779 ------- ------- Total Net Sales ............... $49,188 $60,528 ======= ======= Long lived assets located outside the United States as of the end of the first quarter of fiscal years 2003 and 2002 were approximately $8.1 million and $6.3 million, respectively. The Company relies on a limited number of outside subcontractors and suppliers for silicon wafers, packaging and certain other tasks. Disruption or termination of supply sources or subcontractors could delay shipments and could have a material adverse effect on the Company. Several of the Company's outside subcontractors and suppliers, including third-party foundries that supply silicon wafers, are located in foreign countries, including China, Malaysia, the Philippines and Germany. 3. Temporary and Long-Term Investments Temporary and long-term investments consist of government, bank and corporate obligations. Temporary investments have original maturities in excess of three months, but mature within twelve months of the balance sheet date. Long-term investments have maturities in excess of one year from the date of the balance sheet. The Company changed its method of classifying investments from "held to maturity" to "available for sale" in the fourth quarter of fiscal year 2002, because it expects to sell some securities prior to maturity. The Company includes any unrealized gain or loss, net of tax, in the comprehensive income portion of the equity section. The Company realized interest income of $5.7 million and $9.6 million during the first quarters of fiscal years 2003 and 2002, respectively. 4. Inventories Inventories consisted of the following: April 28, January 27, 2002 2002 ----------------------------- Raw materials ............. $ 627 $ 854 Work in process ........... 14,222 14,648 Finished goods ............ 6,005 7,226 ------- ------- Total inventories ...... $20,854 $22,728 ======= ======= 7 5. Comprehensive Income Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", requires that net income and all other non-owner changes in equity be displayed in a financial statement with the same prominence as other consolidated financial statements. In addition, the statement requires companies to display the components of comprehensive loss, which were as follows (in thousands):
Three Months Ended -------------------------------- April 28, 2002 April 29, 2001 -------------------------------- Unrealized losses on investments $ $ (2,071) - Translation adjustment (3) (83) - Comprehensive Income $ (2,074) $ (83) ======== ==========
6. Stock and Convertible Subordinated Debt Repurchase Programs On January 4, 2001, the Company announced that its Board of Directors had approved a program to repurchase up to $50.0 million of its common stock and registered convertible subordinated notes. On September 20, 2001, the Company indicated that its Board had authorized an additional $50.0 million in buybacks, increasing the total amount authorized under the buyback program to $100.0 million. As of April 28, 2002, the Company had repurchased 1,230,000 shares of its common stock at a cost $33.2 million under this program. Repurchased shares of common stock have been reissued as a result of stock options exercises. As of April 28, 2002, the Company had repurchased 45,830 of its convertible subordinated notes (face value of $1,000 each) at a cost of $42.6 million in open market transactions and recognized a net gain on the repurchase of these convertible subordinated notes of $2.2 million. The Company has retired these repurchased notes. 7. One-Time Costs Operating results in the first quarter of fiscal year 2003 include two one-time items. First, $229,000 of product that had been previously written down were included in net sales, therefore, there was no cost of goods sold associated with these shipments. Second, one-time costs of $247,000 were recorded for the write-off of certain excess test capacity and other assets at the Company's former Newbury Park and New York facilities. The net impact of these two one-time items on first quarter results was costs of approximately $18,000. Operating income for the first quarter of fiscal year 2002 includes one-time costs of $951,000 for the reduction in workforce at the Company's Santa Clara, California wafer fab and the consolidation of the Company's New York, New York location into the Newbury Park, California location. Total headcount was reduced by 17 percent in the first quarter of fiscal year 2002, including the reduction of employees associated with the Company's sale of the Santa Clara, California wafer fab. The sale was completed on April 24, 2001 and a majority of the one-time costs have been paid out in cash. 8. Disposition of Assets On April 23, 2001, the Company sold its Santa Clara, California wafer fab facility to STI Foundry, Inc. In exchange for approximately $1.5 million of assets associated with the facility, the Company received $1.0 million in cash and approximately a $1.4 million receivable for either future inventory or cash from the new owners. The Company expects to eventually recognize a gain of approximately $900,000 on the sale of the wafer fab. As of April 28, 2002, $486,000 of the gain was still unrecognized. The sale of the Santa Clara wafer fab is consistent with the Company's long-term strategy to utilize already installed process technologies at third-party foundries. 8 9. Convertible Subordinated Notes On February 14, 2000, the Company completed a private offering of $400.0 million principal amount of convertible subordinated notes that pay interest semiannually at a rate of 4 1/2 percent and are convertible into common stock at a conversion price of $42.23 per share. The notes are due in February 1, 2007 and callable by the Company on or after February 6, 2003. In connection with these convertible subordinated notes, the Company incurred $11.5 million in underwriter fees and other costs, which are amortized as interest expense using the effective interest method. The Company has used the net proceeds of the offering for general corporate purposes, including working capital, expansion of sales, marketing and customer service capabilities, and product development. In addition, the Company may use a portion of the net proceeds to acquire or invest in complementary businesses, technologies, services or products. For the three months ended April 28, 2002 and April 29, 2001, the Company incurred $4.4 million and $4.9 million, respectively, in interest expense associated with these convertible subordinated notes included in the accompanying consolidated statements of income. As of April 28, 2002, $354.2 million of the convertible subordinated notes were still outstanding, reflecting the Company's repurchase of 45,830 notes (face value of $1,000 each) at a cost of $42.6 million in open market transactions and recognized a net gain on the repurchase of these convertible subordinated notes of $2.2 million. 10. Commitments and Contingencies On February 7, 2000, the Company was notified by the United States Environmental Protection Agency with respect to the Casmalia Disposal Site in Santa Barbara, California. The Company has been included in the Superfund program to clean up this disposal site, because it used this site for waste disposal. During the second quarter of fiscal year 2002, the Company recorded a one-time cost of $765,000 for the pending settlement of this matter with federal and state agencies. On June 22, 2001, the Company was notified by the California Department of Toxic Substances Control ("State") that it may have liability associated with the clean up of the one-third acre Davis Chemical Company site in Los Angeles, California. The Company has been included in the clean-up program, because it is one of the companies believed to have used the Davis Chemical Company site for waste recycling and/or disposal between 1949 and 1990. Investigation into this matter is in its early stages. At this time there is not a specific proposal or budget with respect to the clean-up of the site. Thus, no reserve has been established for this matter. The Company uses an environmental consulting firm, specializing in hydrogeology, to perform periodic monitoring of the groundwater at its previously leased facility in Newbury Park, California. Certain contaminants have been found in the groundwater. Monitoring results over a number of years indicate that contaminants are coming from an adjacent facility. It is currently not possible to determine the ultimate amount of possible future clean-up costs, if any, that may be required of the Company at this site. Accordingly, no reserve for clean-up has been provided at this time. Effective June 11, 1998, the Company's Board of Directors approved a Stockholder Protection Agreement to issue a Right for each share of common stock outstanding on July 31, 1998 and each share issued thereafter (subject to certain limitations). These Rights, if not cancelled by the Board of Directors, can be exercised into a certain number of Series X Junior Participating Preferred Stock after a person or group of affiliated persons acquire 25% or more of the Company's common stock and subsequently allow the holder to receive certain additional Company or acquirer common stock if the Company is acquired in a hostile takeover. In December 2000, the Company purchased a parcel of land in San Diego, California for approximately $7.9 million and began exploring plans to build a facility to support its High Performance product line. The Company deferred the project due to the significant downturn in the product line's business. Early in calendar year 2002, the staff of the San Diego Unified Public School District recommend to the Board of Education that a school be built on 9 the Company's parcel. In April 2002, the Board of Education rejected that proposal and selected another site for the school. From time to time, the Company is a defendant in lawsuits involving matters which are routine to the nature of its business. Management is of the opinion that the ultimate resolution of all such matters will not have a material adverse effect on the accompanying consolidated financial statements. 11. Recently Issued Accounting Standards In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company plans to adopt this statement effective January 26, 2003. The Company does not expect that the adoption of SFAS No. 143 will have a material impact on its results of operations or financial position. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and reporting provision of Accounting Principles Board (APB) Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a business (as previously defined in that Opinion). SFAS No. 144 also resolves significant implementation issues related to SFAS No. 121. The Company adopted these standards effective with the fiscal year beginning January 28, 2002. The Company is currently reviewing these standards to determine the impact on its results of operations and financial position, however, for the first quarter ended April 28, 2002, the adoption of these standards has not had a material impact. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This statement is effective for fiscal years beginning after May 15, 2002. For certain provisions, including the rescission of Statement No. 4, early application is encouraged. The Company has applied this statement to the three months ended April 28, 2002, and the impact of its application was the reclassification of the gains or losses on the extinguishment of debt from an extraordinary item to other income. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND ---------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- You should read the following discussion of our financial condition and results of operations together with the condensed financial statements and the notes to condensed financial statements included elsewhere in this Form 10-Q. This discussion contains forward-looking statements based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements, due to factors including but not limited to those set forth in the "Risk Factors and Forward Looking Statements" and "Quantitative and Qualitative Disclosure About Market Risk" sections of this Form 10-Q and the "Risk Factors" section of the Company's annual report on Form 10-K for the year ended January 27, 2002. We undertake no obligation to update any forward-looking statements after the date of this Form 10-Q. Overview We design, produce and market a broad range of products that are sold principally to customers in the computer, communications and industrial markets. Our products are designed into a wide variety of end applications, including notebook and desktop computers, computer gaming systems, personal digital assistants 10 (PDAs), cellular phones, wireline networks, wireless base stations and automated test equipment (ATE). Products within the communications market include products for local area networks, metro and wide area networks, cellular phones and base-stations. Industrial applications include ATE, medical devices and factory automation systems. Our end customers are primarily original equipment manufacturers and their suppliers, including Acer, Agilent, Cisco, Compaq, Dell, First International, IBM, Intel, Microstar, Motorola, Samsung and Sony. We recognize product revenue when persuasive evidence of an arrangement exists, delivery has occurred, receipt by the customer has been confirmed, the fee is fixed or determinable and collectibility is probable. Product design and engineering revenue is recognized during the period in which services are performed. We defer revenue recognition on shipment of certain products to distributors where return privileges exist until the products are sold through to end users. Gross profit is equal to our net sales less our cost of sales. Our cost of sales includes materials, direct labor and overhead. We determine the cost of inventory by the first-in, first-out method. Our operating costs and expenses generally consist of selling, general and administrative (SG&A), product development and engineering costs (R&D), costs associated with acquisitions, and other operating related charges. Most of our sales to customers are made on the basis of individual customer purchase orders. Many large commercial customers include terms in their purchase orders, which provide liberal cancellation provisions. Trends within the industry toward shorter lead-times and "just-in-time" deliveries have resulted in our reduced ability to predict future shipments. As a result we rely on orders received and shipped within the same quarter. Sales made directly to original equipment manufacturers are approximately 60% of net sales. The remaining 40% of net sales are through independent distributors. We divide and operate our business based on three reportable segments: Standard Semiconductor Products, Rectifier and Assembly Products, and Other Products. We evaluate segment performance based on net sales and operating income of each segment. We do not track segment data or evaluate segment performance on additional financial information. As such, there are no separately identifiable segment assets nor are there any separately identifiable statements of income data (below operating income). The Standard Semiconductor Products segment makes up the vast majority of overall sales and includes our Power Management, Protection, High Performance, Advanced Communications and Human Input/System Management product lines. The Rectifier and Assembly Products segment includes our line of assembly and rectifier devices, which are the remaining products from our original founding as a supplier into the military and aerospace market. The Other Products segment is made up of other custom integrated circuit (IC) and foundry sales. Our business involves reliance on foreign-based entities. Several of our outside subcontractors and suppliers, including third-party foundries that supply silicon wafers, are located in foreign countries, including China, Malaysia, the Philippines and Germany. For the fiscal year ended January 27, 2002, approximately 28% of our silicon was manufactured in China. Foreign sales for the first quarter of fiscal year 2003 constitute approximately 71% of our net sales. Approximately four-fifths of foreign sales are to customers located in the Asia-Pacific region. The remaining are to customers in Europe. One of our strategies is to expand our business through strategic acquisitions. Over the past several years, we have made several small acquisitions in order to increase our pool of skilled technical personnel and penetrate new market segments, such as high performance, advanced communications and system management devices. These acquisitions include: USAR Systems Incorporated; Practical Sciences, Inc.; Acapella Limited; and Edge Semiconductor. The acquisitions of USAR, Acapella and Edge were accounted for as poolings of interests. RESULTS OF OPERATIONS Comparison Of The Three Months Ended April 28, 2002 And April 29, 2001 Net Sales. Net sales for the first quarter of fiscal year 2003 were $49.2 million, compared to $60.5 million for the first quarter of fiscal year 2002, a 19% decrease. Standard Semiconductor Products (Standard Products) declined by 15%. Rectifier and Assembly Products' sales declined 21% and our Other Products segment declined 93% in the first quarter of fiscal year 2003. The decline in sales was due in part to weakness in the overall semiconductor 11 industry caused by poor economic conditions and lower spending in the capital equipment end-markets of communications infrastructure and test systems. Standard Products represented about 94% of net sales in the first quarter of fiscal year 2003, up from 90% in the prior year period. Standard Product sales in the first quarter of fiscal year 2003 reflected year-over-year growth in the Power Management product line, but that was more than offset by large declines in the Protection and High Performance product lines. Sales of our Rectifier and Assembly Products segment declined due to weak industry conditions and a strategic focus on proprietary products. Other Products declined as a result of a strategic de-emphasis of custom and foundry services. We plan to eventually exit the custom and foundry product offerings. In the first quarter of fiscal year 2002, favorable market conditions benefited all three of our reportable segments. The Standard Products segment was most benefited by strength in sales of our High Performance product line used in test systems and Power Management products used in a wide variety of applications. Our Protection product line saw a large decline in sales during the first quarter of fiscal year 2002 as the communications end-market rapidly deteriorated. Gross Profit. Gross profit for the first quarter of fiscal year 2003 was $28.1 million, compared to $35.1 million for the comparable period in the prior year, a 20% decline. Our gross margin was 57% for the first quarter of fiscal year 2003, down from 58% for the first quarter of fiscal year 2002. The decline is due to lower utilization and weaker industry conditions, as reflected in our year-over-year decline in net sales. Operating Costs and Expenses. Operating costs and expenses were $15.9 million, or 32% of net sales, for the first quarter ended April 28, 2002. Operating costs and expenses for the prior year first quarter were $18.9 million, or 31% of net sales. Operating results in the first quarter of fiscal year 2003 include two one-time items. First, $229,000 of products that had been previously written down were included in net sales, therefore, there was no cost of goods sold associated with these shipments. Second, one-time costs of $247,000 were recorded for the write-off of certain excess test capacity and other assets at the Company's former Newbury Park and New York facilities. The net impact of these two one-time items on first quarter results was costs of approximately $18,000. Operating costs and expenses for the first quarter of fiscal year 2002 include one-time costs of $951,000 to cover the expense of reducing headcount at our Santa Clara, California wafer fab and relocating our New York, New York office to our Newbury Park, California office. Before one-time costs, operating costs and expenses so far in fiscal year 2003, as a percentage of net sales, are higher than previous levels due to lower shipment rates and lower efficiencies. Absolute operating costs and expenses, before one-time items, is lower in the first quarter of fiscal year 2003 compared to the prior year due to cost cutting measures taken during the prior year. Operating Income. Operating income was $12.1 million in the first quarter of fiscal year 2003, down from operating income of $16.2 million in the first quarter of fiscal year 2002. Operating income was impacted by a 19% decline in net sales and the drop to a 57% gross margin. The drop in operating income was partially offset by one-time costs of $951,000 that reduced fiscal year 2002 first quarter operating income. We evaluate segment performance based on net sales and operating income of each segment. Operating income for the Standard Semiconductor Products segment declined 28% in the first quarter of fiscal year 2003. Operating income in the Standard segment was hurt by a decline in all product lines, with the exception of the Power Management product line, which had sales increases and an improved profit margin. High Performance products, which have operating margins above our corporate average, represented the largest product line decline compared to the prior year period. 12 Operating income for the Rectifier and Assembly Products segment declined by 24%, while the Other Products segment decreased 80% in first quarter of fiscal year 2003. Both segments' operating margins were impacted by poor efficiencies associated with a lower sales level. Operating income for the Standard Semiconductor Products segment in the first quarter of fiscal year 2002 was most benefited by a significant increase in High Performance product line sales, which had above corporate average operating margins. Operating income for the Rectifier and Assembly Products segment for the first quarter of fiscal year 2002 increased due to a shift in manufacturing to our lower-cost facility in Mexico and reduced overhead. Other Products operating income decreased due to lower gross margins and underutilized overhead. Interest and Other Income. Net interest and other income of $1.2 million was realized in the first quarter of fiscal year 2003. For the first quarter of fiscal year 2002, interest and other income was $2.5 million. Other income and expenses is primarily interest income from investments and interest expense associated with our outstanding convertible subordinated notes. The decline in interest and other income so far in fiscal year 2003 is mostly due to lower rates of return on our investments as compared to the prior year. Provision for Taxes. Provision for income taxes for the first three months of fiscal year 2003 was $3.3 million, compared to $5.4 million in the prior year period. The effective tax rate so far in fiscal year 2003 is 25%, compared to 29% in the prior year period. The decline in the effective tax rate is due to increased sales through foreign-based subsidiaries that are in lower tax jurisdictions. Liquidity and Capital Resources We evaluate segment performance based on net sales and operating income of each segment. We do not track segment data or evaluate segment performance on additional financial information. As such, there are no separately identifiable segment assets and liabilities. On February 14, 2000, we completed a private offering of $400.0 million principal amount of convertible subordinated notes that bear interest at the rate of 4 1/2% per annum and are convertible into our common stock at a conversion price of $42.23 per share. The notes are due in 2007 and redeemable in 2003. We have used the net proceeds of the notes offering, in part, for general corporate purposes, including working capital, expansion of sales, marketing and customer service capabilities, and product development. In addition, we may use a portion of the net proceeds from the notes offering to acquire or invest in complementary businesses, technologies, services or products. As of April 28, 2002, we had working capital of $457.1 million, compared with $403.0 million as of January 27, 2002. The ratio of current assets to current liabilities as of April 28, 2002 was 21.7 to 1, compared to 15.8 to 1 as of January 27, 2002. The increase in working capital as of April 28, 2002 was mostly the result of an increase in cash and temporary investments. Cash provided by operating activities was $7.9 million for the first quarter of fiscal year 2003, compared to $9.6 million for the first quarter of fiscal year 2002. Net operating cash flows were impacted by non-cash charges for depreciation and amortization of $2.5 million and $2.0 million in the first quarters of fiscal years 2003 and 2002, respectively. Net operating cash flows in the first three months of fiscal year 2003 were positively impacted by net income of $10.0 million and by a decrease in inventories, tax benefit from stock option exercises, income taxes payable and other assets. These were partially offset by increases in receivables, deferred income taxes, accounts payable and accrued liabilities, and other assets and liabilities. Investing activities provided $8.5 million in the first quarter of fiscal year 2003 compared to $213.3 million used in the prior year first quarter. Investing activities for both periods consist of increases in temporary investments, purchases and redemptions of long-term investments, and capital expenditures. Investing activities for first quarter of fiscal year 2002 included proceeds of $1.2 million from the sale of assets. Our financing activities used $4.7 million during the first three months of fiscal year 2003 and $6.3 million in the prior year period. Financing activities so far in fiscal year 2003 reflect the proceeds from stock option exercises, 13 which were more than offset by cash used to repurchase long-term debt. Financing activities for the first quarter of fiscal year 2002 reflect the proceeds from stock options exercises and the reissuance of treasury stock, more than offset by cash used to repurchase long-term debt and common stock. We do not have any off balance sheet financing activities and do not have any special purpose entities. As of April 28, 2002, we have approximately $8.2 million in operating lease commitments that extend over a six year period. The portion of these operating lease payments due during the coming fiscal year is less than $1.3 million. In order to develop, design and manufacture new products, we have incurred significant expenditures during the past five years. These investments aimed at developing new products, including the hiring of many design and applications engineers and related purchase of equipment, will continue. We intend to continue to invest in those areas that have shown potential for viable and profitable market opportunities. Certain of these expenditures, particularly the addition of design engineers, do not generate significant payback in the short-term. We plan to finance these expenditures with cash generated by operations and investments. Purchases of new capital equipment were made primarily to improve internal computer systems and expand manufacturing capacity. Funding for these purchases was made from our operating cash flows and cash reserves. We have made significant investments in product and process technology. We believe that sales generating cash flows, together with the proceeds of the notes offering and cash reserves, are sufficient to fund operations and capital expenditures for the foreseeable future. Inflation Inflationary factors have not had a significant effect on our performance over the past several years. A significant increase in inflation would affect our future performance. Critical Accounting Policies In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policy," we identified the most critical accounting policies upon which our financial status depends. We determined the critical principles by considering accounting policies that involve the most complex or objective decisions or assessments. We identified our most critical accounting policies to be related to revenue recognition, inventory valuation and use of estimates. We state these accounting policies in the notes to the consolidated financials statements in our Form 10-K and at relevant sections in this management's discussion and analysis. Recently Issued Accounting Standards In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We plan to adopt this statement effective January 26, 2003. We do not expect that the adoption of SFAS No. 143 will have a material impact on our results of operations or financial position. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and reporting provision of Accounting Principles Board (APB) Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a business (as previously defined in that Opinion). SFAS No. 144 also resolves significant implementation issues related to Statement No. 121. We have adopted these standards effective with the fiscal year beginning January 28, 2002. We are currently reviewing these standards to determine the impact on our results of operations and financial position, however, for the first quarter ended April 28, 2002, the adoption of these standards has not had a material impact. 14 In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This statement is effective for fiscal years beginning after May 15, 2002. For certain provisions, including the rescission of Statement 4, early application is encouraged. We have applied this statement to the three months ended April 28, 2002, and the impact of its application was the reclassification of the gains or losses on the extinguishment of debt from an extraordinary item to other income. RISK FACTORS AND FORWARD LOOKING STATEMENTS In addition to historical information, this Form 10-Q contains statements relating to our future results. These statements include certain projections and business trends, which are "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are made only as of the date of this Form 10-Q. We do not undertake to update or revise the forward-looking statements after the date of this Form 10-Q. Actual results may differ materially from projected results as a result of certain risks and uncertainties. These risks and uncertainties include, without limitation, those described under "Risk Factors" in the Form 10-K for the year ended January 27, 2002, as filed with the Securities and Exchange Commission, those set forth below and elsewhere in this Form 10-Q and those detailed from time to time in press releases, conference calls and other filings with the SEC: ... Economic declines may have adverse consequences for our business ... The cyclical nature of the electronics and semiconductor industries may limit our ability to maintain or increase revenue and profit levels during industry downturns ... Fluctuations and seasonality in the personal computer industry and economic downturns in our end-markets may have adverse consequences for our business ... Reductions in communications infrastructure investments could adversely affect our business ... We may be unsuccessful in developing and selling new products required to maintain or expand our business ... Our products may be found to be defective, product liability claims may be asserted against us and we may not have sufficient liability insurance ... Our share price could be subject to extreme price fluctuations, and shareholders could have difficulty trading shares ... We obtain certain essential components and materials and certain manufacturing services from a limited number of suppliers and subcontractors, including foreign-based entities ... We sell and trade with foreign customers, which subjects our business to increased risks applicable to international sales ... Our foreign currency exposures may change over time as the level of activity in foreign markets grows and could have an adverse impact upon financial results ... Our future operating results may fluctuate, fail to match past performance or fail to meet expectations ... We receive a significant portion of our revenues from a small number of customers and the loss of any one of these customers could adversely affect our operations ... We have acquired and may continue to acquire other companies and may be unable to successfully integrate these companies into our operations ... We compete against larger, more established entities and our market share may be reduced if we are unable to respond to our competitors effectively ... We must commit resources to product production prior to receipt of purchase commitments and could lose some or all of the associated investment 15 . The loss of any of our key personnel or the failure to attract or retain the specialized technical and management personnel could impair our ability to grow our business . We are subject to environmental regulations, which may require us to incur significant expenditures . Major earthquakes may cause us significant losses . Terrorist attacks, such as the attacks that occurred on September 11, 2001, and other acts of violence or war may negatively affect our operations and your investment . We may be unable to adequately protect our intellectual property rights . We could be required to register as an investment company and become subject to substantial regulation that would interfere with our ability to conduct our business ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- Foreign Currency Risk As a global enterprise, we face exposure to adverse movements in foreign currency exchange rates. Because of the relatively small size of each individual currency exposure, we do not employ hedging techniques designed to mitigate foreign currency exposures. Likewise, we could experience unanticipated currency gains or losses. Our foreign currency exposures may change over time as the level of activity in foreign markets grows and could have an adverse impact upon our financial results. Certain of our assets, including certain bank accounts and accounts receivable, exist in nondollar-denominated currencies, which are sensitive to foreign currency exchange rate fluctuations. The nondollar-denominated currencies are principally Euro and British Pounds Sterling. Additionally, certain of our current and long-term liabilities are denominated principally in British Pounds Sterling currency, which are also sensitive to foreign currency exchange rate fluctuations. Substantially all of our foreign sales are denominated in U.S. dollars. Currency exchange fluctuations in countries where we do business could harm our business by resulting in pricing that is not competitive with prices denominated in local currencies. Interest Rate Risk As of April 28, 2002, we had $354.2 million in long-term debt outstanding at a fixed interest rate of 4 1/2 % per annum. We do not currently hedge any potential interest rate exposure. Interest rates affect our return on excess cash and investments. A significant decline in interest rates would reduce the amount of interest income generated from our excess cash and investments. 16 PART II - OTHER INFORMATION --------------------------- ITEM 1. LEGAL PROCEEDINGS ----------------- The Company periodically becomes subject to legal proceedings in the ordinary course of our business. The Company is not currently involved in any proceeding, which is reasonably expected to ultimately result in a material and adverse effect on the Company's financial position. On February 7, 2000, the Company was notified by the United States Environmental Protection Agency with respect to the Casmalia Disposal Site in Santa Barbara, California. The Company has been included in the Superfund program to clean up this disposal site because it used this site for waste disposal. During the second quarter of fiscal year 2002, the Company recorded one-time a cost of $765,000 for the pending settlement of this matter with federal and state agencies. On June 22, 2001, the Company was notified by the California Department of Toxic Substances Control that it may have liability associated with the clean up of the one-third acre Davis Chemical Company site in Los Angeles, California. The Company has been included in the clean-up program because it is one of the companies believed to have used the Davis Chemical Company site for waste recycling and/or disposal between 1949 and 1990. Investigation into this matter is in its early stages. At this time there is not a specific proposal or budget with respect to the clean-up of the site. Thus, no reserve has been established for this matter. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ----------------------------------------- Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES ------------------------------- Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- None. ITEM 5. OTHER INFORMATION ----------------- Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits 10.1 - The Company's Long-Term Stock Incentive Plan, as Amended. 11.1 - Computation of per share earnings - See Note 1 of Notes to Unaudited Consolidated Condensed Financial Statements. (b) Reports on Form 8-K The Company filed the following reports on Form 8-K during the period covered by this report: January 28, 2002 To file press release dated January 25, 2002 regarding expectations for the fourth quarter February 28, 2002 To report change of address of corporate headquarters April 24, 2002 To file press release dated April 24, 2002 regarding expectations for the first quarter 17 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. SEMTECH CORPORATION ------------------- Registrant Date: June 11, 2002 /S/ John D. Poe -------------------------------- John D. Poe Chairman of the Board and Chief Executive Officer Date: June 11, 2002 /S/ David G. Franz, Jr. -------------------------------- David G. Franz, Jr. Vice President Finance, Chief Financial Officer, and Secretary 18 EX-10.1 3 dex101.txt LONG TERM STOCK INCENTIVE PLAN AS AMENDED Exhibit 10.1 ------------ SEMTECH CORPORATION LONG-TERM STOCK INCENTIVE PLAN (As Amended and Restated) 1. THE PLAN (a) Purpose. The purpose of this Long-Term Stock Incentive Plan (the "Plan") is to promote the longer-term financial success of Semtech Corporation (the "Company") by providing a means to attract, retain and award individuals who can and do contribute to such success. By using stock-based compensation, the recipients of awards under the Plan will further identify their interests with those of the Company's stockholders. (b) Effective Date. To serve this purpose, the Plan will become effective upon its approval by the affirmative vote of a majority of the shares present or represented by proxy at the Company's 1998 Annual Meeting of Stockholders. 2. ADMINISTRATION (a) Committee. The Plan shall be administered by a Committee, appointed by the Board of Directors of the Company. So long as the Company's common stock, par value $.01 per share ("Common Stock") remain registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Section 16 Participants may receive awards, any committee authorized by the Board to administer the Plan shall be comprised solely of two or more directors of the Company who are Non-Employee Directors within the meaning of Rule 16b-3(b)(3)(i) promulgated under the Exchange Act. Notwithstanding the foregoing, the Board of Directors of the Company (the "Board") may assume, at its sole discretion, administration of the Plan. The administrator of the Plan, whether a committee of the Board or the full Board, is referred to herein as the "Plan Administrator." (b) Powers and Authority. The Plan Administrator's powers and authority include, but are not limited to, selecting individuals who are (1) employees of the Company or any subsidiary of the Company or other entity in which the Company has a significant equity or other interest as determined by the Plan Administrator, or (2) members of the Board; determining the types and terms and conditions of all awards granted, including performance and other earnout and/or vesting contingencies; permitting transferability of awards to third parties; interpreting the Plan's provisions; and administering the Plan in a manner that is consistent with its purpose. (c) Award Prices. For Plan purposes, all stock options and stock appreciation rights shall have an exercise price which shall reflect the average traded price of a share of Common Stock, on the date as determined by the Plan Administrator, or if the Common Stock is not traded on such date, the average price on the next preceding day on which such Common Stock is traded. The applicable date shall be the date on which the award is granted. 3. SHARES SUBJECT TO THE PLAN (a) Maximum Shares Available for Delivery. Subject to Section 3(c), the maximum number of shares of Common Stock that may be delivered to participants and their beneficiaries under the Plan shall be equal to the sum of (i) 2,000,000 shares of Common Stock; (ii) any shares of Common Stock available for future awards under the Company's 1994 Long-Term Stock Incentive Plan as of the effective date of this Plan; (iii) any shares of Common Stock available for future awards under the Company's 1994 Non-Employee Directors Stock Option Plan as of the effective date of this Plan; (iv) any shares of Common Stock that are represented by awards granted under any prior plan of the Company, which are forfeited, expire or are canceled without the delivery of shares of Common Stock or which result in the forfeiture of shares of Common Stock back to the Company; and (v) up to 2,000,000 additional shares of Common Stock, if authorized by the Board, which are reacquired in the open market or in a private transaction after the effective date of this Plan. Collectively the shares of Common Stock subject 19 to this Plan are referred to herein as "Shares." In addition, any Shares granted under the Plan which are forfeited back to the Company because of the failure to meet an award contingency or condition shall again be available for delivery pursuant to new awards granted under the Plan. Any Shares covered by an award (or portion of an award) granted under the Plan, which is forfeited or canceled, expires or is settled in cash, shall be deemed not to have been delivered for purposes of determining the maximum number of Shares available for delivery under the Plan. Likewise, if any stock option is exercised by tendering Shares, either actually or by attestation, to the Company as full or partial payment in connection with the exercise of a stock option under this Plan or any prior plan of the Company, only the number of Shares issued net of the Shares tendered shall be deemed delivered for purposes of determining the maximum number of Shares available for delivery under the Plan. Further, Shares issued under the Plan through the settlement, assumption or substitution of outstanding awards or obligations to grant future awards as a condition of the Company acquiring another entity shall not reduce the maximum number of Shares available for delivery under the Plan. (b) Other Plan Limits. Subject to Section 3(c), the following additional maximums are imposed under the Plan. The maximum number of Shares that may be covered by stock options intended to comply with Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), ("Incentive Stock Options") shall be 2,000,000. The maximum number of Shares that may be issued in conjunction with awards granted pursuant to Section 4(d) shall be 600,000 plus up to an additional 600,000 to the extent that such Shares are reacquired by the Company pursuant to Section 3(a). The maximum number of Shares that may be covered by awards granted to any one individual pursuant to Sections 4(b) and 4(c) shall be 500,000 during any consecutive three calendar years. The maximum payment that can be made for awards granted to any one individual pursuant to Sections 4(d) and 4(e) shall be $2,500,000 for any single or combined performance goals established for a specified performance period. If a payment under Sections 4(d) or 4(e) is made in Shares, the value of such Shares for determining this maximum individual payment amount will be the closing price of a Share on the first day of the applicable performance period. A specified performance period for purposes of this performance goal payment limit shall not exceed a sixty (60) consecutive month period. (c) Payment Shares. Subject to the overall limitation on the number of Shares that may be delivered under the Plan, the Plan Administrator may use available Shares as the form of payment for compensation, grants or rights earned or due under any other compensation plans or arrangements of the Company, including the plan of any entity acquired by the Company. (d) Adjustments for Corporate Transactions. The Plan Administrator may determine that: (i) In the event that the outstanding shares of Common Stock of the Company are changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of any recapitalization, reclassification, stock split, stock dividend, combination or subdivision, appropriate adjustment shall be made in the number of shares available under the Plan and under any stock awards granted under the Plan. Such adjustment to outstanding stock awards shall be made without change in the total price applicable to the unexercised portion of such awards, and a corresponding adjustment in the applicable option price per share shall be made. No such adjustment shall be made which would, within the meaning of any applicable provisions of the Code, constitute a modification, extension or renewal of any award or a grant of additional benefits to the holder of an award. (ii) In case (A) the Company is merged or consolidated with another corporation or other entity and the Company is not the surviving corporation, (B) all or substantially all of the assets or more than 50% of the outstanding voting stock of the Company is acquired by any other corporation or other entity or (C) of a reorganization or liquidation of the Company, the Plan Administrator or the governing body of any entity assuming the obligations of the Company, shall, as to outstanding awards, either (x) make appropriate provision for the protection of any such outstanding awards by the substitution on an equitable basis of appropriate stock of the Company, or of the merged, consolidated or otherwise reorganized corporation which will be issuable in respect of the shares of Common Stock of the Company, provided that no additional benefits shall be conferred upon participants as a result of such substitution, and the excess of the aggregate fair market value of the shares subject to the awards immediately after such substitution over the purchase price thereof is not more than the excess of the aggregate fair market value of the shares subject to the award immediately before such substitution over the purchase price thereof, or 20 (y) upon written notice to the participants, provide that all unexercised awards must be exercised within a specified number of days of the date of such notice or they will be terminated. In any such case, the Plan Administrator may, in its discretion, accelerate the exercise dates of outstanding awards; provided, however, that subsections (iii) and (iv) of this paragraph (d) shall govern acceleration of awards with respect to the events described therein. (iii) In case of (A) any consolidation or merger involving the Company if the shareholders of the Company immediately before such merger or consolidation do not own, directly or indirectly, immediately following such merger or consolidation, more than fifty percent (50%) of the combined voting power of the outstanding voting securities or interests of the corporation (or its parent corporation) or other entity resulting from such merger or consolidation in substantially the same proportion as their ownership of the shares of Common Stock immediately before such merger or consolidation; (B) any sale, lease, license, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the business and/or assets of the Company or assets representing over 50% of the operating revenue of the Company; or (C) any person (as such term is used in Sections 13(d) and 14(d) of the Exchange Act who is not, on April 16, 1998, a "controlling person" (as defined in Rule 405 promulgated under the Securities Act of 1933, as amended) (a "Controlling Person") of the Company shall become (x) the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of over 50% of the Company's outstanding Common Stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally or (y) a Controlling Person of the Company, all outstanding awards, regardless of the date of grant of such awards, shall immediately become exercisable with respect to 100% of the Shares subject to such awards. This paragraph 3(d)(iii) shall apply only to awards granted prior to October 3, 2001 and to awards granted on or after October 3, 2001 to participants who are non-employee directors on the date of grant. (iv) In the event of the termination without cause of a participant within one year following a Change in Control (as defined below) or a Constructive Termination (as defined below) of a participant, all outstanding awards, regardless of the date of grant of such awards, shall immediately become exercisable with respect to 100% of the Shares subject to such awards. For purposes of this paragraph 3(d)(iv), "Constructive Termination" shall mean participant's voluntary termination within one year following participant's knowledge of the occurrence of any of the following: (A) a reduction in participant's base salary after a "Change in Control" (as defined below) from that in effect immediately prior to the Change in Control; or (B) a material or substantial reduction or change in job duties, responsibilities and requirements after a Change in Control from participant's prior duties, responsibilities and requirements immediately prior to the Change in Control. Notwithstanding the foregoing, a termination shall not be treated as a Constructive Termination if the participant shall have specifically consented in writing to the occurrence of the event giving rise to the claim of Constructive Termination. For purposes of this paragraph 3(d)(iv), "Change in Control" shall mean the occurrence of any of the following events with respect to the Company: (A) any consolidation or merger involving the Company if the shareholders of the Company immediately before such merger or consolidation do not own, directly or indirectly, immediately following such merger or consolidation, more than fifty percent (50%) of the combined voting power of the outstanding voting securities or interests of the corporation (or its parent corporation) or other entity resulting from such merger or consolidation in substantially the same proportion as their ownership of the shares of Common Stock immediately before such merger or consolidation; (B) any sale, lease, license, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the business and/or assets of the Company or assets representing over 50% of the operating revenue of the Company; or (C) any person (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) who is not, on October 3, 2001, a Controlling Person of the Company shall become (x) the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of over 50% of the Company's outstanding Common Stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally or (y) a Controlling Person of the Company. This paragraph 3(d)(iv) shall apply only to awards granted on or after October 3, 2001 to participants who on the date of grant are other than non-employee directors. 4. TYPES OF AWARDS 21 (a) General. An award may be granted singularly, in combination with another award(s) or in tandem whereby exercise or vesting of one award held by a participant cancels another award held by the participant. Any award granted under the Plan shall be evidenced by a written agreement in form and substance satisfactory to the Plan Administrator. These agreements must conform to the Plan. The Plan Administrator may include such terms, consistent with the Plan, as it determines in its discretion. Subject to Section 2(c), an award may be granted as an alternative to or replacement of an existing award under the Plan or under any other compensation plans or arrangements of the Company, including the plan of any entity acquired by the Company. The types of awards that may be granted under the Plan include: (b) Stock Option. A stock option represents a right to purchase a specified number of Shares during a specified period at a price per Share which is no less than that required by Section 2(c). A stock option may be in the form of an incentive stock option or in a form which does not qualify for favorable federal tax treatment. The Shares covered by a stock option may be purchased by means of a cash payment or such other means as the Plan Administrator may from time to time permit, including without limitation (i) tendering (either actually or by attestation) Shares valued using the market price at the time of exercise, (ii) authorizing a third party to sell Shares (or a sufficient portion thereof) acquired upon exercise of a stock option and to remit to the Company a sufficient portion of the sale proceeds to pay for all the Shares acquired through such exercise and any tax withholding obligations resulting from such exercise; (iii) crediting toward the purchase price amounts from individuals' deferred compensation account balances, including accrued dividend equivalent balances; or (iv) any combination of the above. (c) Stock Appreciation Right. A stock appreciation right is a right to receive a payment in cash, Shares or a combination, equal to the excess of the aggregate market price at time of exercise of a specified number of Shares over the aggregate exercise price of the stock appreciation rights being exercised. (d) Stock Award. A stock award is a grant of Shares or of a right to receive Shares (or their cash equivalent or a combination of both) in the future. Each stock award shall be subject to such conditions, restrictions and contingencies as the Plan Administrator shall determine. These may include continuous service and/or the achievement of performance goals. The performance goals that may be used by the Plan Administrator for such awards shall consist of cash generation targets, profit, revenue and market share targets, profitability targets as measured by return ratios, and shareholder returns. The Plan Administrator may designate a single goal criterion or multiple goal criteria for performance measurement purposes with the measurement based on absolute Company or business unit performances and/or on performance as compared with that of other publicly-traded companies. (e) Cash Award. A cash award is a right denominated in cash or cash units to receive a payment, which may be in the form of cash, Shares or a combination, based on the attainment of pre-established performance goals and such other conditions, restrictions and contingencies as the Plan Administrator shall determine. The performance goals that may be used by the Plan Administrator for such awards shall consist of cash generation targets, profits, revenue and market share targets, profitability targets as measured by return ratios and shareholder returns. The Plan Administrator may designate a single goal criterion or multiple goal criteria for performance measurement purposes with the measurement based on absolute Company or business unit performance and/or on performance as compared with that of other publicly-traded companies. (f) Special Provisions for Incentive Stock Options. Stock Options granted under the Plan which are intended to be Incentive Stock Options shall be specifically designated as Incentive Stock Options and shall be subject to the following additional terms and conditions: (i) Dollar Limitation. The aggregate fair market value (determined as of the respective date or dates of the grant) of the Shares with respect to which Incentive Stock Options granted to any employee under the Plan (and under any other incentive stock option plans of the Company and any parent corporation and subsidiary) are exercisable for the first time shall not exceed $100,000 in any one calendar year. In the event that Section 422 of the Code is amended to alter the limitation set forth therein so that following such amendment such limitation shall differ from the limitation set forth in this paragraph (i), the limitation of this paragraph (i) shall be automatically adjusted accordingly. (ii) 10% Stockholder. If any employee to whom an Incentive Stock Option is to be granted under the Plan is at the time of the grant of such option the owner 22 of stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any parent corporation or any subsidiary, then the following special provisions shall be applicable to the Incentive Stock Option granted to such individual: (A) The purchase price per Share subject to such Incentive Stock Options shall not be less than 110% of the fair market value of one share of Common Stock at the time of grant; and (B) The option exercise period shall not exceed five years from the date of grant. (iii) Section 422. All Incentive Stock Options shall otherwise comply with the provisions of Section 422 of the Code, as the same shall be amended from time to time. 5. AWARD SETTLEMENT AND PAYMENTS (a) Dividends and Dividend Equivalents. An award may contain the right to receive dividends or dividend equivalent payments which may be paid currently credited to a participant's account. Any such crediting of dividends or dividend equivalents or reinvestment in Shares may be subject to such conditions, restrictions and contingencies as the Plan Administrator shall establish, including the reinvestment of such credited amounts in Share equivalents. (b) Payments. Awards may be settled through cash payments, the delivery of Shares, the granting of awards or combination thereof as the Plan Administrator shall determine. Any award settlement, including payment deferrals, may be subject to such conditions, restrictions and contingencies as the Plan Administrator shall determine. The Plan Administrator may permit or require the deferral of any award payment, subject to such rules and procedures as it may establish, which may include provisions for the payment or crediting of interest, or dividend equivalents, including converting such credits into deferred Share equivalents. 6. PLAN AMENDMENT AND TERMINATION (a) Amendments. The Company's Board of Directors may amend this Plan as it deems necessary and appropriate to better achieve the Plan's purpose; provided however, that any amendment to the Plan which would require approval of the Company's stockholders under applicable law, or under the rules or guidelines of any exchange or automatic quotation system on which the Shares are traded or included, then, in any of such events, such stockholder approval of any such amendment shall also be obtained. (b) Plan Suspensions and Termination. The Board of Directors of the Company may suspend or terminate this Plan at any time. Any such suspension or termination shall not of itself impair any outstanding award granted under the Plan or the applicable participant's rights regarding such award. If not earlier terminated, this Plan shall terminate upon the tenth anniversary of the effective date of the Plan. Unless an earlier termination is specified, awards granted under the Plan shall terminate upon the tenth anniversary of their date of grant. 7. MISCELLANEOUS (a) No Individual Rights. No person shall have any claim or right to be granted an award under the Plan. Neither the Plan nor any action taken hereunder shall be construed as giving any employee or other person any right to continue to be employed by or to perform services for the Company, any subsidiary or related entity. The right to terminate the employment of or performance of services by any Plan participant at any time and for any reason is specifically reserved to the employing entity. (b) Binding Arbitration. Any dispute or disagreement regarding participation and/or an award recipient's rights under the Plan shall be settled solely by binding arbitration in accordance with the applicable rules of the American Arbitration Association. (c) Unfunded Plan. The Plan shall be unfunded and shall not create (or be construed to create) a trust or a separate fund or funds. The Plan shall not establish any fiduciary relationship between the Company and any participant or 23 beneficiary of a participant. To the extent any person holds any obligation of the Company by virtue of an award granted under the Plan, such obligation shall merely constitute a general unsecured liability of the Company and accordingly shall not confer upon such person any right, title or interest in any assets of the Company. (d) Other Benefit and Compensation Programs. Unless otherwise specifically determined by the Plan Administrator, settlements of awards received by participants under the Plan shall not be deemed a part of a participant's regular, recurring compensation for purposes of calculating payments or benefits from any Company benefit plan or severance program. Further, the Company may adopt other compensation programs, plans or arrangements as it deems appropriate. (e) No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any award, and the Plan Administrator shall determine whether cash shall be paid or transferred in lieu of any fractional Shares, or whether such fractional Shares or any rights thereto shall be canceled. (f) Special Provision Regarding Termination of Directorship. If a participant that is a member of the Board terminates his or her services as a member of the Board by reason of death, disability or retirement (as defined by the Plan Administrator in the written agreement evidencing the award to such Board member), an award granted hereunder held by such person shall be automatically accelerated with respect to its exercisability and shall become immediately exercisable in full for the remaining number of Shares subject to such award for three years after the date of such termination or until the expiration of the stated term of such award, whichever period is shorter, and thereafter such award shall terminate; provided, however, that if such person dies or suffers a disability during said three-year period after retirement such award shall remain exercisable in full for a period of three years after the date of such death or disability or until the expiration of the stated term of such award, whichever period is shorter, and thereafter such award shall terminate. If a participant that is a member of the Board terminates his or her services as a member of the Board for any other reason, any portion of an award granted hereunder held by such person which is not then exercisable shall terminate and any portion of such award which is then exercisable may be exercised for three months after the date of such termination or until the expiration of the stated term of such award, whichever period is shorter, and thereafter such award shall terminate; provided, however, that if such person dies or suffers a disability during such three month period, such award may be exercised for a period of one year after the date of such person's death or disability or until the expiration of the stated term of such award, whichever period is shorter, in accordance with its terms, but only to the extent exercisable on the date of such person's death or disability. 01-03-02 24 -----END PRIVACY-ENHANCED MESSAGE-----