NOTE 5: FINANCIAL INSTRUMENTS
Cash and Investments. The following is a summary of available-for-sale securities:
|March 31, 1997||March 31, 1996|
|In thousands||Cost||Gains||Losses||Fair Value||Cost||Gains||Losses||Fair Value|
|Cash and cash equivalents:|
|Municipal bonds||$210,203||$ --||$ --||$210,203||$101,850||$ --||$ --||$101,850|
All investments classified as "available-for-sale securities" have maturities due in one year or less. Realized gains or losses from sales of available-for-sale securities were immaterial for all periods presented.
Held-to-maturity securities represent investments in U.S. Treasury Securities for which amortized cost equals estimated fair value at March 31, 1997 and March 31, 1996. Held-to-maturity securities relate to certain collateral requirements for lease agreements associated with the Company's corporate facilities and have maturities due in one year or less. See Note 6 of Notes to Consolidated Financial Statements.
Derivatives. The Company periodically enters into currency forward or option contracts to minimize foreign exchange risk relating to the Company's purchase of wafers, some of which are denominated in yen. At March 31, 1997, commitments under option contracts to purchase yen in fiscal 1998 were outstanding in the aggregate amount of $2.8 million. These contracts are accounted for as identifiable hedges against wafer purchases. Realized gains or losses are recognized upon maturity of the contracts and are included in cost of sales. At March 31, 1997, the fair value of these option contracts was immaterial based on market exchange rates. The maturities on these contracts is less than twelve months.
The Company has entered into foreign exchange forward contracts to minimize the impact of future exchange fluctuations on the U.S. dollar cost of investing in the USI joint venture. The contracts require the Company to exchange U.S. dollars for New Taiwan dollars and mature within one year. The contracts are accounted for as a hedge of an identifiable foreign currency commitment. Realized gains or losses will be recognized upon maturity of the contracts and will be included in the USI joint venture investment. At March 31, 1997, the outstanding foreign exchange contracts related to the USI joint venture were approximately $102 million and the fair value of these contracts was immaterial, based on market exchange rates.
The Company has entered into an interest rate swap agreement with a third party in order to reduce risk related to movements in interest rates. Under the agreement, which was effective starting in May 1996 and terminates in November 1998, the Company effectively converted the fixed rate interest payments related to $125 million of the Company's convertible subordinated notes to variable rate interest payments without the exchange of the underlying principal amounts. The Company receives fixed interest rate payments (equal to 5.935%) from the third party and is obligated to make variable rate payments (equal to the three month LIBOR rate) to the third party during the term of the agreement. The net amount of interest payments received from the third party and interest payments made by the Company to the third party is included in interest expense. The fair value of the interest rate swap was immaterial based on market exchange rates.
During 1995, the Company completed a reverse repurchase transaction relating to $350 million of U.S. Treasury Securities. The transaction was entered into with the intent of generating net interest income in an increasing interest rate environment and capital gains that could be used to offset previously incurred capital losses relating to the non-recurring $2.5 million write-off of the investment in Star Semiconductor. As a result of this transaction, the Company recorded approximately $9.7 million of interest expense, $4.7 million of interest income and $4.8 million of bond premium amortization in 1995. Although the Company has generally invested in more conventional investments, such as municipal bonds, the Company believes that the short sale of U.S. Treasury Securities met the Company's investment objectives in 1995. Future investment strategies will be made in accordance with investment policies designed to preserve and enhance corporate assets as such strategies may be adopted from time to time by the Company's Board of Directors.
Long-Term Debt and Lines of Credit. In November 1995, the Company completed a private placement of $250 million aggregate principal convertible subordinated notes under Rule 144a of the Securities Act of 1933. The notes, which mature in 2002, are convertible at the option of the note holders into the Company's common stock at a conversion price of $51 per share, subject to adjustment upon the occurrence of certain events. The conversion price represented a 24.77% premium over the closing price of the Company's stock on November 7, 1995. Interest is payable semi-annually at 5.25% per annum. At any time on or after November 4, 1997, the notes are redeemable at the option of the Company at an initial redemption price of 103.75% of the principal amount, except that prior to November 3, 1998, the notes are not redeemable unless the closing price of the Company's common stock has exceeded $71.40 (40% premium over the conversion price) per share for twenty trading days within a period of thirty consecutive trading days. Redemption prices as a percentage of the principal amount are 103%, 102.25%, 101.50% and 100.75% in the years beginning November 1, 1998, November 1, 1999, November 1, 2000 and November 1, 2001, respectively. Debt issuance costs of $6.1 million incurred in conjunction with issuance of the convertible subordinated notes are being amortized over the seven year life of the notes. In 1997, the Company recorded debt issuance cost amortization of $.9 million. At March 31, 1997, the fair value of the convertible subordinated notes was approximately $291 million based on quoted market prices. The Company has reserved 4,901,961 shares of common stock for the conversion of these notes.
The Company has $40 million available under a multicurrency revolving credit line agreement which expires in March 1998. Under this agreement, borrowings bear interest at the bank's reference rate or 0.75% over the bank's interbank market rate depending on the currency borrowed. Additionally, the Company's Ireland manufacturing facility has $6.2 million available under a multicurrency credit line which expires in November 1997. Under this agreement, borrowings bear interest at 0.79% over the bank's prime rate.
At March 31, 1997, no borrowings were outstanding under either credit line. The agreements require the Company to comply with certain covenants and maintain certain financial ratios. The agreements prohibit the payment of cash dividends without prior bank approval.
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Report 1997 |
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