U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: Commission File Number:
March 31, 1996 0-15449
CALIFORNIA MICRO DEVICES CORPORATION
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(Exact name of registrant as specified in its charter)
California 94-2672609
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(State or other jurisdiction (IRS Employer
of Incorporation) Identification No.)
215 Topaz Street, Milpitas, CA 95035-5430
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (408)263-3214
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent files pursuant to
Item 405 of Regulation S-K (Section 209.405 of this chapter) is not
contained herein, and will not be continued to the best of
registrant's knowledge, in any definitive proxy or information
statement incorporated by reference in Part II of this Form 10-K or
any amendment to this Form 10-K. Yes X No
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 31, 1996, was approximately
$59,000,000.00 based upon the last sale price of the Common Stock
reported for such date on the NASDAQ National Market System. For
purposes of this disclosure, Common Stock held by persons who hold
more than 5% of the outstanding voting shares and Common Stock held
by executive officers and directors of the Registrant have been
excluded in that such persons may be deemed to be "affiliates" as
that term is defined under the rules and regulations promulgated
under the Securities Act of 1933. This determination of affiliate
status is not necessarily a conclusive determination for other
purposes.
As of March 31, 1996, the number of shares of the Registrant's Common
Stock outstanding were 10,306,088.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the Registrant's Annual Meeting of
Shareholders to be held July 26, 1996.
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PART I
ITEM 1. BUSINESS.
General
California Micro Devices Corporation ("CMD") serves OEM and End User
electronic systems manufacturers who need higher performance, higher
density, lower cost, and unique functionality by providing a line of
specialty and precision electronic components. CMD has forged a
leadership position with its proprietary materials, process, and
design technology by specializing in thin film passive electronic
networks. These devices combine multiple thin film passive
electronic components (resistors and capacitors) and/or semiconductor
devices into solutions for many of the industry's most difficult
problems and allow CMD customers to build systems which provide
superior value to their users.
CMD's thin film networks fall into two basic categories: The
traditional IPEC(TM)family, consisting of custom and general purpose
devices for solving unique customer problems; and CMD's new
P/Active(TM) circuits which incorporate the latest in high frequency,
high density, high reliability technology in Application Specific
Passive Networks (ASPN(TM)) for high volume industry standard
applications or devices which complement industry leaders'
semiconductor solutions.
Unlike traditional discrete component products which were developed
during the age of the transistor, CMD's products combine the features of
higher performance, higher density, and lower total system cost to
complement many of today's most sophisticated integrated circuit based
systems. Applications in fields such as high speed computers,
telecommunications, networking, and medical instrumentation demonstrate
the value which CMD can bring to almost any electronics application.
CMD also designs, manufactures and sells certain semiconductor
products (primarily analog and mixed signal products for the
telecommunications industry). These sales are a significant portion
of the Company's business. Sales of older products, which have
constituted the bulk of the Company's semiconductor revenue, continue
to decline, while sales of new products for mobile communications,
plus the onset of revenue from foundry services, have begun to
rejuvenate the semiconductor portion of the Company's business.
During fiscal 1996, the Company informed its customers of its
intention to exit the military business which had declined to less
than three percent of its revenue. This will be accomplished by the
end of calendar year 1996.
CMD enjoys a comprehensive strategic alliance with Hitachi Metals
Ltd., a subsidiary of Hitachi Ltd., that involves equity
participation, product development, manufacturing, marketing and
worldwide distribution. During fiscal 1996, CMD recognized $1.2
million in technology revenue from Hitachi and $0.6 million of
product revenue.
CMD was incorporated in 1980 and has been public since 1986. It
utilizes 110,000 square feet of facilities in Milpitas, California
and Tempe, Arizona.
Passive Component Industry Background
Passive components - principally resistors and capacitors - are used
in virtually all electronic products. They filter, condition, shape,
terminate and improve the characteristics of the electrical signals
used and transmitted by active components such as microprocessors,
application specific integrated circuits ("ASIC's") and dynamic
random access memory ("DRAM") integrated circuits. Although the role of
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passive components has changed over the years, their usage has
continued to grow with the transition to higher levels of
semiconductor integration. For many years the number of passive
components in electronic systems was decreasing, being offset in the
market by increasing numbers of systems. However, in the last year
or two there has been a reversal of this trend in important
electronic segments such as the PC business. The number of passives
in a PC reached a minimum with the 486 generation and is now showing
dramatic increases in the Pentium(R)* and Pentium Pro(R)* generations.
Similar trends are occurring in other areas where new functionality
and higher frequencies are being incorporated in new systems.
Coincident with this changing role, the demands on passive component
performance have accelerated dramatically in the last few years.
According to industry sources, the worldwide market for selected
passive components includes over $3 billion for resistors and
resistor networks, and $9 billion for capacitors. This total market
is expected to continue to grow over the next few years, driven by
the increasing complexity of products such as personal computers,
networking equipment and telecommunications devices, and the
increasing volume of portable products such as cellular phones,
personal communication systems (PCS), pocket pagers, personal digital
assistants (PDA's) and notebook computers. In addition, market
growth has been augmented by greater electronic content in products
such as automobiles and appliances. Given the enormous diversity of
requirements which have developed over the years, CMD can address
only a small portion of the overall market for passive components;
however, it is positioned in some of the most rapidly growing segments.
The target applications for CMD's passive devices are those
traditionally served by multi-layered ceramic capacitors ("MLCs") and
thick-film resistors, interconnected on PC boards. The materials
used in these products are inherently difficult to process into the
fine line circuit patterns demanded by today's high performance
electronic systems. Passive components so manufactured, which
comprise most of the worldwide market for resistors and small value
capacitors, are generally discrete components, able to perform only a
small number of functions. The nature and variety of materials
involved in MLCs and thick film resistors limit the ability of thick
film manufacturers to integrate combinations of resistors and
capacitors into a single circuit.
In contrast, continuing improvements in silicon fabrication
technology have enabled integrated circuit manufacturers to integrate
increasing numbers of active components, principally transistors,
onto single semiconductor chips. This integration has increased the
number of functions performed by each chip, improved performance, and
significantly reduced the cost per function. While thick film
manufacturers have attempted to integrate resistors into networks
since the 1970's, they have achieved only limited integration. The
failure of passive components to match the improvements in active
components has led to a relative increase in the cost of using
passive components as compared to the cost of the surrounding active
elements, increased the proportion of space occupied by passive
components on many printed circuit boards ("PCB's"), and in some
cases limited the ability of system designers to take advantage of
higher performance integrated circuits. This is the opportunity CMD
looks to exploit. During the last year, most of the traditional
thick film passive manufacturers have acknowledged the advantages of
thin film devices and announced their intention to enter the market.
The CMD Solution/AdvantagesUsing its silicon-based thin film materials and
process technology, CMD integrates multiple passive elements into a single
integrated circuit. The Company believes that its thin film products have the
following desirable advantages over traditional thick film technology
components:
Lower Total Cost Solutions - Manufacturers of electronic
products face intense price competition.
(*)Pentium and Pentium Pro are registered trademarks of Intel Corp.
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By integrating multiple passive elements on a single chip, the
Company is able to offer a lower total cost solution than those
offered by most discrete passive component manufacturers. The cost
of purchasing and placing one of the Company's thin film integrated
resistor/capacitor networks - which may combine 18 resistors and 9
capacitors in a single surface mount package - can be as much as 50%
less than the cost of purchasing and installing an equivalent number
of thick film discrete elements. The Company's PAC 1284 solution for
the parallel ports of PC's replace 54 discrete resistors and
capacitors with two miniature IC packages. The customer can realize
further cost savings by reducing the size of the PCB and by using
industry standard semiconductor insertion equipment for assembly.
Smaller Size for Miniaturization and Portability - Consumer
demand for smaller, more portable products has created a need for
smaller printed circuit boards (PCB's). Passive components can
require significant space on the PCB, limiting either the ability to
shrink product size or to incorporate additional features. This is
particularly important in devices such as portable computers,
cellular phones and pagers. The integration of multiple passive
elements on a single integrated circuit reduces the size and weight
of the passive components. For instance, cellular phones generally
require hundreds of passive components which can consume as much as
20% of the PCB space. One of the Company's IPEC(TM) products, which
integrates 18 capacitors and 18 resistors, reduces the space used on
the PCB by up to 80% compared to the use of the same number of
discrete elements. Discrete components have been introduced in
smaller sizes such as the newer format called 0402 in an attempt to
provide some of this space savings. But such tiny devices create
significant assembly, rework, and reliability problems which drive up
the costs significantly.
Outstanding Performance at Higher Frequencies - The
increasing use of faster microprocessors in computers and higher
frequencies in communication products has created a significant
demand for improved passive component performance. Traditional
passive components do not always perform well at higher frequencies
due to a variety of problems including variation of characteristics
with frequency, signal matching delays, and performance
inconsistencies between devices and the PCB's in which they are used.
These problems often keep higher frequency systems from operating
properly. The Company's thin film technology components perform
exceptionally well at high frequencies due to the inherently smaller
size of the component and the ability to achieve consistent placement
of the components relative to each other. The Company's new products
such as the PAC RG family for the Intel Pentium Pro( processor and
other high performance processors are specially designed to optimize
high frequency performance, allowing systems to operate at optimum
speed. These devices have been characterized at up to 10 GHz (well
beyond traditional devices) to provide customers with the operating
margin they need to guarantee the operation of present and next
generation systems.
New EMI/RFI Filtering Capabilities - Electronic systems
designed to operate at high frequencies can emit high levels of
Electromagnetic Interference/ Radio Frequency Interference (EMI/RFI).
These emissions are strictly regulated by the Federal Communications
Commission ("FCC") and the European community. Because systems
manufacturers often only discover the existence of EMI/RFI emission
problems late in the product design cycle, delays in acquiring an
appropriate passive component solution can result in non-compliance
with FCC requirements and delayed product introductions. As products
become smaller and more mobile, the difficulty in suppressing these
emissions increases. The Company's EMI/RFI filters are capable of
suppressing EMI/RFI noise at much higher frequencies than
combinations of thick film components. The Company believes that
this provides a significant advantage for state of the art digital
cellular phones, high performance microcomputers and workstations as
well as other portable electronic equipment. Filters in CMD's new
P/Active(TM) line are effective to over 3 GHz, over 10 times the
frequency at which traditional capacitors stop acting like capacitors
and start looking like inductors (stop filtering).
Improved Reliability - In addition, the Company's thin film
technology is more reliable than traditional thick film technology
due to greater tolerance to hostile environmental conditions and the
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reduction in the number of component connections. The Company's use
of reliable processes common to the semiconductor industry eliminate
many of the problems with solder migration, cracking and peeling, and
sensitivity to environmental conditions which often accompany the use
of thick film technologies. Additionally, the Company's new
P/Active(TM) circuits have enhanced protection against electrostatic
discharge (ESD) to minimize the possibility of damage during the
manufacturing process.
Rapid Development of Customized Solutions - Electronic
system manufacturers often desire passive component solutions that
uniquely optimize their system performance. Performance
customization of traditional passive components, to the extent
possible, can often require long lead times due to the inflexible
nature of the material and process technology. The Company can often
design a customized thin film product for a customer in one week and
deliver prototypes within three or four weeks of design. The Company
is able to offer short lead times by using the same mask and
materials to meet various performance specifications and by laser
trimming its thin film resistor/ resistor-capacitor networks.CMD's Goal/Strategy
The Company's goal, as the leader in integrated thin film passive
components, is to convert significant portions of the thick film
passive market to its thin film technology. CMD's strategy for
achieving this is to target specific market segments which place a
high value on CMD's capabilities, develop solutions to targeted high volume
applications (standard or custom), and leverage its thin film
expertise to provide products with significant cost, size,
performance and reliability advantages over traditional discrete
passive components. The Company also intends to leverage its base of
semiconductor technology in combination with the thin film technology
to provide unique solutions to customer problems. Key elements of
the Company's strategy include:
Target High Volume Solutions - The Company targets
manufacturers of products in growth markets such as personal
computers, cellular phones, pagers, networking, wireless computer
networks and high performance graphics workstations, all of which
have an increasing need for higher performance passive components.
The Company attempts to identify common high volume applications, or,
when appropriate, designs customized solutions to meet particular
customer applications.
Commit to Technology Leadership - CMD uses its extensive
thin film processing and materials expertise in combination with its
semiconductor capabilities to develop and expand its product
technology. The Company is increasing its investments in research
and development for new process and product technology. The Company
is pursuing the use of new structures in order to expand the product
capabilities and serve a broader segment of the passive component
markets. The Company is also using its expertise in integrating
different components to develop combinations of passive components
and certain active components (such as MOS and bipolar transistors
and Schottky diodes), into its P/Active(TM) solutions.
Maintain Position as Low Cost Solution Provider - CMD
believes that, through the use of its thin film technology, it
provides one of the lowest total cost solution for its customer's
passive component needs. The Company intends to maintain this
position by taking advantage of the improvements in semiconductor
fabrication processes, improving manufacturing efficiencies,
shrinking die sizes and improving yields, and by using standard
semiconductor packages. The Company is making significant capital
investments to enhance its position.
Leverage the Capabilities of CMD's Semiconductor
Capabilities - CMD has historically had a highly underutilized
semiconductor capability. Besides utilizing these capabilities to
enhance the Company's P/Active(TM) solutions, the Company has begun
doing foundry work (subcontract wafer manufacturing) for
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other semiconductor manufacturers. While this provides a lower
margin than CMD's traditional products, it provides an opportunity for
additional fixed cost absorption, and allows the Company to fine tune
its manufacturing operations in advance of having its own new products.
Products
Thin Film Products
The Company's product offerings fall into two categories:
IPECs(TM) the Company's traditional custom products which are
cost effective for customers with unique high volume
requirements or who can take advantage of CMD's capabilities to
provide tight tolerances, low temperature coefficients, tight
matching between components, or other special characteristics;
CMD's new P/Active(TM) family of components which optimize high
frequency performance, density, reliability, and other
capabilities. These devices are Application Specific Passive
Networks (ASPN(TM)) targeted to solve industry standard
applications, or to complement the semiconductor offerings of
the industry's leading chip suppliers.
All these devices combine the benefits of multiple thin film
resistors, capacitors, diodes, etc. in single high density packages.
Resistors impede the flow of electrical current and dissipate
electrical energy as heat. They are used to divide, pull-up/pull-
down voltage, terminate and control current and filter out noise.
Capacitors store electrical charges and pass alternating current
while blocking direct current. Integrated resistors-capacitors are
used for a variety of purposes including filtering electromagnetic
radio frequency interference, creating high-pass or low-pass filters,
and terminating transmission lines. Resistor-capacitor-diode
networks clamp (limit the magnitude of) voltage swings as well as
filter electrical signals.
The Company offers a variety of precision and non-precision thin film
resistors and capacitors as well as combinations of those elements
with and without semiconductor devices. The Company has particular
strength in the area of resistor-capacitor filters, one of the most
rapidly growing and difficult segments of the passive component
business.
The Company sells these products both as die and in standard
semiconductor industry packages, primarily Surface Mount Technology
(SMT). Packaged devices represent the largest and most rapidly
growing portion of the Company's business. During the last year
there has been a dramatic swing towards the use of the smaller
QSOP/SSOP/SOT (industry terminology) packages which optimize the
Company's ability to solve customer space problems. The Company's
current product line addresses a substantial portion of the resistor
and resistor network market, and a small percentage of the capacitor
market.
As electronic circuits increase in performance, it becomes more
important that component values be more precise and vary as little as
possible over a wide range of operating conditions. The Company's
products are continually being optimized to maintain their
fundamental characteristics and tolerances over wide ranges of
frequency and temperature. Much of the Company's research and
development is directed into these efforts, and CMD intends to
continue to raise the technological barriers to competitors.
Semiconductor ProductsThe Company's semiconductor facilities are nominally
limited to the production of CMOS or BiCMOS circuits using greater than 1.5
micron minimum feature size. This requires the Company to focus on
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specialized circuits, rather than competing in the mainstream
semiconductor market at the leading edge of technology.
The Company's semiconductor business includes analog and mixed signal
integrated circuits which combine digital and analog functions on a
single chip. Product groups include data communications and
interface families, and telecommunication dual tone multi-frequency
receiver and transceiver (DTMF) products. These products are used in
customer applications such as personal computers, answering machines,
portable telephones and switching systems. During fiscal 1996 the
Company has seen significant interest and business from low voltage/
low power versions of its DTMF circuits. Additionally, the Company
is providing a number of custom circuits for some high volume
customers.
The Company has begun to participate in the foundry business in which
wafers are fabricated to customer specifications, using customer
designed tooling. The Company's intent is to do foundry work to
leverage the capabilities of its available capacity in Tempe, Arizona
while it builds its own products and establishes relationships with
key partners.
Technology
Thin Film Processes
The Company has built upon over 15 years of thin film experience with
the military and aerospace market to develop its commercial
technology, and the Company believes that this expertise provides it
with a significant technical advantage over its competitors. "Thin
film" refers to the deposition of various materials atom by atom in
very thin layers on a suitable substrate. The Company is able to
deposit/grow films in layers as thin as 0.01 microns, which is
approximately 1,000 times thinner than typical thick film layers.Thin film
processing involves the deposition of multiple thin layers of materials,
one layer at a time. The number and the sequence of
layers depends on the level of integration of the passive components
and the type of devices being fabricated. To integrate resistors and
capacitors, the process includes the deposition of a insulating
layers, resistive material, capacitor dielectric material,
interconnecting layers for external connection (pads), passivation
layers and potentially several interface layers. CMD's new
P/Active(TM) family of resistor-capacitor devices also include the
provision of semiconductor based ESD protection devices to insure
greater reliability for these very high frequency devices. If diodes
or transistors are added, the structure is more complex, requiring
the addition of a number of metallic and dielectric thin film layers
in addition to the underlying semiconductor technology. The Company
uses conventional semiconductor photolithography to create the
circuit patterns. However, many of the other processes are more
complicated due to the thinness of layers and diversity of materials.
The Company applied for three patents on new thin film passive
technologies during the last fiscal year.
Materials
The characteristics and costs of a thin film product are heavily
dependent on the selection of materials. The Company believes that
its materials expertise is one of its most significant technical
advantages. The Company alters or combines various commercially
available materials to produce a wide range of passive capabilities.
Resistors - CMD is, to its knowledge, the only company currently
producing thin film resistors with resistance ranging from 0.1
ohms to 30 giga ohms. CMD can achieve this spectrum of
resistance values due to its expertise with compounds such as:
Tantalum Nitride - which is currently used in the majority of
the Company's products and offers excellent resistive properties
over a very wide range of temperatures; Sichrome (Silicon-
Chrome) - which is used to produce resistors with very
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high values up to several giga ohms; Hafnium Diboride - which is
used for resistors that operate at high temperatures or where
mechanical wear is of concern. The Company has unique
experience in all of these materials.
Capacitors - CMD is currently making capacitors in the range of
1 picofarad to 2,000 picofarads (0.002 microfarad) and putting
multiple smaller capacitors on a chip. The Company uses silicon
nitride and silicon dioxide as dielectrics. They are stable
capacitor materials with consistent high breakdown voltages,
good frequency characteristics, and good reliability. The
Company is developing materials and techniques which will
provide substantially higher levels of capacitance.
Sales and Marketing
The Company has focused its marketing efforts in the areas of
personal computers and their peripherals, portable communications
devices, high performance workstations, and networking systems.
Additionally, the Company has focused its efforts on a list of 40
major world wide electronic system manufacturers who participate in
these segments and where the Company feels it can have the most
significant and immediate results.
The Company works with existing and potential new customers to
identify passive and specialized semiconductor component needs which
the Company's capabilities address, and seeks to have customers
design its products into electronic systems. The Company facilitates
these efforts by providing customized solutions to meet customer
design requirements when required. The Company can often leverage
its customized design, and the knowledge created during the process,
to create standard products which the Company can then offer for
similar application requirements in other areas.
During fiscal 1996, the Company strengthened its Applications
Marketing effort to begin understanding in detail the problems facing
manufacturers in its chosen segments, so as to be able to specify,
and ultimately design, ASPN's(TM) which satisfy the needs of multiple
customer's. It is the Company's intent to become value-added
partners with both its customers and leading edge vendors of
semiconductor devices to provide the knowledge and the passive
networks to complement the active devices in a system.
CMD sells its products to original equipment manufacturers (OEMs) and
distributors. The Company's sales channels consist primarily of
independent regional sales representatives supported by the Company's
sales force, which is located in Milpitas, California and in three
regional sales offices. The Company believes that independent sales
representatives generally provide an effective sales force at a lower
cost than a dedicated internal sales force. Independent sales
representatives are generally able to leverage their sales efforts by
offering multiple, although normally not competing, products from
different vendors to their customers. The Company's major accounts
are also supported by factory directed efforts of the sales,
marketing and applications engineering staff.
The Company sells through distributors, both in the US and most
specifically in the Far East and Europe, to provide sources of its products
at locations close to the customers. As the Company's standard product line
expands, the Company expects that an increasing percentage of its sales may
be through national, international, and regional distributors.
During fiscal 1996, the Company hired a new vice president of sales
as well as experienced regional sales managers for its Eastern,
Central, Western, and Far East regions to manage these channels.
Additionally, CMD made major changes to its list of representatives
to secure firms whose customers list and general product mix is
complementary to its target markets and customers. The Company has
been expanding headquarters sales and marketing resources to support
all its sales and distribution activities with experienced marketing
engineers, applications engineers and a communications professional from
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the semiconductor industry. During fiscal 1996, the Company also re-
organized and expanded its customer service resources to better meet the
needs of its customers.
Despite the many changes at the Company, the existence of significant
shareholder litigation in connection with events in 1994 continues to be an
impediment for the Company in doing business with some potential customers.
This will likely continue at some level until there is a resolution of these
matters.
The Company's foreign product sales accounted for 31%, 33%, and 42%
of net product sales for fiscal year ended March 31, 1996, the nine
months ended March 31, 1995, and the fiscal year ended June 30, 1994,
respectively. The Company uses independent foreign sales
representatives and distributors to provide international sales
support. The Company expects that international sales will continue
to represent a significant portion of its sales for the foreseeable
future. The Company's sales are denominated in US dollars to avoid
currency risk.
Although no one customer accounted for more than 10% of product sales
during the fiscal year ended March 31, 1996, a significant portion of
the Company's sales are made to a relatively small number of
customers and in the third and fourth quarters of fiscal 1996
Motorola accounted for more than 10% of the Company's sales. Also, a
significant portion of the Company's products are sold for use in
personal computer applications, and the recent slow down in the PC
market has had a negative impact on the Company's business. CMD has
diversified both its customer base and product mix during fiscal 1996 with a
significant increase in business to the portable phone and pager markets and
recent progress in the networking areas. However, it remains a goal of the
Company to get more balanced penetration and become less susceptible to
swings in any specific application area or with any given customer.
Most of the systems into which the Company's products are designed
have short life cycles. As a result, the Company's requires a
significant number of new design wins on an ongoing basis to maintain
and grow revenue.
Generally, the Company's sales are not subject to long-term contracts
but rather to short-term releases of customer's purchase orders, most
of which are cancelable on relatively short notice. The timing of
these releases for production as well as custom design work are in
the control of the customer, not the Company. Because of the short
life cycles involved with its customers' products, the order pattern
from individual customers can be erratic with significant
accumulation and de-accumulation of inventory during phases of the
life cycle. For these reasons, the Company's backlog and bookings as
of any particular date may not be representative of actual sales for
any succeeding period.
In addition, the Company derives some technology revenue from a joint
development agreement with Hitachi Metals Ltd. (HML). During the
twelve months ended March 31, 1996, this amounted to approximately
$1.2 million. Revenue from sales of product to HML during fiscal
1996 was small. Sales to Hitachi Kinzoku Shoji, Ltd. a subsidiary of
HML, were $0.6 million, $0.3 million and $1.6 million, in fiscal
1996, 1995 and 1994 respectively.
Manufacturing
The Company's manufacturing processes are complex, and require
production in a highly controlled, clean environment suitable for
fine tolerances. Normal manufacturing risks include errors in
fabrication processes, defects in raw materials, as well as other
factors which can affect yields. The Company currently operates
wafer fabrication facilities in Milpitas, California and Tempe,
Arizona. The Milpitas facility includes a 10,000 square foot clean
room and primarily uses 5 inch round and 4 1/2 inch square wafers to
manufacture thin film passive components. The Tempe facility,
acquired from GTE in 1987, includes a 16,000 square foot clean room
and is equipped for five inch wafer fabrication of both thin film
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and semiconductor products. The Company estimates that its wafer
capacity utilization for the year ended March 31, 1996, was
approximately 25% in Tempe and 40% in Milpitas. Obtaining full wafer
fab capacity from both of these locations would require additional
capital expenditures.
CMD manufactures its products using industry standard semiconductor
wafer fabrication equipment that the Company modifies as necessary to
produce thin film products. The Company has historically purchased
used processing equipment at significantly lower cost than new
equipment. The Company has also reduced costs by optimizing its
designs, reducing the size of the individual components by circuit
pattern line width reduction, and developing new device structures.
In fiscal 1996, the Company significantly strengthened its management
and process technology capabilities. New general managers for both
of its facilities were hired, along with strong process engineering
and operations management personnel.
During fiscal 1996, and continuing in fiscal 1997, the Company has
been making substantial investments in capital equipment to both
upgrade its capabilities and to increase capacity in areas such as
test and finish. Much of the Company's equipment is very old,
resulting in higher maintenance costs, higher down-time, and in some
cases the risk of the unavailability of spare parts or the expertise
to maintain the equipment. Selective investments in capital
equipment will enhance productivity and improve costs, as well as
increasing the Company's revenue potential.
The Company anticipates converting certain of its fabrication
operations from 5 inch to 6 inch wafers during the next couple of
years. There is a general shortage of silicon wafers which is
predicted to continue for some time. Additionally, five inch wafers
are no longer considered to be economically viable for most
applications and there is a risk of supply as vendors direct their
resources to larger wafer sizes. Within CMD, this conversion will
generally be accomplished by the conversion of existing equipment and
purchase of used equipment. Current estimates for the cost of this
conversion range between $7 million and $10 million. At this time,
the Company has sufficient cash reserves to finance the conversion
internally, but external financing is an alternative that may be
considered. There is a risk of disruptions to the manufacturing
processes as upgrading of facilities and equipment are implemented.
The Company uses subcontractors in Asia, primarily Thailand and the
Philippines, for assembly and packaging of most of its product.
Although the Company has not typically experienced any significant
disruption of deliveries due to the use of foreign subcontractors,
this common industry practice is subject to political and economic
risks. The volatility of the semiconductor industry has occasionally
resulted in shortages of subcontractor capacity and other disruptions
to supply. This capacity was in short supply during much of fiscal
1996, but is presently in ample supply as a result of additional
investments by vendors coupled with a slowdown in the semiconductor
industry growth rate.
During fiscal 1996, CMD began testing some of its product at the site
of the assembly vendors, and the proportion of the Company's product
tested there will continue to increase. CMD has also begun "drop-
shipping" product from these assembly vendors to customers. This has
the effect of both saving freight charges and reducing the delivery
cycle time. However, it increases the Company's exposure to
disruptions in operations not under its direct control.
Management Information Systems
During fiscal 1996, CMD installed new management information systems
for work in process tracking, order processing, and financial
management. While these projects are not totally complete, and there
are still improvements necessary in the systems, they will, when
completed, provide both enhanced management capabilities and better
customer service information. This has been a historical weakness of
CMD.
9
<PAGE>
Competition
Competition is based on a number of factors, including product
performance and functionality, established customer relationships,
price, engineering and manufacturing capabilities, product and
process development and customer support. In most cases, the primary
competition for the Company has come from established competitors and
from pre-existing ways of solving customers' problems. Many of the
Company's competitors have announced that they will soon be providing
thin film products as well as their traditional thick film devices.
While CMD has yet to see significant direct thin film competition, it
has seen activity from some of these vendors in the last six months
and must assume that they will shortly be more prominent. From
information the Company has, it appears that these competitors may
try to emulate CMD's product line.
The Company's primary competitors for its resistors, resistor
networks and capacitors are substantially larger foreign and domestic
companies such as Viceroy, KAUAI/Spear, Rohm, Panasonic, Mural,
VAX/Kyocera, TDK, and IRC. Although most of them employ older
technology manufacturing methods such as thick film multi-layer
ceramic and wire wound technology, they have substantially greater
resources than the Company and their technologies are usually the
accepted standard for existing applications. They also have
significantly greater sales and distribution capabilities and
typically operate at lower gross margins than the Company.
The Company believes its competitive strengths include materials
expertise and its product performance characteristics, its understanding
of customer product requirements, high quality high technology processing
and manufacturing facilities, cost efficient operations, dual
manufacturing locations, experienced management and technical staff, and
its strategic alliance with Hitachi Metals.
The Company believes its competitive weaknesses include its relative
size compared to its competitors, its embryonic accounting, sales,
and manufacturing information systems and procedures, and its limited
automated design tools, all of which result in inefficiencies in the
day-to-day operations of the Company. The Company has been significantly
upgrading its systems and procedures, enhancing its engineering tools,
and upgrading its manufacturing planning and control systems and expects
to continue to expend significant management and financial resources on
this effort.
Research and Development
The Company's research and development (R&D) programs consist primarily
of developing new products, processes and materials in response to
customer requirements. Additionally, the Company redesigns products to
reduce costs and expand the capabilities and performance of its existing
products. During fiscal 1996, the Company focused most of its efforts on
upgrading the technology of its passive networks, resulting in the
development of the new P/Active(TM) family of products. This has
resulted in new devices with substantially higher frequency performance.
This effort will continue in fiscal 1997 as the family of products is
expanded and refined. Additional base technologies are also under
development.
During fiscal 1996, much of the Company's R&D was restructured and
focused to complement the overall strategies of the Company. A new
Vice President of Engineering was hired and he has begun strengthening
the Company's engineering talent base and improving the infrastructure.
There is significant risk that the Company may not be able to recruit the
top engineering talent it requires or in the time frame needed.
For the fiscal year ended March 31, 1996, the nine months ended
March 31, 1995, and the year ended
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<PAGE>
June 30, 1994, the Company spent $3,417,000, $2,685,000, and $2,937,000,
respectively, on its research and development activities.
The Company has a Joint Development Agreement (JDA) with Hitachi
Metals Ltd. (HML). Under the terms of the agreement, HML contributes
a percentage of the actual expenditures for mutually agreed upon
joint product development. The Company includes HML's contribution
toward product development in the Statements of Operations line
labeled "Technology related revenues". The Company expects this JDA
to continue throughout fiscal 1997.
Employees/Personnel
As of March 31, 1996, the Company had 297 full-time and part-time
employees, including employees in sales and marketing, engineering
and research and development activities, manufacturing, and finance
and administration. 177 of these employees were headquartered in
Milpitas, California and 120 in Tempe, Arizona. CMD's success is
highly dependent on its ability to hire high quality people. The
Company has been able to recruit many senior managers in the last
year and its future progress is tightly linked to the ability to
maintain and extend this base of talent. There can be no assurance
that the required people will be available when needed, particularly
in the difficult recruiting environment which has been characteristic
of semiconductor and related industries in recent years.
Patents and Licenses
The Company's policy is to apply for patent protection for its novel
products and manufacturing processes where such protection is
warranted. Process technologies are more often designated as trade
secrets. With respect to mask works, the Company's policy is to
selectively seek copyright protection.
The Company's ability to compete may be affected by how it protects
its intellectual property. The Company believes that it is important
to obtain patent protection for its patentable inventions, and to
protect its trade secrets. The Company's trade secrets are protected
by having its employees sign confidentiality and non-disclosure
agreements as part of its employees' employment requirements. It is
not the Company's intention to rely solely on protection of
intellectual property rights to deter competition. However, when and
where appropriate, the Company has taken aggressive action to protect
its intellectual property rights. Although the Company continues to
implement protective measures and intends to defend its intellectual
property rights, there can be no assurance that these measures will
be successful.
The Company has three patents related to its thin film technologies.
Two patents relate to the Company's proprietary resistor, capacitor
and diode technology. The other patent relates to the Company's
proprietary inductor process technology. The former patents have been
designated for filing in Japan and Europe pursuant to the
International Patent Cooperation Treaty. The Company has also been
awarded a United States patent for a BiCMOS Track and Hold Amplifier.
The Company has filed patent applications relating to specific
embodiments of its proprietary resistor, capacitor, diode, inductor,
process and product technologies. During fiscal 1996, the Company
also filed three important new applications on its P/Active(TM) technology.
The Company has obtained approval from the United States Copyright
Office to register certain of its mask works for its passive
components products. It is also establishing new trademarks for its
P/Active(TM) family of devices.
11
<PAGE>
The Company has granted a non-exclusive license with respect to
certain of its thin film passive components (including mixed active
and passive components, such as resistors, capacitors, transistors,
diodes, and networks of the same) process and product technology to Hitachi
Metals, Ltd.
As is the case with many companies in the electronics industry, CMD
has, from time to time, been notified of claims that it may be
infringing certain patent rights of others. These claims have been
referred to counsel, and they are in various stages of evaluation.
If it appears necessary or desirable, CMD may seek licenses for these
intellectual property rights. CMD can give no assurances that
licenses will be available, that the terms will be acceptable, or
that the disputes can be reconciled without litigation in all cases.
Environmental Issues
The Company is subject to a variety of federal, state and local
regulations in connection with the discharge and storage of certain
chemicals during its manufacturing processes. The Company believes
that it is in compliance with all such environmental regulations.
Industrial waste generated at the Company's facilities is either
processed prior to discharge or stored in barrels with double
containment methods until removed by an independent contractor. The
Company has obtained all necessary permits for such discharges and
storage.
The Company believes that it is in compliance with applicable
environmental health and safety regulations.
12
<PAGE>
ITEM 2. PROPERTIES.
The Company currently leases approximately 40,000 square feet of
office, development and manufacturing space including a 10,000 square
foot clean room in Milpitas, California, as well as approximately
24,000 square feet of space in Tempe, Arizona which house test
facilities and warehouse space. The Company's existing lease on its
Milpitas facility, pursuant to an agreement that expires on June 30,
2002, provides for a current monthly rent of $29,000 plus operating
expenses. This will be increased 3% annually. See Note 13 of Notes
to Financial Statements. Monthly rent on the leased Tempe facilities
is $10,688 plus operating expenses, pursuant to an agreement that
expires in March 2001 with a five year renewal option.
The Company also owns 5 acres of land and a 46,000 square foot building in
Tempe, Arizona which houses a 16,000 square foot clean room, wafer
fabrication, manufacturing, and engineering design center.
ITEM 3. LEGAL PROCEEDINGS.
In October 1994, the Company's Board of Directors appointed a Special
Committee of independent directors to conduct an investigation into
possible revenue recognition and other accounting irregularities.
The ensuing investigation resulted in the termination of the
Company's former Chairman and CEO, Chan M. Desaigoudar, and several
other key management employees.
In January 1995, the Company reported that an investigation conducted
by the Special Committee of the Board of Directors and Ernst & Young
LLP had found widespread accounting and other irregularities in the
Company's financial results for the fiscal year ended June 30, 1994.
On February 6, 1995, the Company filed a Report on Form 10-K/A
restating its results for the fiscal year ended June 30, 1994. Upon
restatement, the Company reported a net loss of $15.2 million, or a
loss of $1.88 per share, on total revenues of $30.1 million. The
Company previously had reported earnings of $5.1 million, or $0.62
per share, on revenues of $45.3 million. The accounting
irregularities and related matters are the subject of pending
securities class actions against the Company, as well as pending
investigations into possible violations of the federal securities
laws by the Securities and Exchange Commission ("SEC") and the
Justice Department.
From August 5, 1994 through February 16, 1995, eleven purported class
action complaints were filed against the Company in the United States
District Court for the Northern District of California. Other
defendants named in the class actions include certain of the
Company's current and former officers and Coopers & Lybrand L.L.P.,
the Company's former outside auditor. The class actions purport to
be brought on behalf of classes of shareholders of the Company's
Common Stock over varying periods of time ranging from September 7,
1993 to January 9, 1995. The gravamen of the allegations against the
Company in the class actions is that it violated Section 10(b) and
Rule 10b-5 of the Securities Exchange Act of 1934 by disseminating
false and misleading financial statements and reports for the fiscal
year ended June 30, 1993 and June 30, 1994. The complaints seek
unspecified compensatory damages and attorneys' fees, as well as
other relief.
On or about February 23, 1995, the Company entered into a proposed
settlement of the class actions, pursuant to which claims against the
Company would have been released by shareholders who purchased
Company common stock between September 7, 1993 through January 9,
1995, in exchange for the Company paying the class $1.0 million and
the issuance to the class of one million five hundred thousand shares
(1,500,000), as well as certain non-monetary consideration. The
issued shares were to be accompanied by a Contingent Value Right
(CVR), which is personal to the class member, and not transferable,
and which entitled the holder thereof to receive the difference, if
any, between eight dollars ($8.00)
13
<PAGE>
per share and the highest average trading price of the Company's
Common Stock over any consecutive twenty trading day period during
the three and one half years following issuance of the shares, if
such price is lower than $8.00. The total cost of the proposed
settlement was $13.0 million, which has been expensed in the fiscal
year ended March 31, 1995, financial statements. Both the shares and
the cash were placed in, and remain in, trust accounts pending final
settlement of the lawsuits. The 1.5 million shares are included in
shares outstanding and in the computation of earnings per share.
On August 4, 1995, Judge Vaughn Walker of the U. S. District Court for
Northern California, issued an order regarding the securities class
action lawsuits filed against the Company. Judge Walker, in ruling on
the bids by two law firms to represent the proposed class action of
shareholders, rejected one bid and required the other law firm to
undertake an evaluation of class members' affirmative support of the
terms of the previously announced proposed settlement and that firm's
attorney fee proposal. Judge Walker's order stated that if the terms of
the proposed settlement were not affirmatively supported by a significant
portion of the prospective class, the Court would disapprove the proposed
class settlement, and would solicit bids from other law firms who sought
to represent the prospective class. The order further stated that if no
other law firms bid for the right to represent the prospective class, the
Court would deny certification of the class.
Pursuant to the Court's order of August 4, 1995, counsel for the class
surveyed selected institutional and large individual class members in an
effort to determine whether the purposed settlement with the Company was
affirmatively supported. Class members who responded to the survey
generally expressed support for the settlement. On October 12, 1995, the
Colorado Public Employees Retirement Association (COLPERA), a class
member, filed an application for leave to appear in the action for the
limited purpose of participating in the settlement discussions and
determination whether the proposed settlement may be improved.
On February 2, 1996, Judge Walker denied the motion for preliminary
approval of the proposed settlement; denied the request of the law firm
of Lieff, Cabraser, Heimann & Bernstein to be appointed class counsel;
and certified the COLPERA as class representative. The firm of Hogan &
Hartson has appeared as counsel for the class representative.
On April 10, 1996, the Company cross-complained against its former
auditors, Coopers & Lybrand L.L.P. for professional negligence and
contribution under the securities laws. Coopers has indicated that they
intend to cross-complain against the Company; however no such pleading
has been received.
On May 2, 1996, a Case Management Conference was held before Judge
Walker. The Court ordered this matter to Judge Lynch for settlement
conferences, the first of which is now scheduled for June 5, 1996. At
the Case Management Conference Judge Walker also set dates for responsive
pleadings to be filed and for preliminary briefing on a motion for class
certification.
On May 21, 1996, the Court issued a temporary restraining order
prohibiting any transfer or sale by Chan Desaigoudar (the Company's
former CEO and Chairman of the Board) of his CMD stock. The Court also
stated that it would impose a preliminary injunction on May 28, 1996,
sequestering Desaigoudar's CMD stock if counsel for the class and
Desaigoudar failed to agree on a sequestration order. On May 29, 1996,
such preliminary injunction order was entered.
In light of the recent decision by Judge Walker described above, there
can be no absolute assurance that the ultimate resolution of this
litigation will be in the amount and form which the Company has
recognized in its financial statements. However, based on information
currently available to it the Company believes that any settlement of
this matter will involve terms that are no less favorable to the Company
than those previously proposed and accepted by the former Class counsel.
14
<PAGE>
A putative derivative action was filed against the Company and certain
former and present officers and directors on May 25, 1995, in Santa Clara
County Superior Court. An amended complaint was filed that named no
current members of the Company's Board of Directors, and named as a
Company employee only the Company's General Counsel. The Court has
stayed this matter for one year, until January 3, 1997.
The Company has fully cooperated with the pending investigations by the
Justice Department and the SEC. The Justice Department has advised the
Company it is not currently a target of the investigation. The SEC has
taken the position that it is premature, at this stage in its
investigation, to discuss the resolution of the investigation of the
Company.
The Company is a defendant or plaintiff in various other actions which
arose in the normal course of business. In the opinion of management,
the ultimate disposition of these matters will not have a material
adverse effect on the financial condition or overall trends in the
results of operations of the Company.
The Company believes that, with regard to these matters, it has, to the
best of its knowledge, made such adjustments to its financial statements by
means of reserves and expensing the costs thereof, that these matters will
not have any additional adverse impact on the Company's financial
condition; provided, however, that if either the Court or the shareholders
reject the proposed settlement mentioned above, the ultimate resolution of that
litigation may have an adverse effect on the Company's financial
condition.
See Note 17 of Notes to Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED SHAREHOLDER MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "CAMD". However, from January 26, 1995 to July 6, 1995, the
Company's stock was de-listed from the Market due to the Company's
delinquency with respect to two SEC filings, and its inability to meet
certain other filing requirements. During the period of its delisting, the
stock continued to trade on the Instanet Electronic Trading System and
quotations continued to be available through the National Quotations Bureau
and the Nasdaq Electronic Bulletin Board.
Closing prices by quarter for fiscal 1996 and 1995 are as follows:
<TABLE>
Common Stock
<S> <C> <C> <C> <C>
Fiscal 1996 Q1 Q2 Q3 Q4
- - ----------- -- -- -- --
High $6 7/8 $9 7/8 $11 $10
Low $4 1/4 $5 7/8 $7 1/2 $7 3/8
Fiscal 1995 Q1 Q2 Q3 Q4
- - ----------- -- -- -- --
High $22 5/8 $13 7/8 $5 1/2 n/a
Low $11 1/2 $ 4 5/8 $3 1/4 n/a
</TABLE>
Due to a change in the fiscal end in 1995 there was no fourth quarter.Certain
debt covenants may restrict the payment of dividends. No dividends
were paid in fiscal 1996, 1995 or 1994. The Company expects to continue
that policy in the foreseeable future. There were approximately 4,400
Common Shareholders of record as of March 31, 1996.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data (in thousands except per common share
information) set forth below with respect to operating and balance sheet
data are derived from the financial statements of the Company.
<TABLE>
Twelve Months Nine Months
Ended Ended Years Ended June 30,
March 31, March 31, (unaudited)
1996 1995 1994 1993 1992
---------- ---------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Total revenues $39,882 $23,703 $30,073 $33,007 $22,807
Income (loss) before
income taxes* 5,119 (22,617) (16,634) 3,424 137
Net income (loss) 5,119 (23,502) (15,227) 2,078 75
Net income (loss) per
common share 0.48 (2.75) (1.88) 0.35 0.02
Total assets 44,928 40,688 52,097 42,158 36,126
Long-term obligations $ 7,896 $ 9,337 $11,762 $12,771 $10,468
</TABLE>
The 1994 financial statements were restated in February 1995 as a result of
the findings discussed in Note 17 of Notes to Financial Statements. The
impact of the restatement was to change net income for 1994 from $5,059,000
or $0.62 per share to a net loss of ($15,227,000) or ($1.88) per share.
The restatement resulted in a decrease of $20,286,000 in retained earnings
at June 30, 1994, from $9,581,000 to an accumulated deficit of ($10,705,000).
The Company's former independent accountants, Coopers & Lybrand L.L.P.,
resigned as the Company's auditors in January 1995, and were replaced by
Ernst & Young LLP. Coopers & Lybrand L.L.P. reports were withdrawn; as a
result, the Company's statements of operations, shareholders' equity, and
cash flows for the years ended June 30, 1994, 1993, and 1992 are unaudited.
These statements include all adjustments which the Company believes
necessary for a fair presentation.
*And cumulative effect of change in accounting.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Due to the change in the Company's fiscal year in 1995 to March 31 from
June 30, and the resulting nine month fiscal year ended March 31, 1995,
management believes that comparison of absolute dollar amounts from year to
year is of limited usefulness. Accordingly, the following discussion will
compare dollar amounts, quarterly averages, and percentages, as
appropriate, to facilitate meaningful comparisons. In the following
discussion fiscal 1996 refers to the twelve months ended March 31, 1996,
fiscal 1995 refers to the nine months ended March 31, 1995 and fiscal 1994
refers to the twelve months ended June 30, 1994.
RESULTS OF OPERATIONS
Net income for fiscal 1996 was $5.1 million compared with net losses of
$23.5 million for fiscal 1995, and $15.2 for fiscal 1994. Results for
fiscal 1995 were adversely impacted by recognition of the anticipated cost
of settling certain class action lawsuits, re-negotiating certain
contractual arrangements, and expenses related to investigation, litigation
and other matters pertaining to previously announced financial
irregularities. See Note 4 and Note 17 of Notes to Financial Statements.
Results in fiscal 1994 were adversely impacted by write-downs of
receivables and inventories which resulted from the investigation of those
financial irregularities.
Product sales for fiscal 1996 averaged $9.7 million per quarter compared to
$7.4 million per quarter for fiscal 1995 and $5.6 million for fiscal 1994.
The 30% increase in average quarterly product sales in fiscal 1996 relates
primarily to a 50% increase in sales of thin film products and 6% increase
in semiconductor products. The 32% increase in average quarterly product
sales in fiscal 1995 compared to fiscal 1994 relates primarily to increased
sales of the Company's thin film products.
Sales of thin film products, on an average quarterly basis, increased 55%
in fiscal 1995 compared to fiscal 1994, and sales of semiconductor products
increased 13%. Thin film products represented 64%, 55% and 47% of product
revenues in fiscal 1996, 1995 and 1994, respectively.
Technology related sales were $1.2 million in fiscal 1996, compared with
$1.4 million in fiscal 1995 and $7.7 million in fiscal 1994. In 1996 and
1995 technology sales consisted of payments by Hitachi Metals Ltd. (HML)
related to ongoing joint product development projects. Fiscal 1994 revenue
represents a one-time sale of rights to previously developed technology in
connection with the initial alliance with HML.
Cost of sales were 58%, 79%, and 143% of product sales for fiscal 1996,
1995, and 1994, respectively. Cost of sales percentage fluctuations over
this period reflect efficiencies from increased sales volume, and an
increased mix of higher margin thin film sales, primarily in the U.S., in
fiscal 1996, compared to a higher mix of lower margin foreign distributor
sales in fiscal 1995 and a $10.2 million charge for obsolete and slow
moving inventory and a $1.7 million charge for warranty expense in fiscal
1994.
Research and development expense averaged $854,000 per quarter in fiscal
1996 compared with $895,000 and $734,000 per quarter in fiscal 1995 and
fiscal 1994, respectively. The decrease in research and development
spending rate in fiscal 1996 compared with fiscal 1995 primarily reflects
decreases in joint development projects with Hitachi Metals, Ltd. The
increase in fiscal 1995 compared to fiscal 1994 primarily reflects the
increase in such joint development projects.
Selling, marketing, and administrative expenses in fiscal 1996 were $10.6
million compared to $9.8 million for fiscal 1995. Fiscal 1996 expenses
included $1.1 million of unusual legal costs associated primarily with
shareholder litigation. See Note 17 of Notes to Financial Statements.
Fiscal 1995 was
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<PAGE>
impacted by $3.6 million of unusual legal, audit, consulting and other
costs in connection with shareholder litigation and an ongoing
investigation of previously announced accounting irregularities and other
matters, and $1.2 million in accounts receivable write downs and reserves.
Selling, marketing and administrative expenses were $10.5 million in fiscal
1994 and included a $3.0 million write off of machinery and equipment
associated with an abandoned thin film head development project and a $2.1
million increase in bad debt expenses.
In fiscal 1995, the Company expensed $16.3 million of costs associated with
the tentative settlement of shareholder class action suits, re-negotiation
of its relationship with Hitachi Metals Ltd., and other costs associated
with ongoing investigation and litigation related to alleged violations of
securities laws and other matters. See Note 4 and Note 17 of Notes to
Financial Statements.
Interest expense, on an average quarterly basis was $275,000, $311,000, and
$363,000 in fiscal 1996, 1995, and 1994 respectively. The decline in
interest expense relates primarily to the expiration of equipment leases.
Interest and other income increased to $2.8 million in fiscal 1996 compared
to $1.1 million in fiscal 1995 primarily due to the sale of the Company's
interest in Cell Access for a gain of $1.6 million in fiscal 1996. In
fiscal 1995, interest income and other was $1.1 million compared to $0.1
million in fiscal 1994 due to increased interest income from higher cash
and investments and a litigation settlement in fiscal 1995 of $0.2 million.
Income tax expense of $50,000 in fiscal 1995 is made up of foreign royalty
taxes for which the Company does not have offsetting U.S. income. The
Company's effective tax rate was nil in both fiscal 1996 and 1995 and a
benefit of 8% in fiscal 1994. In fiscal 1995, the Company had no
available tax loss carrybacks; the Company utilized all available tax
loss carrybacks in fiscal 1994. At March 31, 1996, the Company had
Federal and State tax loss carryforwards of approximately $9 million and
$11 million, respectively.. See Note 14 of Notes to Financial
Statements.
The cumulative effect of change in accounting principle on the nine
months ended March 31, 1995, was $835,000. See Note 3 of Notes to
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Unrestricted cash, cash equivalents and short-term securities were $22.1
million at March 31, 1996, compared to $19.0 million at March 31, 1995.
Significant cash inflows in fiscal 1996 included $3.5 million in income
tax refunds, $1.6 million from the sale of the Company's interest in Cell
Access and $1.4 million from the sale of the Company's interest in a
joint venture with Hitachi Metals, Ltd. Significant cash outflows in
fiscal 1996 included capital expenditures of $4.4 million and equipment
lease buy-outs of $0.9 million. Significant cash outflows in fiscal 1995
included $2.5 million in refundable income taxes, a $2.5 million
investment in a joint venture with Hitachi Metals Ltd., a $1.0 million
deposit towards an anticipated settlement of certain class actions
lawsuits, capital lease buy-outs of $1.0 million and cash expenditures of
approximately $2.0 million related to unusual legal, audit, and
consulting costs associated with ongoing investigation and litigation
related primarily to the class action lawsuits, alleged violations of
securities laws and related matters. Operating losses were partially
offset by reductions in inventory and receivables.
Cash provided from fiscal 1996 operating activities was $9.6 million
compared with cash used of $8.4 million for fiscal 1995, and cash
provided of $3.6 million in fiscal 1994. In fiscal 1996 operating
activities reflected net income of $5.1 million, compared with net losses
of $23.5 million and $15.2 million in fiscal 1995 and 1994, respectively.
The net loss for fiscal 1995 includes a $12.5 million non-cash charge for
the issuance of Common Stock related to settlements with shareholders.
Fiscal 1996 inventories
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<PAGE>
increased $2.2 million, or 46% on a fourth quarter sales increase of 46%
over the year-ago quarter. In addition to increased sales volume, the
increase in inventories at March 31, 1996, reflects a higher mix of higher
cost packaged product versus product in die form. Inventory turns were 3.7
at the end of fiscal 1996 compared to 4.3 turns at the end of fiscal 1995.
Inventories decreased $7.8 million in fiscal 1994 due to write-offs of
obsolete and slow moving inventory. Receivables increased 40% in fiscal
1996 on a quarter sales increase of 46% over the year-ago quarter. Days
sales outstanding were 47 days at the end of fiscal 1996 compared to 50
days at the end of fiscal 1995. Receivables decreased $3.1 million from
June 30, 1994 to March 31,1995, due to the conversion of certain foreign
distributors from open account terms to letter of credit terms and
additional reserves established for past due accounts. Receivables
decreased $6.0 million in fiscal 1994 reflecting reduced sales volume and
bad debt write-offs. Refundable income taxes and other assets decreased
$4.9 million from March 31, 1995 to March 31, 1996 and increased $4.5
million from June 30, 1994 to March 31, 1995 due primarily to the
collection in fiscal 1996 of refundable income taxes and income tax
carrybacks and a $1.4 million receivable from HML, which were recognized in
fiscal 1995.
The Company's capital expenditures for fiscal 1996 were $4.4 million,
including equipment lease buy-outs of $0.9 million. In fiscal 1995, capital
expenses were $0.6 million, including capital leasing activities of $0.3
million. This is compared to fiscal 1994 capital expenditures of $3.4
million, including capital leasing expenditures of $1.4 million.
During both fiscal 1996 and fiscal 1995 the Company made long-term debt
payments of $0.5 million and capital lease payments of $2.1 million.
Fiscal 1994 financing activities provided proceeds of $26.6 million from
issuance of Common Stock, $1.4 million from sale and leaseback
transactions, and $1.1 million from long-term debt. During 1994, $2.3
million was used to pay off the line of credit, long-term debt payments
were $.4 million and capital lease payments were $1.7 million.
The Company has a $3.0 million line of credit agreement that expires on
July 31, 1996. Under the terms of the line of credit, the Company can
borrow up to $3,000,000, at prime, collateralized by short-term investments
managed by the bank. There were no bank borrowings at March 31, 1996 and
March 31, 1995 and there were no borrowings during either fiscal 1996 or
1995.
The Company is in compliance with its financial covenants.
The Company expects to fund its future liquidity needs through its existing
cash balances, cash flows from operations, bank borrowings under its line of
credit, and equipment lease and loan financing arrangements. Depending on
market conditions and the results of operations, the Company may
pursue other sources of liquidity. Due to the inability to obtain
audited financial statements for the year ended June 30, 1994, the
Company may be precluded from raising funds via a public offering under
the Securities Act of 1933 until after the audit of its fiscal 1997
financial statements. See Note 2 of Notes to Financial Statements.
The Company believes that it has sufficient financial resources to fund
its operations for at least the next twelve months.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements and Schedules Page Number
Financial Statements:
Report of Ernst & Young LLP, Independent Auditors 22
Balance Sheets 23
March 31, 1996 and March 31, 1995
Statements of Operations 24
Year ended March 31, 1996, nine months ended March 31, 1995,
and year ended June 30, 1994
Statements of Shareholders' Equity 25
Year ended March 31, 1996, nine months ended March 31, 1995,
and year ended June 30, 1994
Statements of Cash Flows 26
Year ended March 31, 1996, nine months ended March 31, 1995,
and year ended June 30, 1994
Notes to Financial Statements 27
Financial Statement Schedule:
Schedule 2 Valuation and Qualifying Accounts 47
21
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
California Micro Devices Corporation
We have audited the accompanying balance sheets of California Micro Devices
Corporation as of March 31, 1996 and 1995, and the related statements of
operations, shareholders' equity, and cash flows for the year ended March
31, 1996 and nine months ended March 31, 1995. Our audits also included
the financial statement schedule for the year ended March 31, 1996, and
nine months ended March 31, 1995 listed in the index at Item 14(a)(2).
These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of California Micro
Devices Corporation as of March 31, 1996 and 1995, and the results of its
operations and its cash flows for the year ended March 31, 1996 and nine
months ended March 31, 1995, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial
statement schedule for the year ended March 31, 1996, and the nine months
ended March 31, 1995, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
San Jose, California
May 7, 1996
22
<PAGE>
<TABLE>
CALIFORNIA MICRO DEVICES CORPORATION
BALANCE SHEETS
(Amounts in Thousands, Except Share Data)
<S> <C> <C>
March 31, March 31,
1996 1995
--------- ---------
ASSETS:
Current assets:
Cash and cash equivalents $ 1,512 $ 10,556
Short-term investments 20,638 8,404
Accounts receivable, less allowance for doubtful
accounts of $960 in 1996 and $832 in 1995 4,500 3,203
Inventories 6,940 4,747
Refundable income taxes and other assets 585 5,445
-------- -------
Total current assets 34,175 32,355
Property and equipment, net 9,314 6,665
Restricted cash 905 989
Other long-term assets 534 679
-------- --------
Total assets $44,928 $40,688
======= =======
LIABILITIS AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 2,832 $ 2,725
Accrued salaries and benefits 1,250 560
Other accrued liabilities 4,279 3,748
Deferred margin on shipments to distributors 1,039 1,157
Current maturities of long-term debt and capital
lease obligations 1,282 2,516
------- --------
10,682 10,706
Long-term debt, less current maturities 7,490 7,923
Capital lease obligations less current maturities 299 1,278
Deferred income 107 136
-------- --------
Total liabilities 18,578 20,043
Shareholders' equity:
Preferred stock - no par value;shares authorized
10,000,000;none issued and outstanding - -
Common stock - no par value; shares authorized
25,000,000; shares issued and outstanding
10,306,088 in 1996 and 10,181,404 in 1995 55,442 54,947
Retained earnings (deficit) (29,092) (34,302)
-------- --------
26,350 20,645
-------- -------
Total liabilities and shareholders' equity $44,928 $40,688
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
<TABLE>
CALIFORNIA MICRO DEVICES CORPORATION
STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Data)
<S> <C> <C> <C>
Twelve Months Nine Months Twelve Months
Ended Ended Ended
March 31, March 31, June 30,
1996 1995 1994
------------ ----------- ------------
(unaudited)
Revenues:
Net product sales $ 38,642 $ 22,335 $ 22,353
Technology related revenues 1,240 1,368 7,720
-------- ------- --------
Total revenues 39,882 23,703 30,073
Cost and expenses:
Cost of sales 22,430 17,673 31,919
Research and development 3,417 2,685 2,937
Selling, marketing and
administrative 10,573 9,763 10,469
-------- ------- --------
Total costs and expenses 36,420 30,121 45,325
-------- ------- --------
Operating income (loss) 3,462 (6,418) (15,252)
Settlement of shareholder dispute
and related matters - 16,336 -
Interest expense 1,100 932 1,452
Interest income and other, net (2,757) (1,069) (70)
------- -------- --------
Income (loss) before income taxes
and cumulative effect of change
in accounting 5,119 (22,617) (16,634)
Income taxes (benefit) - 50 (1,407)
-------- -------- --------
Income (loss) before cumulative
effect of change in accounting 5,119 (22,667) (15,227)
Cumulative effect of change in
accounting, net of tax - 835 -
-------- -------- --------
Net income (loss) $ 5,119 $(23,502) $(15,227)
======== ======== ========
Earnings per share:
Income (loss) before
cumulative effect of
change in accounting $ 0.48 $ (2.65) $ (1.88)
Cumulative effect of
change in accounting - (0.10) -
-------- -------- -------
Net income (loss) per share $ 0.48 $ (2.75) $ (1.88)
======== ======== ========
Weighted average common
shares and share equivalents
outstanding 10,645 8,554 8,103
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
<TABLE>
CALIFORNIA MICRO DEVICES CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in Thousands Except per Share Data)
Common Stock
------------ Retained
Number of Earnings
Shares Amount (Deficit) Total
<S> <C> <C> <C> <C>
Balance, June 30, 1993 (unaudited) 6,063,725 $15,559 $ 4,522 $20,081
Exercise of warrants (unaudited) 1,378,000 10,414 - 10,414
Sale of Common Stock (unaudited) 880,000 15,400 - 15,400
Exercise of stock options
(unaudited) 204,486 737 - 737
401(k) employer match (unaudited) 4,046 62 - 62
Net (loss) (unaudited) - - (15,227) (15,227)
--------- --------- -------- ---------
Balance, June 30, 1994 8,530,257 42,172 (10,705) 31,467
Exercise of stock options 15,817 89 - 89
401(k) employer match 35,330 186 - 186
Settlement with HML 100,000 500 - 500
Proposedd Settlement with
Shareholders 1,500,000 12,000 - 12,000
Unrealized (loss) on available-
for-sale investments, net - - (95) (95)
Net (loss) - - (23,502) (23,502)
---------- ------- -------- ------
Balance, March 31, 1995 10,181,404 54,947 (34,302) 20,645
Exercise of stock options 124,684 495 - 495
Unrealized gain on available-
for-sale investments, net - - 91 91
Net income - - 5,119 5,119
---------- ------- ------- -------
Balance, March 31, 1996 10,306,088 55,442 (29,092) 26,350
========== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
<TABLE>
CALIFORNIA MICRO DEVICES CORPORATION
STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
<S> <C> <C> <C>
Twelve Nine Twelve
Months Months Months
Ended Ended Ended
March 31, March 31, June 30,
1996 1995 1994
-------- -------- -------
(unaudited)
Cash flows from operating activities:
Net income /(loss) $ 5,119 $(23,502) $(15,227)
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,763 1,362 2,112
Issuance of Common Stock - settlements - 12,500 -
Issuance of Common Stock - 401(k) match - 186 62
Net (increase)/decrease in inventories (2,193) 430 7,801
Net (increase)/decrease in accounts
receivable (1,297) 3,105 6,033
Net (increase)/decrease in
refundable income taxes and other 4,860 (4,482) 19
Net increase in trade accounts payable
and other current liabilities 1,299 638 (316)
Net decrease in other long-term assets 145 158 102
Increase/(decrease) deferred margin on
distributor sales (118) 1,157 -
Fixed asset write-off and other, net - - 3,000
------- ------- -------
Net cash provided by (used in)
operating activities 9,578 (8,448) 3,586
------- ------- -------
Cash used in investing activities:
Securities purchases (25,833) (14,297) (3,000)
Securities sales 13,690 8,798 -
Capital expenditures (4,412) (325) (2,037)
Net change in restricted cash 84 226 2
------- ------- -------
Net cash used in investing activities (16,471) (5,598) (5,035)
------- ------- -------
Cash flows from financing activities:
Payment of line of credit - - (2,254)
Repayments of capital lease obligations (2,107) (2,182) (1,667)
Repayments of debt (539) (393) (375)
Proceeds from issuance of long-term debt - - 1,102
Proceeds from sale/leaseback - - 1,383
Proceeds from issuance of common stock 495 89 26,614
------- ------- -------
Net cash provided by (used in)
financing activities (2,151) (2,486) 24,803
------- ------- -------
Net increase/(decrease) in cash
and cash equivalents (9,044) (16,532) 23,354
Cash and cash equivalents at beginning
of period 10,556 27,088 3,734
------- ------- -------
Cash and cash equivalents at end of period $ 1,512 $10,556 $27,088
======== ======= =======
Supplemental disclosures of cash flow information:
Interest paid 1,068 $ 1,194 $ 1,411
Income taxes paid (refund) $ (3,757) $ 2,730 $ 55
Supplemental disclosures of non-cash investing and
financing activities:
Capital expenditures financed through
capital lease obligations - $ 301 $ 1,461
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
CALIFORNIA MICRO DEVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Amounts related to the Operating Statements for the year
ended June 30, 1994 are unaudited)
1. THE COMPANY
The Company designs, develops, manufactures and markets a line of specialty
and precision passive electronic components to Original Equipment
Manufacturers and distributors who need higher performance, higher density,
lower cost and unique functionality. The Company uses its silicon-based
thin film materials and process technology to integrate multiple passive
elements onto a single integrated circuit.
The Company also designs, manufactures and sells certain semiconductor
products, primarily analog and mixed signal products for the
telecommunications industry. These sales are a significant portion of the
Company's business.
The Company's products are marketed primarily to customers in the computer
and computer peripherals, wireless communications, networking, and medical
industries.
2. RESTATEMENT
The 1994 financial statements were restated in February 1995 as a result of
the findings discussed in Note 17 of Notes to Financial Statements. The
impact of the restatement was to change net income for 1994 from $5,059,000
or $0.62 per share to a net loss of ($15,227,000) or ($1.88) per share. The
restatement resulted in a decrease of $20,286,000 in retained earnings at
June 30, 1994, from $9,581,000 to an accumulated deficit of ($10,705,000).
The Company's former independent accountants, Coopers & Lybrand L.L.P.,
resigned as the Company's auditors in January 1995, and were replaced by
Ernst & Young LLP. Coopers & Lybrand L.L.P. reports were withdrawn; as a
result, the Company's Statements Of Operations, Shareholders' Equity, and
Cash Flows for the year ended June 30, 1994 are unaudited. These statements
include all adjustments which the Company believes necessary for a fair
presentation.
3. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company changed its fiscal year in 1995 to March 31 from June 30,
resulting in a nine month fiscal year ended March 31, 1995. In the
following presentation, fiscal 1996 refers to the twelve months ended March
31, 1996, fiscal 1995 refers to the nine months ended March 31, 1995, and
fiscal 1994 refers to the twelve months ended June 30, 1994.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with a maturity
date of three months or less at the date of purchase to be cash equivalents.
Cash equivalents generally consist of corporate bonds, commercial paper, and
money market funds.
27
<PAGE>
Short-term Investments
In 1995, the Company adopted SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The adoption had no material
effect on the Company's financial statements.
The Company invests its excess cash in high quality instruments. All of the
Company's marketable investments are classified as available-for-sale and
the Company views its available-for-sale portfolio as available for use in
its current operations Accordingly, the Company has classified all
investments as short-term, even though the stated maturity date may be one
year or more past the current balance sheet date.
Available-for-sale securities are stated at fair market value, with
unrealized gains and losses, net of tax, reported as a component of
shareholder's equity. The cost of securities sold is based upon the
specific identification method. Realized gains and losses and declines in
value judged to be other than temporary are included in interest income and
other (net).
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over the shorter of the
estimated useful lives of the assets, or the remaining lease term.
Estimated useful lives of assets are as follows:
<TABLE>
<S> <C>
Building 40 years
Machinery and equipment 3 - 7 years
Leasehold improvements 4 years
Furniture and fixtures 7 years
</TABLE>
In 1995, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS 121 requires recognition of impairment of long-lived assets in
the event the net book value of such assets exceeds the future undiscounted
cash flows attributable to such assets. SFAS 121 is effective for fiscal
beginning after December 15, 1995. Adoption of SFAS 121 is not expected to
have a material impact on the Company's financial position or results of
operations.
Revenue Recognition
Revenue from product sales to end user customers is recognized upon
shipment. Revenue under license and technology agreements is recognized as
technology related sales upon completion of the appropriate terms of the
agreement. Revenue under product development and engineering design
agreements is recognized as technology related sales using the percentage-
of-completion method. This revenue is measured by engineering estimates of
work performed compared with total estimated requirements specified for
particular projects.
Effective July 1, 1994, the Company changed its accounting method to
recognize revenue on shipments to distributors only upon the final sales by
the distributor to OEMs or other end users. Previously, the Company
recognized revenue at the time of shipment to the distributor. Distributor
agreements allow
28
<PAGE>
the distributors certain rights of return and price protection on unsold
merchandise. As a result, the Company believes that deferral of
distributor sales and related gross margins until the merchandise is resold
by the distributors results in a more meaningful measurement of operations
and is a preferable method of accounting for such shipments.
The impact of the accounting change on retained earnings at June 30, 1994,
would have been a reduction of approximately $835,000. This amount was
expensed as of July 1, 1994. Proforma data giving effect to the change in
accounting has not been presented for periods prior to June 30, 1994, as
that information cannot be calculated.
Common Stock
In May 1995, the Company issued 1,600,000 shares of Common Stock in
connection with the anticipated settlements of shareholder class action
suits and renegotiation of its relationship with Hitachi Metals, Ltd. The
shares, of which 1,500,000 are being held in trust, have been included in
the accompanying financial statements as though they were outstanding as of
March 31, 1995. These shares have been included in the computation of
weighted average common and common equivalents outstanding beginning with
their issuance in May 1995. See Note 4 and Note 17 to Notes to Financial
Statements.
Net Income (Loss) Per Share
Net income per share for each period is computed using the weighted average
number of common shares and dilutive common share equivalents outstanding
during the periods. Net loss per share is computed using the weighted
average number of common shares outstanding during the periods.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts presented in prior years have been reclassified to conform
with current year presentation.
29
<PAGE>
4. HITACHI METALS, LTD.
On March 15, 1994, Hitachi Metals, Ltd. ("HML") and the Company entered into
Strategic Alliance and License and Technical Assistance Agreements to expand
the market for the Company's thin film products. As part of this alliance,
HML purchased 880,000 shares of the Company's Common Stock, under a Stock
Purchase Agreement, and a non-exclusive license to certain technology, under
a License and Technical Assistance Agreement. The Common Stock was valued
at $17.50 per share, totaling $15.4 million, and the technology sale was
valued at $7.7 million, for a total of $23.1 million.
During August 1994, as a continuation of its strategic alliance, HML and the
Company entered into a Joint Development Agreement. Under the terms of the
agreement, HML will contribute a percentage of expenditures for product
development. During 1995 the Company received advances totaling $2.6
million for product development. At March 31, 1996, and March 31, 1995,
$0.3 million and $1.2 million, respectively, remained as a current liability
to be offset by future development work. In October 1994, HML and the
Company formed a joint venture in the Philippines to which the Company
contributed $2.5 million.
In May 1995, HML and the Company concluded negotiations to amend the terms
of its contractual arrangements with HML. The new agreement provides for
the issuance of 100,000 shares of additional stock (valued at $5.00 per
share) and the payment of $50,000 in cash to HML. The License and Technical
Assistance Agreement was adjusted by the forgiveness of a $500,000
receivable from HML, and by a commitment by CMD to provide a certain amount
of training, tooling, and promotional materials at CMD's expense. In
addition, HML acquired the Company's interest in the Philippine joint
venture at a purchase price of $1.4 million. This amount, representing a
receivable from HML, is included in "Other current assets" on the March 31,
1995 Balance Sheet. The aggregate cost of these contractual amendments,
approximately $2.4 million, is included in "Settlement of shareholder
dispute and related matters" on the March 31, 1995, Statement of Operations.
Sales to Hitachi Kinzoku Shoji, Ltd. a subsidiary of HML, were $0.6 million,
$0.3 million and $1.6 million in fiscal 1996, 1995 and 1994, respectively.
Receivables from HML at March 31, 1996 and 1995 were $366,000 and $23,000,
respectively.
30
<PAGE>
5. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The following is a summary of cash, cash equivalents and marketable
securities, (amounts in thousands):
<TABLE>
<S> <C> <C>
March 31, March 31,
1996 1995
--------- ---------
Cash $ - $ 249
Cash equivalents:
Money market funds 751 1,853
Commercial paper and repurchase agreements 761 5,454
Corporate bonds - 3,000
--------- --------
Total cash equivalents 1,512 10,307
--------- --------
Total cash and cash equivalents $ 1,512 $ 10,556
========= ========
Short-term investments:
Auction rate preferred funds floating rate notes $ 7,900 $ 5,300
U. S. Treasuries & U.S. Government agencies 11,721 -
Corporate bonds 1,017 2,000
Municipal bonds - 1,104
--------- --------
Total short-term investments $ 20,638 $ 8,404
</TABLE>
The following is a summary of available-for-sale securities at March 31, 1996
(amounts in thousands):
<TABLE>
Available-for-Sale Securities
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- -------- -------
<S> <C> <C> <C> <C>
Commercial paper and
repurchase agreements $ 761 $ - $ - $ 761
U.S. Treasuries &
U.S. government agencies 11,714 45 (38) 11,721
Corporate bonds 1,028 - (11) 1,017
-------- -------- --------- -------
Total debt securities 13,503 45 (49) 13,499
Auction rate preferred funds
and floating rate notes 7,900 - - 7,900
------- -------- --------- -------
Total $21,403 $ 45 $ (49) $21,399
======== ======== ========= =======
</TABLE>
Of the 1996 securities listed above, $6.5 million of debt securities (at
estimated fair value) mature within one year; $7.0 million mature between
one and two years; and the $7.9 million of auction rate preferred funds are
valued at par and may be liquidated at any interest reset date without
penalty. Realized losses on sales of securities were $17,000 and $33,000
for fiscal 1996 and fiscal 1995 respectively. See Note 6 of Notes to
Financial Statements.
31
<PAGE>
The following is a summary of available-for-sale securities at March 31, 1995
(amounts in thousands):
<TABLE>
Available-for-Sale Securities
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- -------- -------
<S> <C> <C> <C> <C>
Corporate bonds $ 5,000 $ - $ - $ 5,000
Commercial paper 5,454 - - 5,454
Municipal bonds 1,199 - (95) 1,104
-------- ------- -------- --------
Total debt securities 11,653 - (95) 11,558
Auction rate preferred funds 5,300 - - 5,300
--------- -------- -------- --------
Total available-for-sales
securities $ 16,953 $ - $ (95) $ 16,858
======== ======= ========= ========
</TABLE>
6. CONCENTRATIONS OF CREDIT RISK
The Company credit risk consist primarily of temporary cash investments and
trade receivables.The Company places its temporary cash investments and
short-term securities with substantial financial service institutions.
In October 1994, the Company invested $1.2 million in Orange County Tax
and Revenue Municipal bonds. The Company has recognized an unrealized
loss of $95,000 for reduction in the market value of this issue as of
March 31, 1995. These bonds were collected in full during fiscal 1996.
See Note 5 of Notes to Financial Statements.
The significant portion of the Company's sales are to customers whose
activities are related to computer and computer peripherals, wireless
communications, networking, medical, and consumer electronics industries,
including some who are located in foreign countries. The Company generally
extends credit to these customers and, therefore, collection of receivables
is affected by the aforementioned industries and economic influences of
customers' geographic locations. However, the Company monitors extensions
of credit and requires collateral, such as letters of credit, whenever
deemed necessary.
7. CONCENTRATION OF OTHER RISKS
Markets
The Company markets its products to high-technology industries, such as
personal computers, telecommunications, and networking, that are
characterized by rapid technological change, intense competitive pressure,
and volatile demand patterns. Most of the systems into which the Company's
products are designed have short life cycles. As a result, the Company
requires a significant number of new design wins on an ongoing basis to
maintain and grow revenue.
Customers
Generally, the Company's sales are not subject to long-term contracts but
rather to short-term releases of customer's purchase orders, most of which
are cancelable on relatively short notice. The timing of these releases
for production as well as custom design work are in the control of
the customer, not the
32
<PAGE>
Company. Because of the short life cycles involved with its customers'
products, the order pattern from individual customers can be erratic with
significant accumulation and de-accumulation of inventory during phases of
the life cycle. For these reasons, the Company's backlog and bookings as of
any particular date may not be representative of actual sales for any
succeeding period.
Inventories
The Company records inventory reserves on a part-by-part basis to
appropriately consider excess inventory levels and obsolete inventory based
on backlog and forecasted demand, and to consider reductions in sales price.
The Company makes specific provisions for the risk of inventory obsolescence
based on backlog and forecasted demand. However, due to the volatility of
demand, and the fact that many of the Company's products are specific to
individual customers, backlog is subject to revisions and cancellations and
anticipated demand is constantly changing, which may require additions to
the reserves in the future.
Manufacturing
Manufacturing risks include errors in fabrication processes, defects in and
supply of raw materials, as well as other factors which can affect yields
and costs. The Company intends to eventually convert from five-inch wafer
manufacturing processes to six-inch. Currently, because five inch wafers
are no longer considered to be economically viable for most applications,
there is a risk of supply of five-inch wafers as vendors direct their
resources to larger wafer sizes. Additionally, there is a risk of
disruptions to the manufacturing processes as upgrading of facilities and
equipment are attempted.
Subcontractors
The Company uses subcontractors in Asia, primarily Thailand and the
Malaysia, for assembly, packaging, and test of most of its product. This
common industry practice is subject to political and economic risks and
industry volatility has occasionally resulted in shortages of subcontractor
capacity and other disruptions to supply.
33
<PAGE>
8. INVENTORIES
Inventories consist of the following (amounts in thousands):
<TABLE>
<S> <C> <C>
March 31, March 31,
1996 1995
-------- --------
Raw materials $ 1,093 $ 446
Work-in-process 3,949 2,886
Finished goods 1,898 1,415
-------- --------
$ 6,940 $ 4,747
======== ========
</TABLE>
9. PROPERTY AND EQUIPMENTProperty, plant, and equipment consist of the
following (amounts in thousands):
<TABLE>
<S> <C> <C>
March 31, March 31,
1996 1995
-------- --------
Land $ 137 $ 137
Buildings 3,030 3,030
Machinery, equipment and tooling 15,070 10,933
Leasehold improvements 495 465
Furniture and fixtures 329 266
------- -------
19,061 14,831
Less accumulated depreciation and amortization 9,747 8,166
------- -------
$ 9,314 $ 6,665
======== ========
</TABLE>
10. SHORT-TERM BORROWINGS
The Company has a bank line of credit, which expires July 31, 1996. Under
the terms of the line of credit, the Company can borrow up to $3,000,000, at
prime, collateralized by short-term investments managed by the bank. There
were no bank borrowings at March 31, 1996 and 1995.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has evaluated the estimated fair value of financial instruments.
The amounts reported as cash and cash equivalents, accounts receivable,
short-term borrowings, accounts payable, and accrued expenses approximate
the fair value due to their short-term maturities. The fair value for long-
term debt was estimated using discounted cash flow analysis based on
estimated interest rates for similar types of borrowing arrangements.
The carrying amounts and estimated fair values of the Company's long-term
debt are as follows, (amounts in thousands):
<TABLE>
<S> <C> <C>
Carrying Fair
Amount Value
-------- -----
Long-term debt
(excluding capital leases) $7,862 $8,426
</TABLE>
34
<PAGE>
12. LONG-TERM DEBT
Long-term debt consists of the following (amounts in thousands):
<TABLE>
<S> <C> <C>
March 31, March 31,
1996 1995
-------- --------
Notes payable at 8.6%, due
through August 1, 1996 $ 212 $ 611
Industrial revenue bonds at 10.5%, due
through March 1, 2018 7,535 7,630
Industrial revenue bonds at 12%, due
through March 1, 1998 115 160
-------- --------
7,862 8,401
Less current maturities 372 478
-------- --------
$ 7,490 $ 7,923
======== ========
Weighted average interest rate 10.5% 10.4%
</TABLE>
Notes payable are collateralized by certain machinery and equipment.
Industrial revenue bonds are collateralized by a lien on all land and
buildings of the Company in Tempe, Arizona, and certain equipment acquired
with the proceeds of the bonds and require certain minimum annual sinking
fund payments ranging from $160,000 in fiscal 1997 to $780,000 in fiscal
2018. The Company may prepay the 10.5% Industrial Revenue Bond by redeeming
all or part of the outstanding principal amounts on or after March 1, 1998
with penalties declining from 2% on March 1, 1998 to zero at March 1, 2000.
At March 31, 1996, cash of $905,000 was held in sinking fund trust accounts
of which $800,000 is to be used for principal and interest payments in the
event of default by the Company.
The Industrial Revenue Bonds and certain lease agreements require the
maintenance of various financial covenants including certain minimum levels
of net worth, current ratio, quick ratio, ratio of debt to net worth, debt
coverage, and debt to working capital ratio. The Company is in compliance
with these covenants at March 31, 1996. As a result of these covenants, the
Company's ability to pay dividends is restricted.
Future maturities of long-term debt at March 31, 1996 are as follows
(amounts in thousands):
<TABLE>
<S> <C>
1997 $ 372
1998 175
1999 130
2000 140
2001 155
2002 and thereafter 6,890
--------
$ 7,862
========
</TABLE>
35
<PAGE>
13. LEASE COMMITMENTS
Operating LeasesThe Company leases certain manufacturing
facilities under operating leases expiring in 1997 through 2002. Future
minimum lease payments, under non-cancelable operating leases, for the years
ended March 31 are as follows (amounts in thousands):
<TABLE>
<S> <C>
1997 $ 485
1998 496
1999 512
2000 524
2001 541
2002 and thereafter 517
-------
$ 3,072
=======
</TABLE>
Rent expense was $478,427; $1,393,331; and $1,795,000 in fiscal 1996, 1995,
and 1994, respectively.
Capital Leases
Obligations under capital leases are at interest rates ranging from
approximately 4% to 14%, depending primarily upon the purchase option
arrangements at the end of the lease term, and are due in monthly
installments through June 1998. Future minimum lease payments, under
capital leases for the years ended March 31, are as follows (amounts in
thousands):
<TABLE>
<S> <C>
1997 $ 1,025
1998 298
1999 24
-------
Total minimum lease payments 1,347
Less amount representing interest 138
-------
Present value of net minimum lease payments 1,209
Less current portion 910
-------
$ 299
=======
</TABLE>
Machinery and equipment under capital leases are as follows
(amounts in thousands):
<TABLE>
<S> <C> <C>
March 31, March 31,
1996 1995
-------- --------
Cost $ 4,745 $ 4,737
Less accumulated amortization 2,893 1,903
-------- --------
$ 1,852 $ 2,834
======== ========
</TABLE>
36
<PAGE>
14. INCOME TAXES
The provision (benefit) for income taxes for the periods ended March 31,
1996 and 1995 and June 30, 1994, consists of the following (amounts in
thousands):
<TABLE>
<S> <C> <C> <C>
Twelve Months Nine Months Twelve Months
Ended Ended Ended
March 31, March 31, June 30,
1996 1995 1994
------------ ----------- ------------
(unaudited)
Current:
Federal $ - $ - $ (1,444)
State - - -
Foreign - 50 -
Deferred:
Federal - - 37
State - - -
--------- -------- ----------
Provision for income taxes $ - $ 50 $ (1,407)
========= ======== ==========
</TABLE>
A reconciliation of the Company's effective tax rate to the federal
statutory rate is as follows:
<TABLE>
<S> <C> <C> <C>
Twelve Months Nine Months Twelve Months
Ended Ended Ended
March 31, March 31, June 30,
1996 1995 1994
------------ ----------- ------------
(unaudited)
Federal statutory tax 34% (34)% (34)%
Losses with no current benefit - 34 26
Utilization of loss carryforward (34) - -
------- ------- -------
Effective income tax rate 0% 0% (8)%
</TABLE>
At March 31, 1996, the Company had federal and state net operating loss
carryforwards of approximately $9,300,000 and $11,000,000 respectively.
In addition, the Company had federal and California credit carryforwards of
approximately $500,000 and $87,000 respectively. These carryforwards will
expire at various dates beginning in 2008 through 2010, except for certain
state net operating losses of approximately $3,000,000 which expire from
1999 through 2000.
37
<PAGE>
Deferred income taxes reflect the tax effects of net operating loss and
credit carryforwards and temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the Company's
deferred tax assets are as follows (amounts in thousands):
<TABLE>
<S> <C> <C>
March 31, March 31,
1996 1995
-------- --------
Deferred tax assets:
Net operating loss carryforwards $ 3,848 $ 2,700
Tax credit carryforwards 560 530
Inventory reserves 2,624 3,600
Bad debt reserves 442 704
Other non-deductible accurals and reserves 1,832 2,511
------- -------
Total deferred tax assets 9,306 10,045
Less valuation allowance (9,306) (10,045)
------- -------
Net deferred tax asset $ - $ -
======= =======
</TABLE>
The valuation allowance decreased by $739,000 during the year ended March
31, 1996. Approximately $210,000 of the valuation allowance for deferred
tax assets relates to benefits of stock option deductions which, when
recognized, will be directly allocated to common stock. The above deferred
tax assets and net operating loss carryforwards do not reflect a tax benefit
associated with the anticipated shareholder settlement. Such benefit will
be determined when the settlement is finalized.
15. INTEREST INCOME AND OTHER, NET
Interest income and other, net consists of (amounts in thousands):
<TABLE>
<S> <C> <C> <C>
Twelve Months Nine Months Twelve Months
Ended Ended Ended
March 31, March 31, June 30,
1996 1995 1994
------------ ----------- ------------
(unaudited)
Interest income $1,194 $ 870 $ 236
Other income (expense) 1,563 199 (166)
------ ------ ------
$2,757 $1,069 $ 70
====== ====== ======
</TABLE>
Interest income reflects the amounts earned from investments of short-term
securities. Other Income for fiscal 1996 reflects the $1.6 million realized
from the sale of the Company's interest in Cell Access. Fiscal 1995 other
income includes litigation settlement of $163,000.
38
<PAGE>
16. EMPLOYEE BENEFIT PLANS
Employee Stock PlansThe Company accounts for its stock option plans and its
employee stock purchase plan in accordance with the provisions of the
Accounting Principles Board's Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees." In 1995, the Financial Accounting Standards Board
released the Statement of Financial Accounting Standard No. 123 (SFAS 123),
"Accounting for Stock Based Compensation." SFAS 123 provides an alternative
to APB 25 and is effective for fiscal year beginning after December 15, 1995.
The Company expects to continue to account for its employee stock plans in
accordance with the provision of APB 25 and adopt the disclosure provisions
of SFAS 123.
Stock Option Plans
The 1995 Stock Option Plan is administered by a stock option committee
consisting of not less than two directors who, during the one year period
prior to service as administrator of the plan, shall not have been granted
or awarded equity securities except as permitted under Rule 16b-3 under the
Securities Exchange Act of 1934. The plan provides for options for the
purchase of shares to be granted to employees and certain consultants to the
Company. The 1995 Directors Plan is administered by not less than three
members of the Board and the amount of shares granted to the directors shall
be a fixed amount on an annual basis, as approved by the shareholders.
Under the Company's 1995 Stock Option Plan, 1,558,609 shares of Common Stock
are reserved for issuance. The 1995 Stock Option Plan provides for issuance
of options to employees and consultants at prices not less than 85% of fair
market value for shares issued under a non-qualified stock option agreement.
Options may also be issued to key employees for not less than 100% of fair
market value for shares issued under an incentive stock option agreement.
Under the 1995 Directors Plan, 150,000 shares of Common Stock are reserved
for issuance. The 1995 Directors Plan provides for a fixed issuance amount
to the directors at prices not less than 100% of the fair market value of
the common stock at the time of the grant.
In addition to the two 1995 plans, the Company has a plan which was adopted
in 1981 (The Employee Incentive Stock Option Plan), and another plan which
was adopted in 1987 (The 1987 Stock Option Plan) both of which are still
active although no new options are being issued under these plans. These
plans provided for the issuance of 1,500,000 and 2,500,000 shares of Common
Stock, respectively. Under these plans, the Company has granted incentive
stock options and non-qualified options to designated employees, officers
and directors.
Generally, options under the plans become exercisable and vest over varying
periods ranging up to five years as specified by the Board of Directors.
Option terms do not exceed ten years from the date of the grant and all
plans except the 1981 Employee Incentive Stock Option Plan (the "1981 Plan")
expire within 20 years of date of adoption. The 1981 Plan may be terminated
at any time by the Board of Directors. No option may be granted during any
period of suspension or after termination of any plan. Unexercised options
expire upon, or within, three months of termination of employment, depending
upon the circumstances surrounding termination.
39
<PAGE>
Combined plan activity for each of the last three fiscal years is summarized
below:
<TABLE>
Number of Options Option Price
<S> <C> <C>
Balance at June 30, 1993 (unaudited) 1,135,725 $2.00 - $5.63
Option granted (unaudited) 614,995 4.625 - 15.30
Options exercised (unaudited) (204,486) 2.00 - 13.25
Options canceled (unaudited) (113,143) 2.00 - 12.75
---------- ------------
Balance at June 30, 1994 (unaudited) 1,433,091 2.00 - 15.30
Options granted 1,262,175 3.93 - 5.63
Options exercised (15,817) 2.00 - 12.50
Options canceled (1,076,254) 2.00 - 15.30
---------- ------------
Balance at March 31,1995 1,603,195 2.00 - 5.63
Options granted 759,700 5.38 - 10.38
Options exercised (124,684) 2.00 - 5.63
Options canceled (396,347) 2.00 - 15.30
---------- ------------
Balance at March 31, 1996 1,841,864 $2.00 - $12.75
========= ==============
</TABLE>
As of March 31, 1996 there were 400,173 fully vested options outstanding.
Employee Stock Purchase Plan
The 1995 Employee Stock Purchase Plan is available for all full-time
employees possessing less than 5% of the Company's Common Stock on a fully
diluted basis. The plan provides for the issuance of up to 250,000 shares
at 85% of the fair market value of the Common Stock at certain defined
points in the plan offering periods. Purchase of the shares is to be
through employees' payroll deductions and may not exceed 15% of their total
compensation. The plan terminates on February 9, 2005, or earlier at the
discretion of the Company's Board of Directors. As of March 31, 1996,
250,000 shares are reserved for issuance.
401(K) Savings Plan
The Company maintains a 401(K) Savings Plan covering substantially all of
its employees. Under the plan, eligible employees may contribute up to 15%
of their base compensation to the plan with the Company matching at a rate
of 50% of the participants' contributions up to a maximum of 3% of their
base compensation. Participants' contributions are fully vested at all
times. The Company's contributions vest incrementally over a two year
period. Prior to January 1995, the Company's contributions were made by
issuance of common stock of the Company; after January 1, 1995,
contributions are to be made in cash. During fiscal 1996, 1995, and 1994
the Company expensed $163,000, $186,000, and $62,000, respectively, relating
to its contributions under the plan.
40
<PAGE>
17. LITIGATION
In October 1994, the Company's Board of Directors appointed a Special
Committee of independent directors to conduct an investigation into possible
revenue recognition and other accounting irregularities. The ensuing
investigation resulted in the termination of the Company's former Chairman
and CEO, Chan M. Desaigoudar, and several other key management employees.
In January 1995, the Company reported that an investigation conducted by the
Special Committee of the Board of Directors and Ernst & Young LLP had found
widespread accounting and other irregularities in the Company's financial
results for the fiscal year ended June 30, 1994. On February 6, 1995, the
Company filed a Report on Form 10-K/A restating its results for the fiscal
year ended June 30, 1994. Upon restatement, the Company reported a net loss
of $15.2 million, or a loss of $1.88 per share, on total revenues of $30.1
million. The Company previously had reported earnings of $5.1 million, or
$0.62 per share, on revenues of $45.3 million. The accounting
irregularities and related matters are the subject of pending securities
class actions against the Company, as well as pending investigations into
possible violations of the federal securities laws by the Securities and
Exchange Commission ("SEC") and the Justice Department.
From August 5, 1994 through February 16, 1995, eleven purported class action
complaints were filed against the Company in the United States District
Court for the Northern District of California. Other defendants named in
the class actions include certain of the Company's current and former
officers and Coopers & Lybrand L.L.P., the Company's former outside auditor.
The class actions purport to be brought on behalf of classes of shareholders
of the Company's Common Stock over varying periods of time ranging from
September 7, 1993 to January 9, 1995. The gravamen of the allegations
against the Company in the class actions is that it violated Section 10(b)
and Rule 10b-5 of the Securities Exchange Act of 1934 by disseminating false
and misleading financial statements and reports for the fiscal year ended
June 30, 1993 and June 30, 1994. The complaints seek unspecified
compensatory damages and attorneys' fees, as well as other relief.
On or about February 23, 1995, the Company entered into a proposed
settlement of the class actions, pursuant to which claims against the
Company would have been released by shareholders who purchased Company
common stock between September 7, 1993 through January 9, 1995, in exchange
for the Company paying the class $1.0 million and the issuance to the class
of one million five hundred thousand shares (1,500,000), as well as certain
non-monetary consideration. The issued shares were to be accompanied by a
Contingent Value Right (CVR), which is personal to the class member, and not
transferable, and which entitled the holder thereof to receive the
difference, if any, between eight dollars ($8.00) per share and the highest
average trading price of the Company's Common Stock over any consecutive
twenty trading day period during the three and one half years following
issuance of the shares, if such price is lower than $8.00. The total cost
of the proposed settlement was $13.0 million, which has been expensed in the
fiscal year ended March 31, 1995, financial statements. Both the shares and
the cash were placed in, and remain in, trust accounts pending final
settlement of the lawsuits. The 1.5 million shares are included in shares
outstanding and in the computation of earnings per share.
On August 4, 1995, Judge Vaughn Walker of the U. S. District Court for
Northern California, issued an order regarding the securities class action
lawsuits filed against the Company. Judge Walker, in ruling on the bids by
two law firms to represent the proposed class action of shareholders,
rejected one bid and required the other law firm to undertake an evaluation
of class members' affirmative support of the terms of the previously
announced proposed settlement and that firm's attorney fee proposal. Judge
Walker's order stated that if the terms of the proposed settlement were not
affirmatively supported by a significant portion of the prospective class,
the Court would disapprove the proposed class settlement, and would solicit
bids from other law firms who sought to represent the prospective class.
The order
41
<PAGE>
further stated that if no other law firms bid for the right to represent the
prospective class, the Court would deny certification of the class.
Pursuant to the Court's order of August 4, 1995, counsel for the class
surveyed selected institutional and large individual class members in an
effort to determine whether the purposed settlement with the Company was
affirmatively supported. Class members who responded to the survey
generally expressed support for the settlement. On October 12, 1995, the
Colorado Public Employees Retirement Association (COLPERA), a class member,
filed an application for leave to appear in the action for the limited
purpose of participating in the settlement discussions and determination
whether the proposed settlement may be improved.
On February 2, 1996, Judge Walker denied the motion for preliminary approval
of the proposed settlement; denied the request of the law firm of Lieff,
Cabraser, Heimann & Bernstein to be appointed class counsel; and certified
the COLPERA as class representative. The firm of Hogan & Hartson has
appeared as counsel for the class representative.
On April 10, 1996, the Company cross-complained against its former auditors,
Coopers & Lybrand L.L.P. for professional negligence and contribution under
the securities laws. Coopers has indicated that they intend to cross-
complain against the Company; however no such pleading has been received.
On May 2, 1996, a Case Management Conference was held before Judge Walker.
The Court ordered this matter to Judge Lynch for settlement conferences, the
first of which is now scheduled for June 5, 1996. At the Case Management
Conference Judge Walker also set dates for responsive pleadings to be filed
and for preliminary briefing on a motion for class certification.
On May 21, 1996, the Court issued a temporary restraining order prohibiting
any transfer or sale by Chan Desaigoudar (the Company's former CEO and
Chairman of the Board) of his CMD stock. The Court also stated that it
would impose a preliminary injunction on May 28, 1996, sequestering
Desaigoudar's CMD stock if counsel for the class and Desaigoudar failed to
agree on a sequestration order. On May 29, 1996, such preliminary
injunction order was entered.
In light of the recent decision by Judge Walker described above, there can
be no absolute assurance that the ultimate resolution of this litigation
will be in the amount and form which the Company has recognized in its
financial statements. However, based on information currently available to
it the Company believes that any settlement of this matter will involve
terms that are no less favorable to the Company than those previously
proposed and accepted by the former Class counsel.
A putative derivative action was filed against the Company and certain
former and present officers and directors on May 25, 1995, in Santa Clara
County Superior Court. An amended complaint was filed that named no current
members of the Company's Board of Directors, and named as a Company employee
only the Company's General Counsel. The Court has stayed this matter for
one year, until January 3, 1997.
The Company has fully cooperated with the pending investigations by the
Justice Department and the SEC. The Justice Department has advised the
Company it is not currently a target of the investigation. The SEC has
taken the position that it is premature, at this stage in its investigation,
to discuss the resolution of the investigation of the Company.
The Company is a defendant or plaintiff in various other actions which arose
in the normal course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the financial condition or overall trends in the results of
operations of the Company.
42
<PAGE>
The Company believes that, with regard to these matters, it has, to the best
of its knowledge, made such adjustments to its financial statements by means
of reserves and expensing the costs thereof, that these matters will not
have any additional adverse impact on the Company's financial condition;
provided, however, that if either the Court or the shareholders reject the
proposed settlement mentioned above, the ultimate resolution of that
litigation may have an adverse effect on the Company's financial condition.
18. SEGMENT INFORMATION
The Company's principal operations are conducted in the United States.
Foreign sales, primarily in Europe, Canada and Asia, aggregated
approximately 31%, 33% and 42% of net product sales for fiscal 1996, 1995,
and 1994. Foreign currency transaction gains and losses are not
significant.
During the fiscal 1996, 1995, and 1994, no customer accounted for more than
10% of net product sales.
43
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There were no disagreements with the independent accountants in the three
periods ended March 31, 1996, March 31, 1995, and June 30, 1994.
In January 1995, Coopers & Lybrand L.L.P. resigned as the Company's
independent accountants and were replaced by Ernst & Young LLP.
44
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is set forth in the 1996 Proxy
Statement under the captions "Officers and Directors" and "Executive
Compensation" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is set forth in the 1996 Proxy
Statement under the caption "Executive Compensation" and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information related to security ownership of certain beneficial owners and
security ownership of management is set forth in the 1996 Proxy Statement
under the caption "Security Ownership of Management and Principal
Shareholders" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is set forth in the 1996 Proxy
Statement under the caption "Certain Relationships and Transactions" and is
incorporated herein by reference.
45
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT, SCHEDULES, AND REPORTS ON FORM 8-K.
The following documents are filed as a part of this Report:
(a) 1. See Item 8 for a list of financial statements filed herein.
2. See Item 8 for a list of financial statement schedules filed.
All other schedules have been omitted because they are not applicable or the
required information is shown in the Financial Statements or the notes
thereto.
3. Exhibit Index:
Exhibit
Number Description
11 Schedule 11
23 Consent of Ernst & Young LLP, Independent Auditors
(b) 1. Reports on Form 8-K:
(1) On May 9, 1996, the Company filed a Form 8-K, reporting
the release of certain information regarding the
Company's year-end 1996 financials.
(2) On May 17, 1996, the Company filed a Form 8-K, reporting
the release of certain information regarding a court
hearing relating to the pending class actions securities
lawsuits previously filed against it.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement in connection with its 1996
Annual Meeting of Shareholders (which will be filed with the Securities and
Exchange Commission within 120 days of the end of the fiscal year ended
March 31, 1996) are incorporated by reference into Part III.
46
<PAGE>
<TABLE>
CALIFORNIA MICRO DEVICES CORPORATION
SCHEDULE 2
VALUATION AND QUALIFYING ACCOUNTS
Year Ended March 31, 1996, Nine Months Ended March 31, 1995,
and Year Ended June 30, 1994
(Amounts in Thousands)
<S> <C> <C> <C> <C> <C>
Balance Additions Charged Deduc- Balance
at Charged to to Other tions At End
Beginning Cost and Accounts (2) of Year
of Year Expense
-------- -------- -------- ------ ------
Year ended March 31, 1996
Allowance for doubtful
accounts (deducted from
accounts receivable) $ 832 $ (345) $ - $ (473) $ 960
====== ====== ===== ====== =====
Nine months ended March 31, 1995
Allowance for doubtful
accounts (deducted from
accounts receivable) $ 500 $1,230 $ 443 $1,341 $ 832
====== ====== ===== ====== =====
Year ended June 30, 1994(1)
Allowance for doubtful
accounts (deducted from
accounts receivable) $ 500 $2,490 $ - $2,490 $ 500
====== ====== ===== ====== =====
</TABLE>
(1) Unaudited. See Note 2 of Notes to Financial Statements.
(2) Represents write-offs net of recovery of receivables.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized on the
31st day of May 1996.
CALIFORNIA MICRO DEVICES CORPORATION
(Registrant)
By: /s/ Jeffrey C. Kalb
---------------
JEFFREY C. KALB
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 31st day of May 1996.
By:
/s/ Jeffrey C. Kalb President and Chief Executive Officer and Director
JEFFREY C. KALB (Principal Executive Officer)
/s/ John E. Trewin Vice President and Chief Financial Officer
JOHN E. TREWIN (Principal Financial and Accounting Officer)
/s/ Wade Meyercord Chairman of the Board
WADE MEYERCORD
/s/ Angel G. Jordan Director
ANGEL G. JORDAN
/s/ C.K.N. Patel Director
C.K.N. PATEL
- - ----------------- Director
DAVID B. SCHOON
/s/ Stuart Schube Director
STUART SCHUBE
A majority of the Board of Directors.
48
<PAGE>
EXHIBIT 11
<TABLE>
CALIFORNIA MICRO DEVICES CORPORATION
Computation of Per Share Earnings
(Amounts in Thousands, Except per Share Data)
<S> <C> <C> <C>
Twelve Months Nine Months Twelve Months
Ended Ended Ended
March 31, March 31, June 30,
1996 1995 1994
--------- --------- ---------
Net income (loss) $ 5,119 $(23,502) $(15,227)
========= ========= =========
PRIMARY:Weighted average common
shares outstanding 10,035 8,554 8,103
Common equivalents attributable to:
Options 610 - -
-------- -------- --------
Total weighted average common and
common equivalent shares
outstanding 10,645 8,554 8,103
========= ========= ========
Net income (loss) per share $ 0.48 $ (2.75) $ (1.88)
========= ========= ========
FULLY DILUTED:
Weighted average common
shares outstanding 10,035 8,554 8,103
Common equivalents attributable to:
Options 658 - -
-------- ------- --------
Total weighted average common and
common equivalent shares
outstanding 10,693 8,554 8,103
========= ========= ========
Net income (loss) per share $ 0.48 $ (2.75) $ (1.88)
========= ========= ========
</TABLE>
49
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement,
Form S-8, (No. 33-61907) pertaining to the 1981 Employee Incentive Stock
Option Plan, 1987 Stock Option Plan, 1995 Stock Option Plan, 1995 Non-
Employee Directors' Stock Option Plan, and 1995 Employee Stock Purchase Plan
of California Micro Devices Corporation of our report dated May 7, 1996,
with respect to the financial statements and schedule of California Micro
Devices Corporation included in this Annual Report (Form 10-K) for the year
ended March 31, 1996.
/s/Ernst & Young LLP
ERNST & YOUNG LLP
San Jose, California
May 31, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,512
<SECURITIES> 20,638
<RECEIVABLES> 5,460
<ALLOWANCES> 960
<INVENTORY> 6,940
<CURRENT-ASSETS> 34,175<F1>
<PP&E> 10,753<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 44,928
<CURRENT-LIABILITIES> 10,682
<BONDS> 0
0
0
<COMMON> 55,442
<OTHER-SE> (29,092)
<TOTAL-LIABILITY-AND-EQUITY> 44,928
<SALES> 38,642
<TOTAL-REVENUES> 39,882<F3>
<CGS> 22,430
<TOTAL-COSTS> 22,430
<OTHER-EXPENSES> 13,990
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,657)<F4>
<INCOME-PRETAX> 5,119
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,119
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,119
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.48
<FN>
<F1>Includes Refundable income taxes and other assets - 585.
<F2>Includes Property, plant & equipment, net - 9,314; Restricted cash - 905;
and Other long-term assets - 534.
<F3>Includes Technology related sales - 1,240
<F4>Includes - Interest expense - 1,100; and Interest income and other,
net (2,757).
</FN>
</TABLE>
