U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 0-15449
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 of incorporation) (IRS Employer Identification No.)
215 Topaz Street, Milpitas, CA 95035-5430
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(Address of principal executive offices) (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
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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 contained 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
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 31, 1997, was approximately $51,682,000.00 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, 1997, the number of shares of the Registrant's common stock
outstanding were 9,741,124.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the Registrant's Annual Meeting of Shareholders to be
held July 18, 1997.
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PART I
This report contains forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Act of 1934, as amended. Except for the historical
information contained in this discussion of the business and the
discussion and analysis of financial condition and results of operations,
the matters discussed herein are forward looking statements. Such forward
looking statements are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The forward looking
statements regarding revenues, orders and sales involve a number of risks
and uncertainties, including but not limited to, demand for the Company's
product, pricing pressures which could affect the Company's gross margin
or the ability to consummate sales, intense competition within the
industry, the need for the Company to keep pace with technological
developments and respond quickly to changes in customer needs, the
Company's dependence on third party suppliers for components for its
products and the Company's dependence upon intellectual property rights
which, if not available to the Company, could have a material adverse
effect on the Company. These same factors, as well as others, such as the
continuing litigation involving the Company, could also affect the
liquidity needs of the Company. Actual results could differ materially
from those projected in the forward looking statements as a result of
factors set forth below and elsewhere in this Form 10-K.
ITEM 1. BUSINESS.
General
The business strategy of California Micro Devices Corporation ("CMD") is to
develop and capitalize on the high growth market for Thin Film Passive
Electronic Components and related semiconductor solutions. The Company serves
Original Equipment Manufacturers (OEM) and End User electronic systems
manufacturers who need higher performance, higher density, lower cost, unique
functionality, and faster time to market. The Company combines 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 has forged a leadership position by combining proprietary
materials, process, semiconductor, and design technologies while providing
specialized applications support to its customers.
CMD's thin film networks fall into two basic categories: The Company's new
P/Active(TM) circuits 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. The second category is the
traditional IPEC(TM) family, which consists of custom and general purpose
devices for solving unique customer problems.
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 and cost effective integrated circuit based systems.
Applications in fields such as high speed computers and peripherals,
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,
accounting for approximately 40% of product sales over the last three fiscal
years. Sales of older products, which have historically 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 and many of CMD's new P/Active(TM) circuits, have begun to rejuvenate
the semiconductor portion of the Company's business.
CMD has a relationship with Hitachi Metals Ltd., a subsidiary of Hitachi Ltd.,
that involves equity participation, product development, plus manufacturing,
marketing and non-exclusive worldwide distribution rights. During fiscal 1997,
CMD recognized $1.4 million in technology revenue from Hitachi and $2.1 million
of product revenue.
CMD was incorporated in 1980 and has been public since 1986. It utilizes 86,000
square feet of facilities in Milpitas, California and Tempe, Arizona.
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Passive Components
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 memories ("DRAM's"). Although the
role of 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 systems such as the personal
computer was decreasing, being offset in the market by increasing numbers of
systems. However, in the last few years there has been a reversal of this trend.
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)(1) and
equivalent workstation generations. Similar trends are occurring in other areas
where new functionality and higher frequencies are being incorporated in state
of the art systems, dramatically increasing the demands on passive components.
According to industry sources, the worldwide market for selected passive
components includes over $5.0 billion for resistors and resistor networks, and
over $9.0 billion for capacitors. Unit consumption continues to grow
significantly, 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.
During calendar year 1996, over-capacity in the passives industry led to
significant price reductions so that even in the face of increased unit demands,
total industry revenue declined. 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
larger and 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, tight tolerance 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 single function per device. 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.
Most of the traditional thick film passive manufacturers have acknowledged the
advantages of thin film devices and announced their intention to enter the
market.
CMD's Goal/Strategy
The Company's goal, as the leader in integrated thin film passive components, is
to create a high growth company by converting 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 and semiconductor expertise - which it
believes is a unique combination in the industry - to provide products with
significant cost, size, performance and reliability advantages over traditional
passive components. The Company also intends to
_______________________
(1)Pentium and Pentium Pro are registered trademarks of Intel Corp.
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leverage its base of thin film technology to enhance its semiconductor
technology and to provide components which compliment its unique passive
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,
higher density 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. During fiscal 1997,
the Company increased its investments in research and development for new
process and product technology despite a decline in sales. The Company is
pursuing the use of new device 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 transistors and Schottky diodes), into its P/ActiveTM 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 solutions for its customer's passive component needs. The Company intends
to maintain this position and during fiscal 1997 made significant capital and
technology investments to enhance its position. CMD also made a major transition
during fiscal 1997 by moving large portions of its test and finish operation
into lower cost Far East contractors.
Leverage the Capabilities of CMD's Semiconductor Technology - CMD has
historically had a highly underutilized semiconductor capability. Besides
utilizing these capabilities to enhance the Company's P/ActiveTM solutions, the
Company has begun doing foundry work (contract wafer manufacturing) for 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 for
high volume. In addition, the Company has been developing its own new
semiconductor products for the mobile telecommunications market and other custom
applications, as well as new for its P/Active thin film products.
P/Active(TM) Technologies
In the Spring of 1996, CMD introduced it's new P/ActiveTM family of integrated
passive components. These devices represent a major step forward in the
development of high performance passive components.
Historically, integrated thin film passive components have been built on silicon
wafers. But for all intents and purposes, the silicon was incidental to the
devices themselves. Silicon wafers are relatively cheap, readily available,
extremely high quality, and are supported by many generations of semiconductor
processing equipment. They make an outstanding vehicle on which to deposit thin
films for creating higher performance passive components. But the role of the
silicon was historically that of an inactive carrier.
In late calendar 1990 and early 1991, CMD made the first change in this role
when it introduced a family of multiple Resistor-Capacitor configurations in a
package. As originally conceived, construction of these devices would have
involved the deposition of multiple layers of conducting and insulating thin
films on the top of the traditional "passive" silicon substrate, using metal
films to interconnect them. CMD pioneered a method of using very low resistance
semiconductor wafers for the substrate to interconnect the common ground node of
all the capacitors through the "silicon interconnect" provided by the wafer,
instead of using metals. These products were a major success, providing new
levels of performance and reliability.
California Micro Devices new P/ActiveTM family recognizes the power of this
concept and extends it further. In the P/ActiveTM family, the silicon substrate
fills a variety of roles. In some products, it is used to provide this original
silicon interconnect function although in additional configurations. In some,
the silicon is used to provide controlled ground plane characteristics so that
devices have uniform operating characteristics. In others, ESD protection
mechanisms for high performance capacitors are created in the substrate and
integrated with the passives. And in still others, the integration of Schottky
diodes both as simple networks and in combination with other passive devices is
provided.
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In summary, CMD has changed the traditional role of the silicon wafer in thin
film passives from being a non-contributing, passive carrier upon which thin
films were deposited, to that of an active part of the functioning device,
extracting the full measure of capability from the silicon substrate to provide
customer solutions that have performance exceeding the limitations of
traditional devices. CMD's semiconductor capabilities are central to this
solution.
The CMD Solution/Advantages
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. By integrating multiple passive elements on a single
chip, the Company is able to offer a lower total cost solution than that 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 18 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 and Workstations replaces 36 discrete
resistors, 18 capacitors, and the equivalent of 36 ESD protection diodes with
two miniature IC packages. The customer can realize further cost savings by
reducing the size of the printed circuit board ("PCB"), eliminating board
interconnection, 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 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 discrete semiconductors and
passive components which can consume as much as 30% 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 for manufacturers which significantly increases costs. It
appears that discrete passive components may be reaching the limits of size
reduction and there is increasing interest in integrating more components in a
given package as CMD is doing.
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 perform well at many of today's 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 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
RC family of filters, operate properly at up to 10 times the frequency of
traditional discrete components. Other devices such as the PAC RG family for the
Pentium Pro(R) and other high performance microprocessors have been
characterized at frequencies up to 10 GHz (well beyond the functional limits of
traditional devices) to provide customers with the operating range they need for
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 can only test for the
existence of EMI/RFI emission problems late in the product design cycle,
non-compliance with FCC requirements can result in delayed product
introductions. As products run at higher frequencies and become smaller and more
mobile, the difficulty in suppressing these emissions increases. The Company's
filters are capable of suppressing EMI/RFI noise by as much as 10X more than
combinations of thick
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film components at high frequencies. 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. CMD's new P/ActiveTM filters are effective to over 3 GHz, as much as
10 times the frequency at which traditional capacitors stop acting like
capacitors and start looking like inductors (stop filtering). This can result in
fewer problems in final FCC testing.
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 reduction in the number of component
interconnections. The Company's use of reliable processes common to the
semiconductor industry eliminate many of the problems with solder migration,
cracking and peeling, sensitivity to environmental conditions, and poor solder
joints which often accompany the use of thick film technologies. Additionally,
the Company's new P/ActiveTM circuits have enhanced electrostatic discharge
(ESD) protection to minimize the possibility of damage during the manufacturing
process. In the case of CMD's PAC 1284 parallel port filter (for PC's and
workstations), the additional ESD protection also contributes to protecting the
high performance semiconductors used for these functions.
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 focuses its
efforts on major world wide electronic system manufacturers who participate in
these segments and where the Company feels it has the greatest opportunities.
This often implies a longer design-in cycle, but greater long term business
potential.
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 the Company's products into the
customer's electronic systems. The Company facilitates these efforts by
providing customized solutions to meet customer design requirements. These
customized designs, and the knowledge acquired during the process, can often be
used to create standard products which the Company can then offer for similar
application requirements in other areas.
During fiscal 1997, the Company continued to strengthen its marketing
applications efforts to understand in detail the problems facing manufacturers
in its chosen segments, so as to be able to specify and ultimately design
Application Specific Passive Networks (ASPN's(TM)) which satisfy the needs of
multiple customers. In essence, the Company is becoming a value-added partner
with both customers and leading 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 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 headquarters directed efforts of
the sales, marketing and applications engineering staff.
The Company sells through distributors, both in the U.S.A. and 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 more of its sales may be through national, international, and regional
distributors. Distributors are particularly effective in serving smaller
customers and those with particular service requirements.
During fiscal 1996, the Company hired a new Vice President of Marketing and an
experienced regional sales manager for its Western region. It opened its first
international technical support operation in Taiwan. There were also internal
organization shifts to leverage the experience and knowledge base of existing
personnel. Additionally, CMD continued to make changes to its list of
representatives to secure firms whose customer list and general product mix are
complementary to CMD's target markets and customers. The Company has been
expanding headquarters sales and marketing resources with experienced marketing
engineers and applications engineers to support all its sales and distribution
activities.
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As the fiscal year came to a close, the existence of significant shareholder
litigation in connection with events in 1994 began to fade as an impediment for
the Company in doing business with some potential customers. This should not be
a significant factor in fiscal year 1998.
The Company's foreign product sales accounted for 36%, 31%, and 33% of net
product sales for fiscal year ended March 31, 1997, the fiscal year ended March
31, 1996, and the nine months ended March 31, 1995 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.
A significant portion of the Company's sales are made to a relatively small
number of customers. In fiscal 1997, Motorola accounted for 11% of net product
sales. However, CMD has diversified both its customer base and product mix
during fiscal 1997 with a significant increase in business to the portable phone
and pager markets and recent progress in the networking areas. 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 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 technology revenue and revenue from product
sales through agreements with Hitachi Metals Ltd.
Products
Thin Film Products
The Company's thin film product offerings fall into two categories:
o 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.
o 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.
All these devices provide the benefits of combining 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
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component business. 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.
The Company sells these products both in standard semiconductor industry
packages, primarily Surface Mount Technology (SMT), and as unpackaged die.
Packaged devices represent the dominant portion of the Company's business. As
the pressure for higher performance and density continues to mount on systems
manufacturers, there is growing interest in the Company's capability to provide
"bumped" die for flip chip assembly.
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.
Semiconductor Products
The 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 specialized circuits, rather than
competing at the leading edge of the semiconductor 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. 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 an insulating layer, resistive material, capacitor dielectric
material, interconnecting layers for external connection (pads), passivation
layers and potentially several interface layers. CMD's new P/ActiveTM family of
resistor-capacitor devices also includes 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 four patents on new
thin film passive technologies during fiscal year 1997.
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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 4 and 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 and semiconductor products. The Company
estimates that its wafer capacity utilization for the year ended March 31, 1997,
was approximately 40% in Tempe and 40% in Milpitas. Obtaining full wafer
fabrication capacity from both of these locations would require moderate
additional capital expenditures.
During fiscal 1997, both the Milpitas facility and the Tempe facility received
ISO 9000 certification. This certification is an internationally recognized
acknowledgment that the Company has established and adheres to detailed
operational controls.
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, but also began purchasing new
equipment for some operations during fiscal year 1997 where it could be shown to
be more cost effective. 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.
During fiscal 1996, and continuing in fiscal 1997, the Company made substantial
investments in capital equipment to both upgrade its capabilities and to
increase capacity in areas such as test and finish of thin film products. Much
of the Company's equipment is very old, resulting in higher maintenance costs,
more 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 increase 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. Five inch wafers are no
longer considered to be economically viable for many applications and there is a
risk of supply as vendors direct their resources to larger wafer sizes. This
transition will not be attempted in totality until the utilization of the
existing facilities is significantly increased. Within CMD, this conversion will
generally be accomplished by the conversion of existing equipment and purchase
of used equipment. All the equipment which is currently being purchased is
suitable for 6 inch wafers, so that by the time a conversion is deemed
appropriate, much of the required equipment will be in place.
The Company uses subcontractors in Asia, primarily Thailand and Malaysia, for
assembly and packaging 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 of 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 1997, CMD began testing and finishing a large portion of its
product at the site of the assembly vendors, and the proportion of the Company's
product tested there is expected to continue to increase. CMD has also begun to
"drop-ship" 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 and has required the Company to enhance its MIS systems
to coordinate this remote activity.
As a result of the transfer of high volume testing to the Far East, CMD was able
to vacate its two small leased facilities in Tempe, Arizona during the latter
half of fiscal year 1997 and consolidate its remaining operations in the larger
owned facility. The two smaller facilities were sub-leased, thereby reducing the
Company's cost structure.
8
<PAGE>
Management Information Systems
In the last half of fiscal 1996, CMD installed new management information
systems for work in process tracking, order processing, and financial
management. During fiscal year 1997 these systems were solidified and new
capabilities installed. The Company became able to analyze costs and variances
at the detailed operational level and is now using these tools for cost analysis
and reduction. Also, the new systems are beginning to provide insight into
customer order patterns and requirements.
The investment in MIS systems will continue during the next few years.
Competition
Competition in the passives industry is based on a number of factors, including
price, product performance, established customer relationships, manufacturing
capabilities, product development and customer support. The primary competition
for the Company has come from established competitors and from pre-existing
technologies. Many of the Company's competitors have announced that they will be
providing thin film products as well as their traditional thick film devices.
CMD has seen only sporadic direct thin film competition, but continues to
believe that this competition will become more prominent. From information the
Company has, these competitors are trying to emulate CMD's product line, but may
find it difficult to replicate CMD's new P/ActiveTM technology because of the
significant component of semiconductor technology involved.
The Company's primary competitors for its resistors, resistor networks and
capacitors are substantially larger foreign and domestic companies as listed
below. 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. Competitors include: AVX/Kyocera;
Beckman Industrial Corp.; KOA-SPEER Electronics, Inc.; Matsushita Electronics
Components Co., Ltd.; Murata-Erie of North America, Inc.; ROHM Co., Ltd.; TDK
Corp. of America; and Vishay Intertechnology, Inc.
The Company believes its competitive strengths include unique 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 limited sales, marketing and distribution
capabilities, still evolving planning and analysis, sales, and manufacturing
infrastructure, and its limited engineering staff and 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 identified
market needs. Additionally, the Company redesigns products to reduce costs and
expand the capabilities and performance of its existing products. During fiscal
1997, the Company focused most of its efforts on introducing the new P/ActiveTM
family of products and in developing next generation base technologies. This has
resulted in a new family of devices with substantially higher frequency
performance. This effort will continue in fiscal year 1998 as the family of
products is expanded and refined. There will be an expanded focus during fiscal
1998 on the applications of the P/Active technologies to additional
applications. Additional base technologies are also under development,
particularly in the areas of enhanced capacitor technologies and improved diode
technologies.
In late fiscal 1996, the Company added two senior engineering managers to its
staff. However, the Company was not able to find the number of qualified mid to
entry level engineers it needed to expand the staff. There is
9
<PAGE>
significant risk that this problem will continue and that the Company may not be
able to recruit the top engineering talent it requires in the time frame needed.
For the fiscal years ended March 31, 1997, and March 31, 1996, and the fiscal
year nine months ended March 31, 1995, the Company spent $4.2 million, $3.4
million and $2.7 million, 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 in fiscal 1998 but that the level of joint R&D may decline
in the 1998 fiscal year and beyond.
Employees/Personnel
As of March 31, 1997, the Company had 260 full-time and part-time employees,
including employees in sales and marketing, engineering and research and
development activities, manufacturing, finance, and administration. Of these
employees, 153 were headquartered in Milpitas, California and 107 in Tempe,
Arizona. CMD's success is highly dependent on its ability to hire high quality
people. Although the Company has been able to recruit many talented senior
managers in the last couple of years, 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 personnel policy.
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 been granted four patents related to its thin film technologies.
Two patents relate to the Company's proprietary resistor, capacitor and diode
technology. Another patent relates to the Company's proprietary inductor process
technology. These 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, process and product technologies.
During fiscal 1997, the Company also filed four 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 has
also established trademarks for its P/Active(TM) family of devices.
The Company has granted a non-exclusive, non-assignable license with respect to
certain of its thin film passive component (including mixed active and passive
components, such as resistors, capacitors, transistors, diodes, and networks of
the same) process and product technology to HML.
10
<PAGE>
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 has implemented additional emission controls for its Tempe, Arizona
facility through the addition of a "burn box" for the controlled combustion of
flammable materials.
The Company believes that it is in compliance with applicable environmental
health and safety regulations.
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, pursuant to an agreement that expires on June 30, 2002,
that provides for a current monthly rent of $29,870 plus operating expenses.
This rent amount will be increased 3% annually. 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.
The Company also leases approximately 24,000 square feet of space in Tempe,
Arizona which formerly housed test facilities and warehouse space. Monthly rent
on the leased Tempe facilities is $13,988 plus operating expenses, pursuant to
an agreement that expires in March 2001. These facilities are currently being
subleased through the term of the lease. The sublease revenue should cover the
costs of the lease. See Note 12 of Notes to Financial Statements.
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 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.
11
<PAGE>
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 had 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), personal
to the class member, and not transferable, which would have 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 were lower than $8.00. The total
cost of the proposed settlement was $13.0 million, which was expensed in the
fiscal year ended March 31, 1995, financial statements.
On February 2, 1996, Judge Vaughn R. Walker of the United States District Court
for the Northern District of California denied a motion for preliminary approval
of the 1995 proposed settlement. On May 2, 1996, Judge Walker ordered this
matter to Judge Eugene F. Lynch for settlement conferences which resulted in a
new proposed settlement announced by the Company on September 16, 1996. All
defendants, other than Mr. Desaigoudar, participated in the new settlement.
On March 7, 1997, Judge Walker orally granted plaintiffs' motion for final
approval of the new settlement. On May 20, 1997, the Court issued a written
order certifying the proposed class for settlement purposes and approving the
settlement. Members of the class have thirty (30) days to appeal from that
order; however, the Company views such an appeal as unlikely, in light of the
overwhelming acceptance of the settlement.
Generally, the Company's contribution towards the new settlement calls for the
payment of $6,000,000 in cash and the issuance of 608,696 new shares of the
Company's common stock to the class. Each new share will be accompanied by a
Contingent Value Right (CVR), personal to the shareholder, that entitles the
shareholder to receive the difference between $11.50 and the highest 20 day
average trading price of the Company's common stock (assuming the average price
is less than $11.50) over the three years following the issuance of the CVR. The
CVR expires at the end of the three year period or when the $11.50 price is met,
whichever occurs first. In addition, the Company will pay $2,000,000 into a
restricted account as a guarantee for performance under the CVR. The cash will
be returned to the Company, without interest, if and when the CVR is
extinguished.
The terms of this settlement differ from those negotiated in 1995. However, the
aggregate amount of consideration to be paid by the Company, in cash and common
stock, is the same in both settlements. The new settlement reflects a
substantial reduction in the common stock component (from 1,500,000 shares down
to 608,696 shares) and a substantial increase in cash (from $1,000,000 to
$6,000,000). Pursuant to the terms of the agreement, the Company has deposited
the cash component of the settlement in a trust account controlled by counsel
for the class and has recorded as restricted cash the $2,000,000 guarantee of
performance under the CVR. If the new settlement does not become final, these
monies will be returned, with accrued interest, to the Company.
A putative shareholders derivative action was filed against certain former and
present officers and directors of the Company on May 25, 1995, in Santa Clara
County Superior Court. Plaintiff subsequently agreed to dismiss from the case,
without prejudice, all of the outside directors named in the complaint; the only
current Company officer named as a defendant is the Company's General Counsel.
The stay previously granted in this matter has lapsed and discovery is being
undertaken by the plaintiff.
The Company continues to cooperate with the pending investigations of certain of
its former officers by the Justice Department and the SEC. The Justice
Department has advised the Company that it is not currently a target or subject
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.
12
<PAGE>
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.
See Note 16 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 trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol "CAMD".
Closing prices by quarter for fiscal 1997 and 1996 are as follows:
Common Stock
------------
Fiscal 1997 Q1 Q2 Q3 Q4
----------- -- -- -- --
High $12 1/2 $9 $7 5/8 $9
Low $7 3/8 $4 7/8 $5 1/2 $5 1/16
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
Certain debt covenants restrict the payment of dividends. No dividends were paid
in fiscal 1997, 1996, or 1995. The Company expects to continue that policy in
the foreseeable future. There were approximately 3,000 common shareholders of
record as of March 31, 1997.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
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.
<CAPTION>
Twelve Months Nine Months Twelve Months
Ended Ended Ended June 30,
March 31, March 31, (unaudited)
1997 1996 1995 1994 1993
------------- -------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 32,936 $ 39,882 $ 23,703 $ 30,073 $ 33,007
Income (loss) before income taxes* $ 704 $ 5,119 $ (22,617) $ (16,634) $ 3,424
Net income (loss) $ 704 $ 5,119 $ (23,502) $ (15,227) $ 2,078
Net income (loss) per common share $ 0.07 $ 0.48 $ (2.75) $ (1.88) $ 0.35
Total assets $ 38,270 $ 44,928 $ 40,688 $ 52,097 $ 42,158
Long-term obligations $ 8,499 $ 7,896 $ 9,337 $ 11,762 $ 12,771
<FN>
*And cumulative effect of change in accounting in fiscal year 1995 totaling a
loss of $835,000.
</FN>
</TABLE>
The 1994 financial statements were restated in February 1995 as a result of
certain irregularities uncovered in investigations by current management and the
SEC. 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).
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<PAGE>
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, and 1993 are unaudited. These statements include all
adjustments which the Company believes necessary for a fair presentation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
In the following discussion, fiscal 1997 and fiscal 1996 refers to the twelve
months ended March 31, 1997 and 1996, respectively and fiscal 1995 refers to the
nine months ended March 31, 1995. 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
between fiscal 1996 and fiscal 1995 is of limited usefulness. Accordingly, the
following discussion will compare dollar amounts, quarterly averages, and
percentages, as appropriate, to facilitate meaningful comparisons.
RESULTS OF OPERATIONS
Net income for fiscal 1997 was $704,000 compared to $5.1 million in 1996 and
compared with a net loss of $23.5 million for fiscal 1995. 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 3 and Note 16 of
Notes to Financial Statements.
Product sales for fiscal 1997 averaged $7.9 million per quarter compared to a
1996 average of $9.7 million per quarter and to $7.4 million per quarter for
fiscal 1995. The 18% decrease in average quarterly product sales in fiscal 1997
compared to fiscal 1996 relates primarily to reduced demand from customers as
inventories were being reduced and also due to lower shipments of thin film
products into customers' new products. Fiscal 1996 product sales increased 30%
over fiscal 1995 average quarterly product sales primarily due to a 50% increase
in sales of thin film products and 6% increase in semiconductor products, in
part caused by customers building inventories due to long lead times generally
prevailing in the marketplace at that time.
Technology related revenues were $1.4 million in fiscal 1997, compared with $1.2
million in fiscal 1996, and $1.4 million in fiscal 1995. In 1997, 1996, and 1995
technology revenues consisted of cost-sharing payments by HML related to ongoing
joint product development projects.
Cost of sales were 67%, 58%, and 79% of product sales for fiscal 1997, 1996, and
1995, respectively. The cost of sales percentage increase in fiscal 1997
compared to fiscal 1996 reflects increased mix of packaged products, which
include significant outside contractor costs, and reduced mix of sales of
product in die form (which generally carry a higher margin), lower factory
utilization due to lower customer demand and unusual levels of scrap. During
1996 the Company realized efficiencies from increased sales volume, and an
increased mix of higher margin thin film sales, primarily in the U.S.A.,
compared to a higher mix of lower margin foreign distributor sales in fiscal
1995.
Research and development expense averaged $1,045,000 per quarter in fiscal 1997
compared with $854,000 and $895,000 per quarter in fiscal 1996 and 1995,
respectively. The increase in fiscal 1997 compared to fiscal 1996 primarily
reflects the increase in development of the P/Active(TM) products in addition to
increased joint product development projects in conjunction with HML. The
decrease in the research and development spending rate in fiscal 1996 compared
with fiscal 1995 primarily reflects decreases in joint development projects with
HML.
Selling, marketing, and administrative expenses in fiscal 1997 were $7.4 million
compared to $10.6 million and $9.8 million for fiscal 1996 and 1995,
respectively. Fiscal 1997 expenses reflect reductions in legal expenses in part
due to insurance reimbursements and fee reductions, reduced consulting fees,
reduced sales commission, and reduced bonus expense. Fiscal 1996 expenses
included $1.1 million of unusual legal costs associated primarily with
shareholder litigation. See Note 16 of Notes to Financial Statements. Fiscal
1995 was impacted by $3.6 million of unusual legal, audit, consulting and other
costs in connection with shareholder litigation and an ongoing
15
<PAGE>
investigation of previously announced accounting irregularities and other
matters, and $1.2 million in accounts receivable write downs and reserves.
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 HML, and other costs associated with ongoing investigation and
litigation related to alleged violations of securities laws and other matters.
See Note 3 and Note 16 of Notes to Financial Statements.
Interest expense, on an average quarterly basis, was $185,000, $275,000, and
$311,000 in fiscal 1997, 1996, and 1995, respectively. The decline in interest
expense relates primarily to the expiration of equipment leases.
Interest and other income decreased to $1.4 million in fiscal 1997 compared to
$2.8 million in fiscal 1996 and $1.1 million in fiscal 1995. The higher level of
interest and other income in fiscal 1996 was primarily due to the sale of the
Company's interest in Cell Access for a gain of $1.6 million.
The Company's effective tax rate was nil in both fiscal 1997 and 1996. Income
tax expense of $50,000 in fiscal 1995 is made up of foreign royalty withholding
taxes. 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,
1997, the Company had Federal and State tax loss carryforwards of approximately
$12.2 million and $12.4 million, respectively. See Note 13 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 2 of Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Unrestricted cash, cash equivalents and short-term securities were $6.8 million
at March 31, 1997 compared to $22.1 million at March 31, 1996. Restricted cash
increased to $2.9 million in fiscal 1997 compared to $0.9 million in fiscal 1996
due to the creation of a $2.0 million contingent value right fund required as
part of the shareholder litigation settlement. See Note 4 and Note 16 of Notes
to Financial Statements. Significant cash outflows in fiscal 1997 included
capital equipment additions of $6.0 million (including capital lease buy-outs of
$2.1 million), $5.0 million paid as part of the settlement of shareholder
litigation, the aforementioned $2.0 million transferred to restricted cash, and
the payment of previously accrued legal fees totaling $1.4 million. 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 HML. Significant
cash outflows in fiscal 1996 included capital expenditures of $4.4 million
(including 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 HML, 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 other related matters. Operating losses in
fiscal 1995 were partially offset by reductions in inventory and receivables.
Cash used in operating activities for fiscal 1997 was $7.6 million compared to
cash provided in fiscal 1996 operating activities of $9.6 million and with cash
used of $8.4 million for fiscal 1995. In fiscal 1997 operating activities
reflected net income of $704,000, compared with net income of $5.1 million and
net losses of $23.5 million in fiscal 1996 and 1995, respectively. The net loss
for fiscal 1995 includes a $12.5 million non-cash charge for the issuance of
common stock related to anticipated settlements with shareholders. In fiscal
1997 the terms of the settlement were amended to decrease the common stock
(non-cash) component and to increase the cash component by $5.0 million. (See
preceding paragraph). In fiscal 1997 inventories increased $1.9 million due
primarily to reduced lead times on customer orders, resulting in an increase in
inventory to improve response times and secondarily to increase inventory for
new products. Fiscal 1996 inventories 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 2.7 at the end of fiscal 1997 compared to 3.7 turns at the
end of fiscal 1996. Receivables decreased 12% in fiscal 1997 compared to fiscal
1996 due to reduced sales. Days sales outstanding were 54 days at March 31, 1997
compared to 47 days at March 31, 1996, due to the higher percentage of product
shipped towards the end of the
16
<PAGE>
quarter. Other assets at March 31, 1997, were $874,000 compared to $585,000 at
March 31, 1996. The increase reflects the $400,000 receivable from HML for
fourth quarter fiscal year 1997 technology billings offset by lower interest
receivables due to lower cash, cash equivalents, and short-term investments.
Other long-term assets were $421,000 at March 31, 1997, compared to $534,000 at
March 31, 1996. The decrease is due to the reduction in deposits on leases that
were concluded during fiscal year 1997.
The Company made capital lease payments of $0.9 million, $2.1 million, and $2.2
million in fiscal 1997, 1996, and 1995, respectively, and debt repayments of
$0.4 million, $0.5 million, and $0.4 million in fiscal 1997, 1996, and 1995,
respectively.
The Company has a $3.0 million line of credit agreement that expires on July 31,
1997. 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, 1997,1996, and 1995 and there
were no borrowings during fiscal 1997, 1996, and 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, and equipment lease and
loan financing arrangements. Depending on market conditions and the results of
operations, the Company may pursue other sources of liquidity.
The Company believes that it has sufficient financial resources to fund its
operations for at least the next twelve months.
17
<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 19
Balance Sheets 20
March 31, 1997 and March 31, 1996
Statements of Operations 21
Year ended March 31, 1997, March 31, 1996,
and nine months ended March 31, 1995
Statements of Shareholders' Equity 22
Year ended March 31, 1997, March 31, 1996,
and nine months ended March 31, 1995
Statements of Cash Flows 23
Year ended March 31, 1997, March 31, 1996,
and nine months ended March 31, 1995
Notes to Financial Statements 24
Financial Statement Schedule:
Schedule 2 Valuation and Qualifying Accounts 40
18
<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, 1997 and 1996, and the related statements of
operations, shareholders' equity, and cash flows for the years ended March 31,
1997 and 1996 and the nine months ended March 31, 1995. Our audits also included
the financial statement schedule for the years ended March 31, 1997 and 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, 1997 and 1996, and the results of its operations and
its cash flows for the years ended March 31, 1997 and 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 years
ended March 31, 1997 and 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.
/s/ERNST & YOUNG LLP
San Jose, California
April 29, 1997
19
<PAGE>
CALIFORNIA MICRO DEVICES CORPORATION
BALANCE SHEETS
(Amounts in Thousands, Except Share Data)
March 31, March 31,
1997 1996
------------ ----------
ASSETS:
Current assets:
Cash and cash equivalents $ 343 $ 1,512
Short-term investments 6,467 20,638
Accounts receivable, less allowance for doubtful
accounts of $437 in 1997 and $900 in 1996 3,938 4,500
Inventories 8,843 6,940
Other assets 874 585
-------- --------
Total current assets 20,465 34,175
Property and equipment, net 14,481 9,314
Restricted cash 2,903 905
Other long-term assets 421 534
-------- --------
Total assets $ 38,270 $ 44,928
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 2,618 $ 2,832
Accrued salaries and benefits 795 1,250
Other accrued liabilities 1,457 4,279
Deferred margin on shipments to distributors 576 1,039
Current maturities of long-term debt and capital
lease obligations 745 1,282
-------- --------
Total current liabilities 6,191 10,682
Long-term debt, less current maturities 7,315 7,490
Capital lease obligations less current maturities 1,184 299
Deferred income -- 107
-------- --------
Total liabilities 14,690 18,578
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 9,741,124 in 1997
and 10,306,088 in 1996 51,939 55,442
Accumulated deficit (28,359) (29,092)
-------- --------
Total shareholders' equity 23,580 26,350
-------- --------
Total liabilities and shareholders' equity $ 38,270 $ 44,928
======== ========
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
<TABLE>
CALIFORNIA MICRO DEVICES CORPORATION
STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Data)
<CAPTION>
Twelve Months Twelve Months Nine Months
Ended Ended Ended
March 31, March 31, March 31,
1997 1996 1995
---------------- ---------------- -------------
<S> <C> <C> <C>
Revenues:
Net product sales $ 31,506 $ 38,642 $ 22,335
Technology related revenues 1,430 1,240 1,368
-------- -------- --------
Total revenues 32,936 39,882 23,703
Cost and expenses:
Cost of sales 21,255 22,430 17,673
Research and development 4,180 3,417 2,685
Selling, marketing and administrative 7,412 10,573 9,763
-------- -------- --------
Total costs and expenses 32,847 36,420 30,121
-------- -------- --------
Operating income (loss) 89 3,462 (6,418)
Settlement of shareholder dispute and
related matters -- -- 16,336
Interest expense 739 1,100 932
Interest income and other, net (1,354) (2,757) (1,069)
-------- -------- --------
Income (loss) before income taxes and cumulative
effect of change in accounting 704 5,119 (22,617)
Income taxes -- -- 50
-------- -------- --------
Income (loss) before cumulative effect of
change in accounting 704 5,119 (22,667)
Cumulative effect of change in accounting,
net of tax -- -- 835
-------- -------- --------
Net income (loss) $ 704 $ 5,119 $(23,502)
======== ======== ========
Earnings per share:
Income (loss) before cumulative effect of
change in accounting $ 0.07 $ 0.48 $ (2.65)
Cumulative effect of change in accounting -- -- (0.10)
-------- -------- --------
Net income (loss) per share $ 0.07 $ 0.48 $ (2.75)
======== ======== ========
Weighted average common shares
and share equivalents outstanding 10,549 10,645 8,554
======== ======== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
21
<PAGE>
<TABLE>
CALIFORNIA MICRO DEVICES CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in Thousands Except Share Data)
<CAPTION>
Common Stock
------------
Number of Accumulated
Shares Amount Deficit Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
Proposed 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
Exercise of stock options 214,389 885 -- 885
Revision of settlement with shareholders (891,304) (5,000) -- (5,000)
Employee Stock Purchase Plan 108,951 592 -- 592
Stock award 3,000 20 -- 20
Unrealized gain on
available-for-sale investments, net -- -- 29 29
Net income -- -- 704 704
----------- ----------- ----------- -----------
Balance, March 31, 1997 9,741,124 $ 51,939 $ (28,359) $ 23,580
=========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
22
<PAGE>
<TABLE>
CALIFORNIA MICRO DEVICES CORPORATION
STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
<CAPTION>
Twelve Twelve Nine
Months Months Months
Ended Ended Ended
March 31, March 31, March 31,
1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income /(loss) $ 704 $ 5,119 $(23,502)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,191 1,763 1,362
Issuance of common stock - settlements -- -- 12,500
Issuance of cash - settlements (5,000) -- --
Issuance of common stock - 401(k) match -- -- 186
Net (increase)/decrease in inventories (1,903) (2,193) 430
Net (increase)/decrease in accounts receivable 562 (1,297) 3,105
Net (increase)/decrease in refundable income taxes and other (289) 4,860 (4,482)
Net increase/(decrease) in trade accounts payable and other
current liabilities (3,491) 1,299 638
Net decrease in other long-term assets 113 145 158
Increase/(decrease) deferred margin on distributor sales (463) (118) 1,157
-------- -------- --------
Net cash provided by/(used in) operating activities (7,576) 9,578 (8,448)
-------- -------- --------
Cash used in investing activities:
Securities purchases (3,940) (25,833) (14,297)
Securities sales 18,140 13,690 8,798
Capital expenditures (6,011) (4,412) (325)
Net change in restricted cash (1,998) 84 226
-------- -------- --------
Net cash provided by/(used in) investing activities 6,191 (16,471) (5,598)
-------- -------- --------
Cash flows used in financing activities:
Net repayments of capital lease obligations (910) (2,107) (2,182)
Repayments of debt (372) (539) (393)
Proceeds from issuance of common stock 1,498 495 89
-------- -------- --------
Net cash provided by/(used in) financing activities 216 (2,151) (2,486)
-------- -------- --------
Net decrease in cash and cash equivalents (1,169) (9,044) (16,532)
Cash and cash equivalents at beginning of period 1,512 10,556 27,088
-------- -------- --------
Cash and cash equivalents at end of period $ 343 $ 1,512 $ 10,556
======== ======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 896 $ 1,068 $ 1,194
Income taxes paid/(refund) $ (60) $ (3,757) $ 2,730
Supplemental disclosures of non-cash investing and financing activities:
Capital expenditures financed through capital lease obligations $ 1,455 $ -- $ 301
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
23
<PAGE>
CALIFORNIA MICRO DEVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS
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. 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 1997 and fiscal 1996 refer to the twelve months ended March 31, 1997 and
1996, and fiscal 1995 refers to the nine months ended March 31, 1995.
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.
Short-term Investments
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.
24
<PAGE>
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:
Building 40 years
Machinery and equipment 3 - 7 years
Leasehold improvements 4 years
Furniture and fixtures 7 years
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
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. Pro forma 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
On December 16, 1996, the Company reduced the previously issued 1,500,000 shares
of common stock being held in trust, in connection with the anticipated
settlements of shareholder class action, to 608,696 shares. The 1,5000,000
shares have been included in shares outstanding and in the computation of
weighted average common and common share equivalents outstanding beginning with
their issuance in May 1995 until December 16, 1996. The 608,696 shares have been
included in shares outstanding and in the computation of weighted-average shares
and share equivalents outstanding since December 17, 1996. See Note 16 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.
Employee Stock Plans
The 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 years beginning after December 15, 1995. As allowed under SFAS 123, the
Company continues to account for its employee stock plans in accordance with the
provision of APB 25 and has adopted the disclosure provisions of SFAS 123. See
Note 15 of Notes to Financial Statements.
25
<PAGE>
Adoption of FASB 128
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact of Statement 128 on the calculation
of primary earnings has no material impact for fiscal 1997 and an increase of
$0.03 for fiscal 1996. The impact of Statement 128 on the calculation of fully
diluted earnings per share for fiscal 1997 and fiscal 1996 is not material.
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.
3. HITACHI METALS, LTD.
The Company has a Joint Development Agreement (JDA) with Hitachi Metals Ltd.
(HML) , a significant shareholder. 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".
In May 1995, HML and the Company concluded negotiations to amend the terms of
its contractual arrangements with HML. The new agreement provided 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.
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 Metals, Ltd., and its subsidiary, Hitachi Kinzoku Shoji, Ltd.,
were $2.1 million, $1.2 million and $0.4 million in fiscal 1997, 1996 and 1995.
Trade accounts receivable from all HML entities at March 31, 1997 and 1996 were
$117,000 and $446,000, respectfully.
26
<PAGE>
4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The following is a summary of cash, cash equivalents and marketable securities
at March 31, 1997 and March 31, 1996 respectively (amounts in thousands):
March 31, March 31,
1997 1996
---- ----
Cash equivalents
Money market funds $ 1,370 $ 751
Commercial paper and repurchase agreements 973 761
Less:
Amount classified as restricted cash in
connection with class action settlement* (2,000) --
------- -------
Total cash equivalents $ 343 $ 1,512
======= =======
Short-term investments:
Auction rate preferred funds floating rate notes $ -- $ 7,900
U. S. Treasuries & U.S. Government agencies 5,523 11,721
Corporate bonds 944 1,017
------- -------
Total short-term investments $ 6,467 $20,638
======= =======
*See Note 16 of Notes to Financial Statements
<TABLE>
The following is a summary of available-for-sale securities at March 31, 1997
and 1996 (amounts in thousands):
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
March 31, 1997:
Commercial paper and repurchase agreements $ 973 $ -- $ -- $ 973
U.S. Treasuries & U.S. government agencies 5,503 20 -- 5,523
Corporate bonds 940 4 -- 944
------- ------- ------- -------
Total $ 7,416 $ 24 $ -- $ 7,440
======= ======= ======= =======
March 31, 1996:
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 1997 securities listed above, $3.5 million of debt securities (at
estimated fair market value) mature within one year and $3.9 million mature
between one and two years. Realized gains and losses on the sales of securities
are reported as other income and were not significant for all years presented.
See Note 5 of Notes to Financial Statements.
5. CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of 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. See Note 4 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,
27
<PAGE>
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.
6. 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 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
demand, and to consider reductions in sales price. The Company makes specific
provisions for the risk of inventory obsolescence based on backlog and 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.
28
<PAGE>
7. INVENTORIES
Inventories consist of the following (amounts in thousands):
March 31, March 31,
1997 1996
---- ----
Raw materials $1,316 $1,093
Work-in-process 3,821 3,949
Finished goods 3,706 1,898
------ ------
$8,843 $6,940
====== ======
8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (amounts in thousands):
March 31, March 31,
1997 1996
---- ----
Land $ 137 $ 137
Buildings 3,030 3,030
Machinery, equipment and tooling 20,017 15,070
Leasehold improvements 685 495
Furniture and fixtures 360 329
------- -------
24,229 19,061
Less accumulated depreciation and amortization 9,748 9,747
------- -------
$14,481 $ 9,314
======= =======
9. SHORT-TERM BORROWINGS
The Company has a bank line of credit, which expires July 31, 1997. 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 during fiscal 1997, 1996 and 1995.
10. 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 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):
Carrying Fair
Amount Value
------ -----
Long-term debt (excluding capital leases) $ 7,490 $ 7,889
29
<PAGE>
11. LONG-TERM DEBT
Long-term debt consists of the following (amounts in thousands):
March 31, March 31,
1997 1996
---- ----
Notes payable at 8.6%, due through August 1, 1996 $ -- $ 212
Industrial revenue bonds at 10.5%, due through March 1, 2018 7,430 7,535
Industrial revenue bonds at 12%, due through March 1, 1998 60 115
------ ------
7,490 7,862
Less current maturities 175 372
------ ------
$7,315 $7,490
====== ======
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
$175,000 in fiscal 1998 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, 1997, cash of $903,000 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, 1997. As a result of these covenants, the Company's
ability to pay dividends is restricted.
Future maturities of long-term debt at March 31, 1997, are as follows (amounts
in thousands):
1998 $ 175
1999 130
2000 140
2001 155
2002 170
2003 and thereafter 6,720
------
$7,490
======
12. LEASE COMMITMENTS
Operating Leases
The Company leases certain manufacturing facilities under operating leases
expiring in 2001 and 2002. During 1997, the Company had sublet the leased
facility in Arizona for the remaining period of the lease. The rents received
should equal the amounts owed by the Company during the remaining lease period.
Future gross minimum lease payments, under non-cancelable operating leases, for
the years ended March 31 are as follows (amounts in thousands):
1998 $ 545
1999 552
2000 563
2001 580
2002 414
2003 and thereafter 104
------
$2,758
Sublease receipts (704)
------
$2,054
======
Rent expense net of sublease income was $524,352, $478,427 and $1,393,331 in
fiscal 1997, 1996, and 1995, respectively.
30
<PAGE>
Capital Leases
Obligations under capital leases are at interest rates ranging from
approximately 7% to 10%, depending primarily upon the purchase option
arrangements at the end of the lease term, and are due in monthly installments
through April 2002. Future minimum lease payments, under capital leases for the
years ended March 31, are as follows (amounts in thousands):
1998 $ 704
1999 423
2000 406
2001 405
2002 145
---------
Total minimum lease payments 2,083
Less amount representing interest 329
---------
Present value of net minimum lease payments 1,754
Less current portion 570
---------
$1,184
=========
Machinery and equipment under capital leases are as follows (amounts in
thousands):
March 31, March 31,
1997 1996
---- ----
Cost $ 3,902 $ 4,745
Less accumulated amortization 973 2,893
------------ ------------
$ 2,929 $ 1,852
============ ============
13. INCOME TAXES
Due to the availability of tax loss carryforwards, there was no provision for
income taxes for the periods ended March 31, 1997 and 1996. For the nine months
ended March 31, 1995, there was a $50,000 current provision for foreign income
taxes.
<TABLE>
A reconciliation of the Company's effective tax rate to the federal statutory
rate is as follows:
<CAPTION>
Twelve Months Twelve Months Nine Months
Ended Ended Ended
March 31, March 31, March 31,
1997 1996 1995
------------- ------------- --------------
<S> <C> <C> <C>
Federal statutory tax 34% 34% (34)%
Losses with no current benefit - - 34
Utilization of loss carryforward (34) (34) -
------------- ------------- --------------
Effective income tax rate 0% 0% 0%
============= ============= ==============
</TABLE>
At March 31, 1997, and 1996 the Company had federal and state net operating loss
carryforwards of approximately $12,200,000 and $12,400,000 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 2011, except for certain state net
operating losses of approximately $4,800,000 which expire from 1999 through
2001.
31
<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):
March 31, March 31,
1997 1996
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 4,895 $ 3,848
Tax credit carryforwards 560 560
Inventory reserves 2,506 2,624
Bad debt reserves 233 442
Other non-deductible accruals and reserves 860 1,832
------- -------
Total deferred tax assets 9,054 9,306
Less valuation allowance (9,054) (9,306)
------- -------
Net deferred tax asset $ -- $ --
======= =======
The valuation allowance decreased by $252,000 during the year ended March 31,
1997. Approximately $430,000 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
shareholder settlement. See Note 16 of Notes to Financial Statements. Such
benefit will be determined when the settlement proceeds are distributed.
14. INTEREST INCOME AND OTHER, NET
<TABLE>
Interest income and other, net consists of (amounts in thousands):
<CAPTION>
Twelve Months Twelve Months Nine Months
Ended Ended Ended
March 31, March 31, March 31,
1997 1996 1995
------------------- ------------------- -----------------
<S> <C> <C> <C>
Interest income $1,024 $1,194 $ 870
Other income 330 1,563 199
------ ------ -------
$1,354 $2,757 $ 1,069
====== ====== =======
</TABLE>
Interest income reflects the amounts earned from investments in short-term
securities. Other income for fiscal 1997 includes $184,000 from the sale of the
final portion of the Company's interest in Cell Access. 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.
15. EMPLOYEE BENEFIT PLANS
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 have been made in cash. During
fiscal 1997, 1996, and 1995, the Company expensed $136,000, $163,000, and
$186,000, respectively, relating to its contributions under the plan.
32
<PAGE>
Nonqualified Deferred Compensation Plan
In April 1997, the Company implemented a nonqualified deferred compensation plan
for the benefit of eligible employees. This plan is designed to permit certain
discretionary employer contributions in excess of the tax limits applicable to
the 401(k) plan and to permit employee deferrals in excess of certain tax
limits. As of March 31,1997, no Company expense was taken.
Stock Option Plans
The 1995 Stock Option Plan amended as of July 26, 1996 (the "1995 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 1995
Plan provides for options for the purchase of shares to be granted to employees
and certain consultants to the Company. The 1995 Directors Plan amended as of
July 26, 1996 (the "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 Plan, 1,850,614 shares of common stock are reserved for
issuance. The 1995 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 Directors Plan, 166,875 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.
<TABLE>
The following is a summary of stock option activity and related information:
<CAPTION>
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Options:
Outstanding at
beginning of year 1,841,864 $5.7560 1,603,195 $ 5.2831 1,433,091 $7.5603
Granted 515,517 $6.7402 759,700 $ 8.2655 1,262,175 $4.1250
Exercised (214,389) $4.1285 (124,684) $ 3.9663 (15,817) $5.6611
Canceled (110,546) $6.4146 (396,347) $10.4849 (1,076,254) $7.4495
--------- ------- --------- -------- --------- -------
Outstanding at
end of year 2,032,446 $6.1255 1,841,864 $ 5.7560 1,603,195 $5.2831
========= ======= ========= ======== ========= =======
</TABLE>
33
<PAGE>
<TABLE>
The following table summarizes information about options outstanding at March
31, 1997:
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- -----------------------------------
Weighted-Average
Remaining
Contractual Weighted-Average Weighted-Average
Number Life Exercise Number Exercise
Range of Exercise Prices Outstanding (Years) Price Exercisable Price
- ------------------------------- ---------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$2.0000 - $3.6250 14,165 1.82 $3.5296 14,165 $3.5296
$3.9300 - $3.9300 725,879 7.70 $3.9300 345,730 $3.9300
$4.1250 - $6.0000 467,502 7.91 $5.5536 114,498 $4.9271
$7.5000 - $8.5000 431,450 9.06 $8.0115 61,655 $8.2449
$8.6250 - $12.7500 393,450 8.27 $8.8810 143,255 $8.9053
--------- ---- ------- ------- -------
$2.0000 - $12.7500 2,032,446 8.11 $6.1255 679,303 $5.5305
========= ==== ======= ======= =======
</TABLE>
Employee Stock Purchase Plan
The 1995 Employee Stock Purchase Plan (the "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 Purchase 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 Purchase Plan terminates on February 9, 2005, or earlier at
the discretion of the Company's Board of Directors. There were no shares
purchased under the Purchase Plan at March 31, 1996. As of March 31, 1997,
141,049 shares are reserved for issuance.
The following is a summary of stock purchased under the plan:
1997 1996
-------------- -------------
Aggregate purchase price $644,427 -
Shares purchased 108,951 -
Employee participants as of March 31 150 139
Stock-Based Compensation
As permitted under Statement of Financial Accounting Standards No. 123 ("SFAS
123"),"Accounting for Stock-Based Compensation," the Company has elected to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25"), and related Interpretations, in accounting for
stock-based awards to employees. Under APB 25, the Company generally recognized
no compensation expense with respect to such grants.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS 123 for grants after April 1, 1995, as if the Company
had accounted for its stock-based compensation under the fair value method of
SFAS 123. The fair value of the Company's stock-based grants was estimated using
a Black-Scholes option pricing model. The Black-Scholes option valuation model
was developed for use in estimating the fair value of traded options which have
specific vesting schedules and are ordinarily not transferable. Because the
Black-Scholes model requires the input of highly subjective assumptions,
including the expected stock price volatility which can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily
34
<PAGE>
<TABLE>
provide a reliable single measure of the fair value of its grants. The fair
value of the Company's stock-based grants was estimated assuming no expected
dividends and the following weighted-average assumptions:
<CAPTION>
Options Purchase Plan
--------------------------------- --------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Expected Life Years 3.17 3.15 .5 .5
Volatility 64.68% 65.45% 64.43% 64.14%
Risk-Free Interest Rate 6.20% 5.61% 5.25% 5.19%
</TABLE>
For pro forma purposes, the estimated fair value of the Company's stock-based
grants is amortized over the options' vesting period (for stock options granted
under the 1995 Plan and the Director Plan) and the six month purchase period
(for stock purchases under the Purchase Plan). No purchases were made under the
Purchase Plan prior to fiscal year 1997. The Company's pro forma information
follows, amounts in thousands except per share amounts):
1997 1996
------------- ------------
Net income (loss) - pro forma ($1,148) $4,346
Primary net income (loss) per share - pro forma ($0.11) $ 0.41
Because SFAS 123 is applicable only to options granted subsequent to March 31,
1995, its pro forma effect will not be fully reflected until approximately the
year 2000. The weighted-average fair value of stock options and stock purchase
rights granted in fiscal 1997 was $3.24 and $2.35 per share, respectively.
16. 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 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 had 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), personal
to the class member, and not transferable, which would have entitled the holder
thereof to receive
35
<PAGE>
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 were lower than $8.00. The total cost of the proposed
settlement was $13.0 million, which was expensed in the fiscal year ended March
31, 1995, financial statements.
On February 2, 1996, Judge Vaughn R. Walker of the United States District Court
for the Northern District of California denied a motion for preliminary approval
of the 1995 proposed settlement. On May 2, 1996, Judge Walker ordered this
matter to Judge Eugene F. Lynch for settlement conferences which resulted in a
new proposed settlement announced by the Company on September 16, 1996. All
defendants, other than Mr. Desaigoudar, participated in the new settlement.
On March 7, 1997, Judge Walker orally granted plaintiffs' motion for final
approval of the new settlement. On May 20, 1997, the Court issued a written
order certifying the proposed class for settlement purposes and approving the
settlement. Members of the class have thirty (30) days to appeal from that
order; however, the Company views such an appeal as unlikely, in light of the
overwhelming acceptance of the settlement.
Generally, the Company's contribution towards the new settlement calls for the
payment of $6,000,000 in cash and the issuance of 608,696 new shares of the
Company's common stock to the class. Each new share will be accompanied by a
Contingent Value Right (CVR), personal to the shareholder, that entitles the
shareholder to receive the difference between $11.50 and the highest 20 day
average trading price of the Company's common stock (assuming the average price
is less than $11.50) over the three years following the issuance of the CVR. The
CVR expires at the end of the three year period or when the $11.50 price is met,
whichever occurs first. In addition, the Company will pay $2,000,000 into a
restricted account as a guarantee for performance under the CVR. The cash will
be returned to the Company, without interest, if and when the CVR is
extinguished.
The terms of this settlement differ from those negotiated in 1995. However, the
aggregate amount of consideration to be paid by the Company, in cash and common
stock, is the same in both settlements. The new settlement reflects a
substantial reduction in the common stock component (from 1,500,000 shares down
to 608,696 shares) and a substantial increase in cash (from $1,000,000 to
$6,000,000). Pursuant to the terms of the agreement, the Company has deposited
the cash component of the settlement in a trust account controlled by counsel
for the class and has recorded as restricted cash the $2,000,000 guarantee of
performance under the CVR. If the new settlement does not become final, these
monies will be returned, with accrued interest, to the Company.
A putative shareholders derivative action was filed against certain former and
present officers and directors of the Company on May 25, 1995, in Santa Clara
County Superior Court. Plaintiff subsequently agreed to dismiss from the case,
without prejudice, all of the outside directors named in the complaint; the only
current Company officer named as a defendant is the Company's General Counsel.
The stay previously granted in this matter has lapsed and discovery is being
undertaken by the plaintiff.
The Company continues to cooperate with the pending investigations of certain of
its former officers by the Justice Department and the SEC. The Justice
Department has advised the Company that it is not currently a target or subject
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.
36
<PAGE>
17. SEGMENT INFORMATION
The Company's principal operations are conducted in the United States. Foreign
sales, primarily in Europe, Canada and Asia, aggregated approximately 36%, 31%,
and 33% of net product sales for fiscal 1997, 1996, and 1995. Foreign currency
transaction gains and losses are not significant.
During fiscal 1997, Motorola accounted for 11% of the net product sales. During
fiscal 1996 and 1995, no customer accounted for more than 10% of net product
sales.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There were no disagreements with the independent accountants in the three
periods ended March 31, 1997, March 31, 1996, and March 31, 1995.
In January 1995, Coopers & Lybrand L.L.P. resigned as the Company's independent
accountants and were replaced by Ernst & Young LLP.
37
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is set forth in the 1997 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 1997 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 1997 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 1997 Proxy Statement
under the caption "Certain Relationships and Transactions" and is incorporated
herein by reference.
38
<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:
<TABLE>
The exhibits listed below are filed herewith or incorporated by
reference as indicated. pursuant to Regulation S-K. The exhibit number refers to
number indicated pursuant to the Instructions To The Exhibit Table for
Regulation S-K.
<CAPTION>
Exhibit
Number Description Document if Incorporated by Reference
------------- ---------------------------------- -----------------------------------------------------
<S> <C> <C>
3(i) Articles of Incorporation, as Exhibit 3(i) to the Company's Annual Report on Form
amended. 10K (File No. 0-15549) for the fiscal year ended
March 31, 1995, ("1995 Form 10-K).
3(ii) By-Laws, as amended. Exhibit 3(ii) to the Company's Annual Report on
Form 10K (File No. 0-15549) for the fiscal year
ended March 31, 1995, ("1995 Form 10-K).
11 Statement re: computation of
per share earnings.
18 Letter re: change in accounting Exhibit 18 to the Company's Annual Report on Form
principles. 10K (File No. 0-15549) for the fiscal year ended
March 31, 1995, ("1995 Form 10-K).
27* Financial Data Schedule
</TABLE>
(b) 1. Reports on Form 8-K:
On March 11, 1997, the Company filed a Form 8-K, under Item 5,
reporting the release of certain information regarding the
approval of the settlement of class action lawsuits previous
filed against it,
*Exhibit on EDGAR filing only.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement in connection with its 1997 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, 1997)
are incorporated by reference into Part III.
39
<PAGE>
SCHEDULE 2
CALIFORNIA MICRO DEVICES CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
Year Ended March 31, 1997, Year Ended March 31, 1996, and
Nine Months Ended March 31, 1995
(Amounts in Thousands)
<CAPTION>
Additions
Balance at Charged to Charged to Balance
Beginning Cost and Other At End of
of Year Expense Accounts Deductions (1) Year
--------------- --------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1997
Allowance for doubtful accounts
(deducted from accounts receivable) $ 900 $ (15) $ - $ 448 $ 437
====== ====== ==== ====== =====
Year ended March 31, 1996
Allowance for doubtful accounts
(deducted from accounts receivable) $ 832 $ (345) $ - $ (413) $ 900
====== ======= ==== ======== =====
Nine months ended March 31, 1995
Allowance for doubtful accounts
(deducted from accounts receivable) $ 500 $1,230 $ 443 $1,341 $ 832
====== ======= ====== ======= =====
<FN>
(1) Represents write-offs net of recovery of receivables.
</FN>
</TABLE>
40
<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 22nd day of May
1997.
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 22nd day of May 1997.
By:
/s/ Jeffrey C. Kalb President and Chief Executive Officer and Director
- ---------------------- (Principal Executive Officer)
JEFFREY C. KALB
/s/ John E. Trewin Vice President and Chief Financial Officer
- ---------------------- (Principal Financial and Accounting Officer)
JOHN E. TREWIN
/s/ Wade Meyercord Chairman of the Board
- ----------------------
WADE MEYERCORD
/s/ Angel G. Jordan Director
- ----------------------
ANGEL G. JORDAN
/s/ David B. Schoon Director
- ----------------------
DAVID B. SCHOON
/s/ Stuart Schube Director
- ----------------------
STUART SCHUBE
/s/ John Sprague Director
- ----------------------
JOHN SPRAGUE
A majority of the Board of Directors.
41
EXHIBIT 11
<TABLE>
CALIFORNIA MICRO DEVICES CORPORATION
Computation of Per Share Earnings
(Amounts in Thousands, Except per Share Data)
<CAPTION>
Twelve Months Twelve Months Nine Months
Ended Ended Ended
March 31, 1997 March 31, 1996 March 31, 1995
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Net income (loss) $ 704 $ 5,119 $(23,502)
======== ======== ========
PRIMARY:
Weighted average common shares outstanding 10,234 10,035 8,554
Common equivalents attributable to:
Options 315 610 --
-------- -------- --------
Total weighted average common and
common equivalent shares outstanding 10,549 10,645 8,554
======== ======== ========
Net income (loss) per share $ 0.07 $ 0.48 $ (2.75)
======== ======== ========
FULLY DILUTED:
Weighted average common shares outstanding 10,234 10,035 8,554
Common equivalents attributable to:
Options 392 658 --
-------- -------- --------
Total weighted average common and
common equivalent shares outstanding 10,626 10,693 8,554
======== ======== ========
Net income (loss) per share $ 0.07 $ 0.48 $ (2.75)
======== ======== ========
</TABLE>
42
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
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 and in the
Registration Statement on Form S-8 (No. 333-10257) pertaining to the 1995 Stock
Option Plan, as amended, and 1995 Non-Employee Directors' Stock Option Plan, as
amended, of California Micro Devices Corporation of our report dated April 29,
1997, 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, 1997.
/s/ERNST & YOUNG LLP
San Jose, California
May 22, 1997
43
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
March 31, 1997 10K FDS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 343
<SECURITIES> 6,467
<RECEIVABLES> 4,375
<ALLOWANCES> 437
<INVENTORY> 8,843
<CURRENT-ASSETS> 20,465
<PP&E> 24,229
<DEPRECIATION> 9,748
<TOTAL-ASSETS> 38,270
<CURRENT-LIABILITIES> 14,690
<BONDS> 0
0
0
<COMMON> 51,939
<OTHER-SE> (28,359)
<TOTAL-LIABILITY-AND-EQUITY> 38,270
<SALES> 31,506
<TOTAL-REVENUES> 32,936
<CGS> 21,255
<TOTAL-COSTS> 21,255
<OTHER-EXPENSES> 10,238
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 739
<INCOME-PRETAX> 704
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 704
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
