Financial Review
1 Description of Business
12 Properties
12 Legal Proceedings
14 Commong Stock and Related Matters
14 Five Year Selected Financial Data
15 Management's Discussion and Analysis
19 Financial Statements
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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, 1999
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 (IRS Employer
of incorporation) 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 ___
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 ___
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 31, 1999, was approximately $16,090,000 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 10% 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, 1999, the number of shares of the Registrant's common stock
outstanding were 10,116,144.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the Registrant's Annual Meeting of Shareholders to be
held August 5, 1999.
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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 Company's ability to attract and retain high quality people, 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, expense reductions, year
2000 issues, 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
California Micro Devices Corporation ("California Micro Devices", "CAMD" or "the
Company") is the acknowledged industry leading supplier of Thin Film Integrated
Passive Devices ("IPD's") and complimentary semiconductor solutions. The Company
serves Original Equipment Manufacturers ("OEM's"), Contract Manufacturers
("CM's") and End User electronic systems manufacturers who need higher density,
higher performance, lower cost, unique functionality, and faster time to market
for their passive and combined passive and semiconductor solutions. The Company
combines multiple Thin Film Passive Electronic Components (resistors and
capacitors) and/or semiconductor devices into single chip solutions for many of
the industry's densest, highest performance electronic applications. In the last
two years the Company has focused its expertise on providing high volume, cost
effective solutions for computer systems and peripherals, high performance
networking, and the mobile communications markets.
The Company's IPD's are application specific, high volume standard and lower
volume custom products. They represent complete solutions to the electronic
problems of termination, filtering, electrostatic discharge ("ESD") protection,
and power switching that plague many system designers. California Micro Devices
uses its semiconductor technologies to complement and enhance its IPD's and uses
its extensive thin film technology to enhance the capabilities of its
semiconductor products. Most of the systems in the Company's target markets
include a core of highly integrated integrated circuits ("IC's"), accompanied by
discrete passive components, semiconductors and low integration level IC's. The
Company's goal is to service the need for the integration of these companion
components. In recent years, these "un-integrated devices" have come to dominate
the size and significantly impact the cost of most systems, providing a value
added opportunity for the Company.
Unlike traditional discrete passive components that were developed during the
age of the transistor, IPD's are targeted to complement many of todays 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 that the Company
can bring to almost any electronics application.
During fiscal year 1999, the Company introduced additional semiconductor
products designed to provide ESD protection to today's faster, more sensitive
electronic systems. In addition, the Company developed and introduced new
semiconductor devices in the areas of Power Management and Operational
Amplifiers which target the same systems as the IPD's.
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California Micro Devices designs, manufactures, and sells certain older
semiconductor products (primarily analog and mixed signal products for the
telecommunications industry). These sales continue to be a significant portion
of the Company's business, accounting for approximately 35% of product sales
over the last three fiscal years. The sales of these older products, which have
historically constituted the bulk of the Company's semiconductor revenue,
continue to decline. Sales of new P/Active(R) products, plus the revenue from
foundry services, now make up the majority of the Company's semiconductor sales.
The Company was incorporated in 1980, and has been a public company since 1986.
It utilizes 86,000 square feet of facilities in Milpitas, California and Tempe,
Arizona.
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, the overall demand for
these products has continued to grow, even with the transition to higher levels
of semiconductor integration. For many years the number of passive components in
systems such as personal computers decreased, offset in the market by increases
in the numbers of systems sold. However, in recent years there has been a
reversal of this trend. For example, the number of passives in a PC reached a
minimum with the 486 generation and is now showing dramatic increases in the
Pentium(R), Pentium Pro(R), Pentium II(R),1 and equivalent workstation
generations and servers. Similar trends are occurring in other areas such as
cellular phones, where multiple bands, new functionality and higher frequencies
are being incorporated in state of the art systems, dramatically increasing the
numbers of 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. Pricing pressures have been extremely severe
for the last couple of years, but unit consumption continues to grow
significantly. This is 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 that continued unabated through the Company's
fiscal 1999, so that even in the face of increased unit demands, total industry
revenue has declined. Although California Micro Devices only addresses a small
portion of the overall market for passive components, it is focused on some of
the largest and most rapidly growing segments. The Company's prospects are
dependent on its ability to penetrate customers and applications in the face of
this intense competitive price pressure.
The target applications for the Company's IPD's are those traditionally served
by multi-layered ceramic capacitors ("MLCs") and thick-film resistors
interconnected on PC boards. Passive components manufactured for placement on PC
boards, which comprise most of the worldwide market for resistors and small
value capacitors, are traditionally discrete components, able to perform only a
single function per device. The direction among the manufacturers of these
devices has been to make them smaller and cheaper. However, these devices are
reaching physical size and cost limits. In the last couple of years, small
levels of integration, normally 4 or 8 components per device, have been gaining
popularity in the discrete passives market. This trend began initially in the
resistor market, but in the last year has become more common in some small value
capacitors. This low but increasing level of integration has significantly
increased the competitiveness of the traditional technologies compared to the
Company's products, but the total conversion costs of the competitor's devices
(the total cost to use them), continues to exceed the total cost of the
component by factors of 5X to 20X. This provides the opening for the Company's
higher levels of integration, which is further complemented by the combination
of passive and active components. This combination is beyond the capability of
the traditional passive components.
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1 Pentium, Pentium Pro, and Pentium II are registered trademarks of Intel
Corp.
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The low level of integration found in traditional passive components has several
limitations. To date, these products offer only resistors or capacitors, and not
combinations of the two. Also, these products are single valued arrays, meaning
that all of the resistors or capacitors have the same value. 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. 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 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 California Micro
Devices looks to exploit. Most of the traditional thick film passive
manufacturers have recognized the advantages of thin film devices, announced
their intentions to enter the market, and acknowledged the Company's leadership
in the field. Standards organizations such as the Electronic Industries
Associate (EIA) in which, California Micro Devices plays a significant role, are
now drafting standards for IPD's, a sign of the increasing role that these
devices are beginning to play in the industry. The first of these standards was
issued during the company's 1999 fiscal year.
California Micro Devices' Goal/Strategies
The Company's goal, as the leader in Integrated Passive Devices, is to create a
high growth, high profitability company by converting significant portions of
the thick film passive market to its thin film, Integrated Passive technology.
The Company's strategy for achieving this is to target specific market segments
which place a high value on the Company'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 is also
using its base of thin film technology to enhance its semiconductor technology
and to provide components that complement 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 and servers, cellular
phones and their infrastructure, pagers, networking, wireless computer networks
and high performance graphics workstations, all of which have an increasing need
for higher performance and higher density passive components. The Company
attempts to identify common, high volume applications or, when appropriate,
designs customized solutions to meet particular customer applications.
Combine Semiconductor Functions with its Passives and vice versa -
Whenever it is possible to combine semiconductor functions with its passive
technologies, the Company is able to create unique value added for its customers
while at the same time generally improving its own margins.
Commit to Technology Leadership - California Micro Devices uses its
extensive thin film processing and materials expertise in combination with its
semiconductor capabilities to develop and expand its product technology. For
example, during fiscal 1999, the Company announced the introduction of its
second generation P/Active(R) RC technology that effectively doubled the
capacitance density, which could be achieved without sacrificing other
characteristics such as reliability and high frequency functionality. This
improved processing technology allowed the Company to expand its product
capabilities, integrate more devices in a single package, and serve a broader
segment of the passive component markets by lowering the cost of manufacturing.
This process development strategy is the equivalent of Moore's law in the
semiconductor industry, meaning the ability of the industry to double the number
of transistors on a chip every 18 months. 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 with passives), into its P/Active(R) solutions. In addition, the Company
has been developing new semiconductor products for the mobile telecommunications
market and other custom applications.
Enhance Position as Low Cost Solution Provider - California Micro
Devices believes that, through the use of its thin film technology, it can
provide one of the lowest total cost solutions for its customer's passive
component needs. Having made significant capital and technology investments to
enhance its position during fiscal year 1997, the Company embarked on an
aggressive pricing policy in fiscal years 1998 and 1999 aimed at penetrating
markets in which cost savings are a dominant driver. While this has short-term
negative impacts, the Company believes that this strategy is necessary to gain
market acceptance for its products outside the traditional and more limited
applications
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which integrated passive have fulfilled. The resulting increases in volume sales
are expected to more than offset the effects of this pricing strategy.
Develop Highly Responsive Product Development and Production
Capabilities - Passive component usage is not typically pre-planned to the
extent that semiconductor requirements are anticipated. This is because most
passive components are standard, off the shelf components, not solutions to
problems. This creates a need for extremely fast new product development to be
able to service customer requirements at the tail end of their design process.
California Micro Devices believes that solving this response problem is key to
reducing the customer's risk profile in using IPD's and has been making
investments in both development capability and the inventory planning and
production capabilities to service this need and create a unique position for
the Company.
Leverage the Volume Capabilities of California Micro Devices'
Technology and Facilities - The Company has historically had underutilized
fabrication facilities, both in Tempe and in Milpitas (both currently 25% to 30%
utilization). The Company is taking advantage of this capability to be
aggressive on volume pricing. It is also doing foundry work (contract wafer
manufacturing) for other semiconductor manufacturers to leverage the fixed
investment. While these activities provide a lower average margin than the
Company's traditional products, they provide an opportunity for additional fixed
cost absorption and higher incremental margin, while the Company fine tunes its
manufacturing operations for even lower costs.
P/Active(R) Products
In the spring of 1996, California Micro Devices introduced its new P/Active(R)1
family of integrated passive components. These devices represent a major step
forward in the development of high performance, lower cost passive components.
In fiscal year 1998 these products began to generate revenue and currently
represent the most rapidly growing segment of the business.
Historically, integrated thin film passive components have been built on silicon
wafers, but the silicon was incidental to the devices themselves. Silicon wafers
are relatively cheap, readily available, of 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, California Micro Devices 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. The Company 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/Active(R) family recognizes the power of this
concept and extends it further. In the P/Active(R) 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 enhance and control the electrical 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.
In summary, California Micro Devices 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. In doing so, it extracts the full measure of capability from
the silicon substrate to provide customer solutions that have performance
exceeding the limitations of traditional devices. The Company's semiconductor
capabilities are central to this solution.
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1 P/Active (R) is a registered trademark and IPEC and PAC are trademarks of
California Micro Devices.
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For the last year, the Company has focused much of its development efforts on
using the thin film passive technology to provide enhancement to semiconductor
devices. The Company believes that this allows for greater levels of integration
and creates unique opportunities for the Company, not serviceable by the
traditional passives suppliers and by only a small number of semiconductor
companies.
California Micro Devices Advantages
The Company integrates multiple passive elements and small-scale integration
semiconductors into a single integrated circuit. The Company believes that its
thin film products have the following desirable advantages over traditional
thick film technology components:
Smaller Size for Miniaturization and Portability - Customer demand for
smaller, more portable products and more functionality within a given space has
created a need to reduce component size. Discrete passive components typically
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 devices on a single integrated circuit reduces
the size and weight of the passive components. This has been the most important
factor in the Company's sales to date. For instance, cellular phones generally
require hundreds of discrete semiconductors and passive components, which can
consume as much as 2/3 of the PCB space. Even one of the Company's older
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 in
an attempt to provide space savings. But such tiny devices create assembly
rework and reliability problems for manufacturers, which significantly increases
costs. It appears that discrete passive components are reaching the limits of
size reduction and there is increasing interest in integrating more components
in a given package as the Company is doing. The traditional passives
manufacturers have begun to introduce their own limited levels of integration as
well.
Lower Total Cost Solutions - Manufacturers of electronic products face
intense price competition, especially in the last couple of years. By
integrating multiple passive elements onto 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 as many as
76 components in a single surface mount package - can be as much as 75% less
than the cost of purchasing and installing an equivalent number of thick film
discrete elements. The Company's Super PAC(TM) 1284 solution for the parallel
ports of PC's and Workstations replaces 25 discrete resistors, 17 capacitors,
and the equivalent of 34 ESD protection diodes with one miniature IC package.
The customer also realizes further cost savings by reducing the size of the
printed circuit board, and by eliminating board interconnection. Marketing this
advantage effectively to potential customers remains one of the Company's most
significant challenges as the savings in manufacturing time and effort and space
must be demonstrated to the customer rather than simply comparing the cost of
the components.
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 inconsistencies in characteristics
between devices and the PCB's on which they are used. These problems often keep
higher frequency systems from operating to their full capability. 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 PAC(TM) RC
family of filters operates properly at up to 10 times the frequency of
traditional discrete components. Other devices such as the PAC(TM) RG have been
characterized at frequencies up to 10 GHz (well beyond the functional limits of
traditional devices) and are being adopted by some customers to achieve the
operating frequency they need for the operation of next generation systems.
Unique Electrostatic Discharge (ESD) Protection Capabilities - All of
California Micro Devices P/Active(R) family of products have been designed to
tolerate high levels of electrostatic discharge, and these capabilities are
constantly being enhanced to keep pace with increasingly stringent industry
requirements. Recently, the European Community has introduced new electrostatic
discharge requirements for systems aimed at improving system reliability in the
field. The Company has taken a leadership position in providing protection
devices, which meet the most stringent levels of these new standards, while
simultaneously increasing the ESD capabilities of its PAC(TM) RC family of
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products to not only survive the tests themselves, but also to help protect
other devices to which they might be connected.
EMI/RFI Filtering Capabilities - Electronic systems designed to operate
at high frequencies can emit high levels of Electromagnetic Interference/Radio
Frequency Interference ("EMI/RFI"). The Federal Communications Commission
("FCC") and the European Community strictly regulate these emissions. 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 costly delays in 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 10 times more than combinations of thick 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 portable electronic
equipment. The Company's new P/Active(R) filters are effective to over 3 GHz, as
much as 10 times the frequency at which traditional capacitors stop acting like
capacitors and start behaving like inductors (stop filtering). This can result
in fewer problems in final FCC testing.
Improved Reliability - 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. Depending on the system, over 40% of all system failures can
be attributed to poor interconnections. Increased integration, along with the
Company's use of reliable processes common to the semiconductor industry, reduce
the number of connections and 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.
Sales and Marketing
The Company has focused its marketing efforts in the areas of computers and
their peripherals, portable communications devices and their infrastructural
support, and networking systems. Additionally, the Company focuses its own
efforts on major world wide electronic system manufacturers who are considered
market leaders in these segments, and where the Company feels it has the
greatest opportunities and ability to influence the industry at large. This
often involves a longer design-in cycle, but has greater long-term business
potential.
The sales process requires that the Company achieve design wins in which its
products are specified for individual projects. The Company's products are
generally not specified without engineer to engineer contact, as well as strong
interaction with procurement, and sometimes other functions within the
customer's organization.
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 as necessary 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 1999, the Company further strengthened its applications
engineering effort to understand in detail the problems facing the users in its
chosen segments. The goal is to be able to specify and ultimately design
application specific passive networks, which satisfy the needs of multiple
customers. Progress in this area is particularly evident in the improved
strength of the Company's applications engineering group and the increased
numbers of application notes and seminars the group has completed. The Company
has become a value-added partner with some of its customers, as well as leading
vendors of semiconductor devices, to provide the knowledge and the passive
networks to complement the active devices in a system.
California Micro Devices sells its products to OEM's, distributors, and contract
manufacturers. 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 four regional sales offices throughout
the United States. 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,
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although normally not competing, products from different vendors to their
customers. This makes them ideal channels for opening the doors at customer
sites. Toward the end of fiscal year 1999 the Company also took actions to
increase the amount of direct presence it has in the field, with the intention
of providing a greater degree of the Company support and direction to the
representatives. The Company's major accounts are also supported by
headquarters' directed efforts of the sales, marketing and applications
engineering staff.
In fiscal 1999, the Company also added a dedicated Strategic Account Group to
service the top five account opportunities.
The Company sells through distributors, in the USA, 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. In the last year there has also been a
slight shift towards the use of distributors to support the short lead times
required by many contract manufacturers.
There is a distinct shift towards the use of contract manufacturing within the
Company's customer base, and the indications are that this trend will continue.
By the end of fiscal 1998 and continuing into fiscal 1999, a contract
manufacturer had become the Company's single largest direct purchaser of
product. In recognition of this trend, the Company established a contract
manufacturing account program at the end of fiscal 1999 to be able to further
develop sales opportunities in this arena.
The Company's foreign product sales accounted for 39%, 33%, and 37% of product
sales for fiscal years ended March 31, 1999, 1998, and 1997, 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.
In fiscal 1999, no one customer accounted for over 10% of net product sales. In
fiscal 1998, Bell Milgray Inc., a distributor, accounted for just over 10% of
net product sales. During fiscal 1997, Motorola accounted for 11% of the net
product sales.
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.
There has been a recent shift in customer ordering patterns that has lead to a
reduction in long term (i.e., 3 to 6 month) backlog, and an increase in turns
orders. Turns orders are customer requests for products that are made and
shipped within the same fiscal quarter. Recently, the Company's revenue from
turns orders has been more than 60% of the total quarter's revenue. Accompanying
this shift has been a substantial overall reduction in customer requested
lead-time. In light of the Company's manufacturing cycle time, these factors
have required the Company to rely heavily on forecasts.
Products
Thin Film Products
The Company's thin film product offerings fall into two categories:
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o The Company's new P/Active(R) family of components, which optimize high
frequency performance, density, reliability, and other capabilities. These
devices are application specific passive networks targeted to solve
industry standard applications or to complement the semiconductor offerings
of the industry's leading chip suppliers.
o Traditional custom products which are cost effective for customers with
unique high volume requirements or who can take advantage of the Company'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. into 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.
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 integrated passive 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 total capacitor market.
The Company sells these products both in standard semiconductor industry
packages, primarily Surface Mount Technology (SMT), and as un-packaged 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.
Historically, most of the Company's thin film business was custom in nature, and
typically a product was only sold to one customer. In late fiscal year 1997, the
Company began the effort to define standard products which would not only
provide a greater degree of stability to the overall revenue base, but could
also be used as technology drivers for improving the cost and allow the Company
to invest in refining the manufacturing process of individual products.
During fiscal year 1998, the Company announced a partnership with Flip Chip
Technologies and Avex Corporation targeted at providing flip chip integrated
passives for use in standard electronic systems. The success of this program and
its acceptance by the industry could have a significant impact on both the space
savings and cost savings ability of integrated passives. In response to customer
demand, in February 1999 the Company entered into a non-exclusive license
agreement with Flip Chip Technologies that provides the Company with access to
their Ultra CSP(TM) technology for internal manufacturing.
Semiconductor Products
The Company's semiconductor facilities are 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 that 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.
With the significant strengthening of its design resources during fiscal years
1998 and 1999, the Company has begun the development of a number of new
integrated circuit families. Two major new semiconductor product families were
developed and introduced in fiscal 1999: the power management solutions and the
Company's first operational amplifiers. The power management solutions address
the problems caused by the use of different or changing power
8
<PAGE>
supply voltages. Operational amplifiers are devices with a large number of uses
in the measurement of electrical signals.
The Company participates in the foundry business, in which wafers are fabricated
to customer specifications, using customer designed tooling. Most of these
products are built using unique processes which are not directly competitive
with the mainstream foundries in Southeast Asia and elsewhere. The Company's
intent is to do foundry work to leverage the under-utilization of its capacity
in Tempe, Arizona while it builds its own products and establishes relationships
with key partners.
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, process changes, as well as other factors that 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 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, 1999, was approximately 25% in
Tempe and 30% in Milpitas. Ramping up to 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. To maintain ISO 9000 certification, the Company must be
re-certified on a regular basis.
The Company 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 has also purchased
new equipment for some operations where it could be shown to be more cost
effective.
During fiscal year 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. This investment level declined
substantially in fiscal 1998 and 1999. Much of the Company's equipment is still
very old, resulting in the risk of higher maintenance costs, more downtime, and
in some cases the unavailability of spare parts or the expertise to maintain the
equipment. Selective investments in capital equipment enhance productivity,
improve costs, and increase the Company's revenue potential.
The Company uses subcontractors in Asia, primarily in Thailand and secondarily
in Malaysia, for assembly, packaging, and testing of most of its products.
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, economic and other risks. Also, due to its
volume of product, it is impractical for the Company to spread its use of
subcontractors over more than a few suppliers without significant increase in
its costs. Should the operations of its subcontractors be disrupted in both
Thailand and Malaysia, the Company would have to reevaluate its sources of
supply for these services. The volatility of the semiconductor industry has
occasionally resulted in shortages of subcontractor capacity and other
disruptions of supply. In recent years, capacity has been in ample supply in
most product types as a result of additional investments by vendors coupled with
a slowdown in the semiconductor industry growth rate.
The Company also "drop-ships" product from these foreign 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. In addition, the Company
maintains significant inventory of die at its foreign subcontractors, to
facilitate rapid response to customer demands for prompt shipment. The Company
monitors the financial health of its Southeast Asian vendors in an attempt to
anticipate any financial problems there.
9
<PAGE>
Management Information Systems
In the last half of fiscal 1996, the Company installed new management
information systems for work in process tracking, order processing, and
financial management. During fiscal years 1997 and 1998, these systems were
solidified and new capabilities installed. The Company is now able to analyze
costs and variances at the detailed operational level and is using these tools
for cost analysis and reduction. Also, the new systems provide greatly improved
insight into customer order patterns and requirements.
During fiscal 1998, the Company established a web site on the Internet and this
has become an extremely effective method of communicating with all of the
Company's constituents. Use by customers has exceeded expectations and the
Company is investing in updating and expanding its use of the Internet. The
Company's website can be found at WWW.CALMICRO.COM. Both Internet and the
internal networks have significantly improved the Company's operations. In
fiscal 1998, the Internet was combined with the Company's MIS systems to provide
efficient low cost methods of implementing production control techniques around
the world.
For a description of the Company's position on the "Year 2000" please see Item 7
"Impact of the Year 2000" in "Management's Discussion and Analysis of Financial
Conditions and Results of Operations."
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 are or
will be providing thin film products in addition to their traditional thick film
devices. The Company has seen only sporadic thin film competition, but continues
to believe that this competition will become more prominent. From information
the Company has, most of these competitors are trying to emulate the Company's
traditional product line. Two competitors have been successful in imitating the
Company's first generation P/Active(R) products, but still lag behind the
Company with respect to its more recent offerings.
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 targets. Competitors include:
AVX/Kyocera; IRC; Beckman Industrial Corp.; KOA Electronics, Inc.; Matsushita
Electronics Components Co., Ltd.; Murata-Erie of North America, Inc.; ROHM Co.,
Ltd.; TDK Corp. of America; Philips Electronics, N.V.; and Vishay
Intertechnology, Inc.
The Company believes its competitive strengths include unique high density
capabilities, product performance characteristics, its understanding of customer
product requirements, high quality, high technology processing and manufacturing
facilities, cost efficient operations, dual manufacturing locations, and
experienced management and technical staff.
The Company believes its competitive weaknesses include its relative size
compared to its competitors, its limited sales, marketing and distribution
capabilities, a less mature manufacturing infrastructure, and less presence with
major corporations around the world. All of these factors result in
inefficiencies in the day-to-day operations of the Company as well as
limitations on the speed with which the Company can penetrate new customers and
markets.
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
10
<PAGE>
expand the capabilities and performance of its existing products. During fiscal
1997, the Company focused most of its efforts on introducing the new P/Active(R)
family of products and in developing next generation base technologies. This
resulted in a new family of devices with substantially higher frequency
performance. In fiscal year 1998, the level of investment in process development
declined significantly while the direct investment in new products increased
significantly. In fiscal 1999, the Company invested in numerous application
specific devices and several new families of semiconductor devices. While there
will continue to be additional base technology developments and refinements,
particularly in the areas of enhanced capacitor technologies and improved ESD
diode technologies, the concentration of effort going forward will be on new
products.
For the fiscal years ended March 31, 1999, 1998, and 1997, the Company spent
$3.7 million, $3.0 million, and $4.2 million, respectively, on its research and
development activities. See Item 7 for discussion of fluctuations in R&D
expenditures.
Employees/Personnel
As of March 31, 1999, the Company had 256 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, 150 were headquartered in Milpitas, California and 106 in Tempe,
Arizona. The Company's success is highly dependent on its ability to hire and
retain high quality people. Although the Company has been able to recruit many
talented senior managers, 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 nine patents related to its thin film technologies.
The Company has pending seven patent applications relating to specific
embodiments of its proprietary resistor, capacitor, diode, process and product
technologies, of which three were filed in fiscal 1999. The Company has obtained
approval from the United States Copyright Office to register certain of its mask
works for its passive component products. It has also established domestic and
international trademarks for its P/Active(R)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 Hitachi Metals (HML).
The Company has acquired a non-exclusive, non-assignable license with respect to
manufacturing Flip Chip, or "bumped" die from Flip Chip Technologies, an Arizona
corporation. Under the terms of this license, the Company can utilize certain of
Flip Chip's Ultra Chip Scale packaging technologies.
11
<PAGE>
As is the case with many companies in the electronics industry, the Company has,
from time to time, been notified of claims that it may be infringing certain
patent rights of others. Where appropriate, these claims have been referred to
counsel, and they are in various stages of evaluation. If it appears necessary
or desirable, the Company may seek licenses for these intellectual property
rights. The Company 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 fiscal 1999 the Company entered into a fully paid up license
under the Lemelson patents applicable to its product and manufacturing needs.
Environmental Issues
The Company is subject to a variety of federal, state and local regulations in
connection with the discharge and storage of certain chemicals during its
manufacturing processes. The Company believes that it is in compliance with all
such environmental regulations. Industrial waste generated at the Company's
facilities is either processed prior to discharge or stored in barrels with
double containment methods until removed by an independent contractor. The
Company has obtained all necessary permits for such discharges and storage.
The Company believes that it is in compliance with applicable environmental
health and safety regulations.
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 $32,640 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 $14,363 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 is expected to
cover the costs of the lease. See Note 12 of Notes to Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
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.
By court order dated May 20, 1997, these actions have been settled. The
Company's contribution towards the settlement consisted of 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 was 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 a three year period. The CVR expires at the end of that three-year
period or when the $11.50 price is met, whichever occurs first. The total amount
of this settlement, $13,000,000, was expensed in the fiscal year ended March 31,
1995. In addition, the Company has put $2,000,000 into a restricted account as a
guarantee for performance under the CVR. The cash will cease to be restricted,
without interest, if and when the CVR is extinguished. Should any payment to the
class be required under the terms of the CVR, it will be charged to equity,
since the full amount of $11.50 per share was included in the $13,000,000
previously expensed.
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.
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The Company is a party to or target of lawsuits, claims, investigations, and
proceedings, including commercial and employment matters, which are being
handled and defended in the ordinary 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 and those previously
reported, 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.
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 1999 and 1998 are as follows:
Common Stock
Fiscal 1999 Q1 Q2 Q3 Q4
----------- -- -- -- --
High $6 3/8 $4 1/16 $3 $3 5/16
Low $4 3/8 $1 7/8 $1 5/8 $2 1/4
Fiscal 1998 Q1 Q2 Q3 Q4
----------- -- -- -- --
High $8 7/8 $8 11/16 $7 3/4 $6 3/4
Low $7 $6 13/16 $5 1/4 $4 3/4
Certain debt covenants restrict the payment of dividends. No dividends were paid
in fiscal 1999, 1998, or 1997. The Company expects to continue that policy in
the foreseeable future. There were approximately 4,500 common shareholders of
record as of March 31, 1999.
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
Ended Ended
March 31, March 31,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total revenues $ 33,617 $ 33,043 $ 32,936 $ 39,882 $ 23,703
Income (loss) before income taxes* $ (2,771) $ (3,005) $ 704 $ 5,119 $(22,617)
Net income (loss) $ (2,771) $ (3,005) $ 704 $ 5,119 $(23,502)
Net income (loss) per common share $ (0.28) $ (0.30) $ 0.07 $ 0.48 $ (2.75)
Total assets $ 33,644 $ 35,994 $ 38,270 $ 44,928 $ 40,688
Long-term obligations $ 8,422 $ 8,159 $ 8,499 $ 7,896 $ 9,337
<FN>
*And cumulative effect of change in accounting in fiscal year 1995 totaling a loss of $835,000.
</FN>
</TABLE>
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In the following discussion, fiscal 1999, 1998, and 1997 refer to the twelve
months ended March 31, 1999, 1998, and 1997, respectively.
RESULTS OF OPERATIONS
Product sales for fiscal 1999 totaled $33.6 million compared to $32.5 million in
fiscal 1998 and $31.5 million in fiscal 1997. The 3% increase in product sales
for both fiscal 1999 over fiscal 1998 and fiscal 1998 over fiscal 1997 reflects
primarily the increase in unit sales of the Company's new P/Active(R) family of
products, offset by a decline in demand for some of the older semiconductor
products. The P/Active(R) family of products accounted for approximately 25% of
the Company's sales in fiscal 1999 compared to approximately 16% in fiscal 1998
and 3% in fiscal 1997. Thin film products (including P/Active(R)) accounted for
approximately 69%, 66%, and 64% of the Company's sales in fiscal 1999, 1998, and
1997, respectively.
Technology related revenues, consisting of cost-sharing payments by Hitachi
Metals Ltd. (HML) related to joint process and product development projects,
were $569,000 in fiscal 1998 and $1,430,000 in fiscal 1997. There were no
cost-sharing payments by HML in fiscal 1999. The Company expects no further
revenue from HML for joint research and development in the future. The decline
in fiscal 1998 and 1997 was due to HML's declining participation in joint
projects.
Cost of sales were 74%, 76%, and 67% of product sales for fiscal 1999, 1998, and
1997, respectively. The cost of sales percentage decrease in 1999 compared to
1998 reflects primarily manufacturing cost reduction and efficiencies partially
offset by unit price declines. Average unit prices were 63 cents in fiscal 1999
compared to 72 cents in fiscal 1998 but average unit costs declined at a greater
rate, averaging 44 cents in fiscal 1999 compared to 54 cents in fiscal 1998. The
cost of sales percentage increase in fiscal 1998 compared to fiscal 1997
reflects a higher mix of lower margin standard products, a lower mix of high
margin custom products, pricing pressure on products shipped to Far East
personal computer OEM's, and write downs of inventory to net realizable value.
Research and development expenses were $3.7 million in fiscal 1999 compared to
$3.0 million and $4.2 million in fiscal 1998 and 1997, respectively. The
increase in fiscal 1999 compared to fiscal 1998 reflected a higher number of new
products being developed and introduced. The decrease in fiscal 1998 compared to
fiscal 1997 is due to reduced materials costs, as the Company's research and
development emphasis shifted from process development efforts to product
development.
Selling, marketing, and administrative expenses in fiscal 1999 were $7.3 million
compared to $7.9 million and $7.4 million for fiscal 1998 and 1997,
respectively. Fiscal 1999 expenses were lower than fiscal 1998 primarily due to
a legal settlement with an insurance carrier. The settlement, net of legal
expenses incurred, reduced legal expenses by approximately $575,000. Fiscal 1998
expenses, as compared to fiscal 1997, reflect increased headcount, advertising,
and other costs in marketing and sales partially offset by reduced
administrative expenses.
Interest expense was $892,000, $941,000, and $739,000, in fiscal 1999, 1998, and
1997, respectively. The increase in interest expense in fiscal 1998 compared to
fiscal 1997 primarily reflects higher interest on capital equipment leases.
Interest and other income was $219,000 in fiscal 1999 compared to $511,000 in
fiscal 1998 and $1.4 million in fiscal 1997. The decrease in fiscal 1999 as
compared to fiscal 1998 and in fiscal 1998 as compared to fiscal 1997 is
primarily due to the comparatively lower level of cash and investments period to
period.
As a result of the above factors, the Company had a net loss of $2.8 million in
fiscal 1999 as compared to a net loss of $3.0 million in fiscal 1998 and net
income of $0.7 million in fiscal 1997.
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<PAGE>
The Company's effective tax rate was 0% in fiscal 1999, 1998 and 1997. At March
31, 1999, the Company had Federal and State tax loss carryforwards of
approximately $29.0 million and $7.0 million, respectively. See Note 13 of Notes
to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Unrestricted cash, cash equivalents, and short-term securities were $4.9 million
at March 31, 1999 compared to $5.6 million at March 31, 1998. Receivables
decreased to $4.5 million at March 31, 1999 compared to $5.1 million at March
31, 1998. This decrease occurred partly because fourth quarter fiscal 1998
product sales were $0.2 million higher than the fiscal 1999 fourth quarter,
partially because a greater proportion of sales shipped in the last two months
of fiscal 1998 as compared to fiscal 1999, and partly due to the reduction of
receivables over 90 days past due as of March 31, 1999 as compared to March 31,
1998. Inventories were $8.4 million at March 31, 1999 as compared to $8.1
million at March 31, 1998 due to an increased finished goods offset by reduced
raw materials and work-in-process. The increase in finished goods was in part
due to new products and in part due to customers rescheduling into fiscal 2000
certain orders originally built in anticipation of shipment in the fiscal 1999
fourth quarter. Property, plant and equipment decreased to $11.5 million at
March 31, 1999 compared to $12.9 million at March 31, 1998. Capital expenditures
were $1.5 million in fiscal 1999 but depreciation and amortization was $2.9
million. The Company made significant expenditures in fiscal 1997 to upgrade its
manufacturing operations and management information systems as well as to buy
out previously leased equipment, resulting in higher depreciation expense in
subsequent years. Current liabilities were $6.1 and $6.2 million at March 31,
1999 and 1998, respectively. Long-term debt was $7.5 million at March 31, 1999
compared to $7.2 million at March 31, 1998. The net increase was due to $650,000
in new financing in fiscal 1999 collateralized by certain equipment, partially
offset by reductions of other long-term debt. Common stock increased by $0.3
million in fiscal 1999 primarily due to the operation of the Company's employee
stock purchase program and the issuance of stock in exchange for a licensing
agreement.
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, $2.0 million
transferred to restricted cash in connection with the settlement of the
shareholder class action lawsuits, and the payment of previously accrued legal
fees totaling $1.4 million.
The Company made capital lease payments of $0.4 million, $0.6 million, and $0.9
million in fiscal 1999, 1998, and 1997, respectively, and debt repayments of
$0.2 million, $0.2 million, and $0.4 million in fiscal 1999, 1998, and 1997,
respectively.
As of April 1999, the Company has a $3.0 million revolving secured line of
credit agreement that expires on July 31, 2000. Under the terms of the line of
credit, the Company can borrow up to $3.0 million at prime plus one-half
percent, collateralized by eligible receivables. See Footnote 9. There were no
bank borrowings at March 31, 1999, 1998, and 1997 and there were no borrowings
during fiscal 1999, 1998, and 1997. 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.
16
<PAGE>
IMPACT OF YEAR 2000
Many computer systems employ a two-digit date field and could experience
problems beyond the year 1999. Also, some systems assign special meaning to
certain dates, such as 9/9/99, and the year 2000 is a leap year, which some
systems may not recognize. The Company has evaluated its management information
systems (MIS) and has developed a plan, as described herein, to convert all of
its MIS applications to year 2000 compliant versions by March 31, 1999. This
plan is intended to encompass all major categories of systems in use by the
Company, including manufacturing, sales, finance and human resources.
California Micro Devices utilizes software packages supplied by outside vendors
for all of its mission critical applications. These software vendors have
supplied the Company with versions of their software that they have certified to
be year 2000 compliant. However, the Company recognizes that relying on
certification statements alone could potentially place its systems at risk if
some level of integration and system level testing is not also performed. To
ensure that these applications work in CAMD's environment, the Company has
completed a consolidated, system level test plan that incorporated testing each
of the key applications. The positive results of these tests have allowed the
Company to proceed with its migration plan to year 2000 compliant systems and
the Company was fully converted as of March 1, 1999. As a result of the above
progress, the Company has not formulated formal contingency plans regarding
conversion to year 2000 compliant critical systems. Should any unforeseen
difficulties arise in the implementation of these software packages, the Company
would convert to alternate software packages.
The Company has completed its evaluation of computers and software utilized in
its manufacturing operations. Nothing has come to the attention of the Company
that would indicate a material impact of year 2000 issues on the Company's
results of operation or financial condition.
The Company has substantially completed its evaluation of the possible impact of
year 2000 issues on its key suppliers and subcontractors. Part of this
evaluation was performed based upon representations received from those key
suppliers and subcontractors. Noncompliance with year 2000 issues on the part of
key suppliers and subcontractors could result in disruption of the Company's
operations. Nothing has come to the attention of the Company that would indicate
a material impact on the Company as a result of year 2000 issues at its key
suppliers and subcontractors. However, the potential impact and related costs
are not known at this time.
The Company's products are not date sensitive.
The out-of-pocket expenditures incurred to date related to these programs are
less than $300,000. The Company currently expects that the total incremental
expenditures of these programs will not exceed $500,000. Most of these
expenditures involve new capital equipment that will be amortized over a three
to five year period.
The costs of the project and the date on which the Company believes it will
complete the year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third-party modification plans
and other factors. There can be no assurance that these estimates will be
achieved and actual results could differ materially from those anticipated.
The Company believes that its most reasonably likely worst-case year 2000
scenarios would relate to problems with the systems of third parties rather than
with the Company's internal systems or its products. Because the Company has
less control over assessing and remediating the year 2000 problems of third
parties, the Company believes the risks are greatest in the areas of utility
services, telecommunications, transportation supply chains and critical
suppliers of materials. Due to the large number of variables involved, the
Company cannot provide an estimate of the damage it might suffer if any of these
scenarios were to occur.
Based on currently available information, management does not believe that the
year 2000 matters discussed above related to internal systems or products sold
to customers will have a material adverse impact on the Company's financial
condition or overall trends in results of operations. However, it is uncertain
to what extent the Company may be affected by such matters. In addition, there
can be no assurance that the failure to ensure year 2000 capability by a
supplier or another third party would not have a material adverse effect on the
Company.
17
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company owns financial instruments that are sensitive to market risks as
part of its investment portfolio. The investment portfolio is used to preserve
the Company's cash until it is required to fund operations and capital
investments. None of these market-risk sensitive instruments are held for
trading purposes. The Company does not own derivative financial instruments in
its investment portfolio. The investment portfolio contains instruments that are
subject to fluctuation in interest rates.
The Company's investment portfolio includes debt instruments that are primarily
United Stated government bonds, high-grade corporate bonds and money market
funds of less than one year in duration. These investments are subject to
interest rate risk, and could decline in value if interest rates increase. The
Company's investment portfolio also consists of certain commercial paper that is
also subject to interest rate risk. Due to the short duration and conservative
nature of these instruments, the Company does not believe that it has a material
exposure to interest rate risk.
The interest rates on the Company's long-term debt and capital lease obligations
are fixed and therefore not subject to interest rate fluctuations. See Note 11
of Notes to Financial Statements.
18
<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 20
Balance Sheets 21
March 31, 1999 and March 31, 1998
Statements of Operations 22
Years ended March 31, 1999, March 31, 1998, and March 31, 1997
Statements of Shareholders' Equity 23
Years ended March 31, 1999, March 31, 1998, and March 31, 1997
Statements of Cash Flows 24
Years ended March 31, 1999, March 31, 1998, and March 31, 1997
Notes to Financial Statements 25
Financial Statement Schedule:
Schedule 2 Valuation and Qualifying Accounts 41
19
<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, 1999 and 1998, and the related statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended March 31, 1999. Our audits also included the financial
statement schedule 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. These 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, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1999 in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, 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 28, 1999
20
<PAGE>
<TABLE>
CALIFORNIA MICRO DEVICES CORPORATION
BALANCE SHEETS
(Amounts in Thousands, Except Per Share Data)
<CAPTION>
March 31, March 31,
1999 1998
-------- --------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 762 $ 480
Short-term investments 4,171 5,110
Accounts receivable, less allowance for doubtful
accounts of $224 in 1999 and $380 in 1998 4,471 5,086
Inventories 8,438 8,092
Other assets 592 987
-------- --------
Total current assets 18,434 19,755
Property and equipment, net 11,540 12,925
Restricted cash 2,900 2,909
Other long-term assets 770 405
-------- --------
Total assets $ 33,644 $ 35,994
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 3,239 $ 3,328
Accrued salaries and benefits 998 1,008
Other accrued liabilities 554 802
Deferred margin on shipments to distributors 576 581
Current maturities of long-term debt and capital lease obligations 685 489
-------- --------
Total current liabilities 6,052 6,208
Long-term debt, less current maturities 7,503 7,185
Other long-term liabilities 919 974
-------- --------
Total liabilities 14,474 14,367
Shareholders' equity:
Preferred stock - no par value; shares authorized
10,000,000; none issued and outstanding -- --
Common stock - no par value; shares authorized
25,000,000; shares issued and outstanding 10,116,144 as of March 31, 1999
and 9,978,351 as of March 31, 1998 53,328 53,011
Accumulated deficit (34,160) (31,389)
Accumulated other comprehensive income 2 5
-------- --------
Total shareholders' equity 19,170 21,627
-------- --------
Total liabilities and shareholders' equity $ 33,644 $ 35,994
======== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
21
<PAGE>
<TABLE>
CALIFORNIA MICRO DEVICES CORPORATION
STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Data)
<CAPTION>
Years Ended March 31,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Net product sales $ 33,617 $ 32,474 $ 31,506
Technology related revenues -- 569 1,430
-------- -------- --------
Total revenues 33,617 33,043 32,936
Cost and expenses:
Cost of sales 24,730 24,701 21,255
Research and development 3,685 3,017 4,180
Selling, marketing and administrative 7,300 7,900 7,412
-------- -------- --------
Total costs and expenses 35,715 35,618 32,847
-------- -------- --------
Operating (loss) income (2,098) (2,575) 89
Interest expense 892 941 739
Interest income and other, net (219) (511) (1,354)
-------- -------- --------
Net (loss) income $ (2,771) $ (3,005) $ 704
======== ======== ========
Basic (loss) earnings per share $ (0.28) $ (0.30) $ 0.07
======== ======== ========
Diluted (loss) earnings per share $ (0.28) $ (0.30) $ 0.07
======== ======== ========
Weighted average common shares outstanding 10,017 9,971 10,234
Dilutive effect of employee stock options -- -- 315
Weighted average common shares outstanding,
assuming dilution 10,017 9,971 10,549
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
22
<PAGE>
<TABLE>
CALIFORNIA MICRO DEVICES CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in Thousands, Except Per Share Data)
<CAPTION>
Common Stock Accumulated
--------------------------- Other
Number Of Accumulated Comprehensive
Shares Amount Deficit Income/(Loss) Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1996 10,306,088 $ 55,442 $ (29,088) $ (4) $ 26,350
Components of comprehensive income/(loss):
Net income -- -- 704 -- 704
Change in unrealized gain/(loss) on
available for sale investments -- -- -- 29 29
-----------
Total comprehensive income 733
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
----------- ----------- ----------- ----------- -----------
Balance at March 31, 1997 9,741,124 51,939 (28,384) 25 23,580
Components of comprehensive income/(loss):
Net income -- -- (3,005) -- (3,005)
Change in unrealized gain/(loss) on
available for sale investments -- -- -- (20) (20)
-----------
Total comprehensive income (3,025)
Exercise of stock options 51,742 214 -- 214
Employee Stock Purchase Plan 185,485 858 -- 858
----------- ----------- ----------- ----------- -----------
Balance at March 31, 1998 9,978,351 53,011 (31,389) 5 21,627
Components of comprehensive income/(loss):
Net income -- -- (2,771) -- (2,771)
Change in unrealized gain/(loss) on
available for sale investments -- -- -- (3) (3)
-----------
Total comprehensive income (2,774)
Exercise of stock options 6,600 26 26
Employee Stock Purchase Plan 100,993 211 211
Stock award 200 1 1
Licensing agreement 30,000 79 79
----------- ----------- ----------- ----------- -----------
Balance at March 31, 1999 10,116,144 $ 53,328 $ (34,160) $ 2 $ 19,170
========== =========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
23
<PAGE>
<TABLE>
CALIFORNIA MICRO DEVICES CORPORATION
STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
<CAPTION>
Years Ended March 31,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,771) $ (3,005) $ 704
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization 2,945 2,852 2,191
Issuance of cash for class action settlement -- -- (5,000)
Issuance of common stock in exchange for licensing agreement 79 -- --
Change in operating assets and liabilities:
Inventories (346) 751 (1,903)
Accounts receivable 616 (1,148) 562
Other assets 394 (113) (289)
Trade accounts payable and other current liabilities (347) 268 (3,491)
Other long-term assets (381) 16 113
Net increase in other long-term liabilities 323 -- --
Deferred margin on distributor sales (5) 5 (463)
-------- -------- --------
Net cash provided by (used in) operating activities 507 (374) (7,576)
-------- -------- --------
Investing activities:
Securities purchases (4,824) (6,144) (3,940)
Securities sales 5,760 7,481 18,140
Capital expenditures (1,544) (1,132) (6,011)
Net change in restricted cash 9 (6) (1,998)
-------- -------- --------
Net cash (used in) provided by investing activities (599) 199 6,191
-------- -------- --------
Financing activities:
Net repayments of capital lease obligations (357) (585) (910)
Borrowings 650 -- --
Repayments of debt (157) (175) (372)
Proceeds from issuance of common stock 238 1,072 1,498
-------- -------- --------
Net cash provided by financing activities 374 312 216
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 282 137 (1,169)
Cash and cash equivalents at beginning of period 480 343 1,512
-------- -------- --------
Cash and cash equivalents at end of period $ 762 $ 480 $ 343
======== ======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 892 $ 941 $ 896
Income taxes refunded $ -- $ -- $ (60)
Supplemental disclosures of non-cash investing and financing activities:
Capital expenditures financed through capital lease obligations $ -- $ 163 $ 1,455
Unrealized gain (loss) on securities $ (3) $ (20) $ 29
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
24
<PAGE>
CALIFORNIA MICRO DEVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
The Company designs, develops, manufactures and markets a line of passive
electronic components for Original Equipment Manufacturers and distributors who
need higher density, higher performance, 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
In the accompanying financial statements, fiscal 1999, 1998, and 1997 refer to
twelve months ended March 31, respectively.
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,
except for amounts related to the Company's non-qualified deferred compensation
program described in Note 15, 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 shareholders' 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.
25
<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.
The Company recognizes revenue on shipments to distributors upon the final sales
by the distributor to OEMs or other end users. 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 revenue from
distributors.
Advertising
The Company expenses all advertising as incurred.
Common Stock
On December 16, 1996, the Company reduced the previously issued 1,500,000 shares
of common stock being held in trust to 608,696 shares to reflect the revised
settlement of shareholder class actions. The 1,500,000 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 of Notes to
Financial Statements.
Net Income (Loss) Per Share
Basic earnings per common share are computed using the weighted-average number
of common shares outstanding during the period. Diluted earnings per common
share incorporate the incremental shares issuable upon the assumed exercise of
stock options and other dilutive securities. Options to purchase 2,478,000 and
2,315,000 shares of common stock at weighted-average prices of $3.58 and $5.44
per share were outstanding during fiscal 1999 and 1998 respectively, but were
not included in the computation of diluted net income per common share because
the effect in years with a net loss would be antidulitive. In fiscal 1997, a
total of 807,300 shares of common stock at a weighted-average exercise price of
$8.44 per share were not included in the computation of diluted net income per
common share because the exercise price was greater than the market price and
the effect would have been antidilutive.
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.
26
<PAGE>
Comprehensive Income
Effective in the first quarter of fiscal year 1999, the Company adopted
Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 established new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
SFAS 130 had no impact on the Company's net income (loss) or total shareholders'
equity. Accumulated other comprehensive income (loss) presented in the
accompanying balance sheets consists of the accumulated net unrealized losses on
available-for-sale securities.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). The Company is required to adopt SFAS 133 for all
fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS 133
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. Because the Company currently holds no derivative financial
instruments and does not currently engage in hedging activities, adoption of
SFAS 133 is expected to have no material impact on the Company's financial
condition or results of operations.
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.
3. HITACHI METALS, LTD.
The Company has a Joint Development Agreement with Hitachi Metals Ltd. (HML), a
significant shareholder. Under the terms of the agreement, HML may share in a
percentage of the actual expenditures for mutually agreed upon joint product
development. The Company includes HML's share of product development expenses in
the Statements of Operations line labeled "Technology related revenues". The
Company expects no revenue from HML for joint research and development in the
future.
Sales to Hitachi Metals, Ltd., and its subsidiary, Hitachi Kinzoku Shoji, Ltd.,
were $0.7 million, $0.7 million, and $2.1 million in fiscal 1999, 1998, and
1997, respectively. Trade accounts receivable from all HML entities at March 31,
1999 and 1998 were $26,000 and $154,000, respectively.
27
<PAGE>
4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
<TABLE>
The following is a summary of cash, cash equivalents and marketable securities
at March 31, 1999 and March 31, 1998, respectively (amounts in thousands):
<CAPTION>
March 31, March 31,
1999 1998
------- -------
<S> <C> <C>
Cash equivalents
Money market funds $ 2,250 $ 1,960
Commercial paper 535 520
Less:
Amount classified as restricted cash in connection with class action (2,000) (2,000)
------- -------
Total cash equivalents $ 785 $ 480
======= =======
Short-term investments
U. S. Treasuries & U.S. Government agencies $ 2,257 $ 3,198
Corporate bonds 1,914 1,912
------- -------
Total short-term investments $ 4,171 $ 5,110
======= =======
Long-term investments:
Mutual funds $ 300 $ --
======= =======
<FN>
*See Note 16 of Notes to Financial Statements.
</FN>
</TABLE>
<TABLE>
The following is a summary of available-for-sale securities at March 31, 1999
and March 31, 1998, respectively, (amounts in thousands):
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ------- -------
<S> <C> <C> <C> <C>
March 31, 1999:
Commercial paper $ 535 $ -- $ -- $ 535
Mutual funds 300 -- -- 300
U.S. Treasuries & U.S. government agencies 2,254 4 (1) 2,257
Corporate bonds 1,914 3 (3) 1,914
------- ------- ------- -------
Total $ 5,003 $ 7 $ (4) $ 5,006
======= ======= ======= =======
March 31, 1998:
Commercial paper $ 520 $ -- $ -- $ 520
U.S. Treasuries & U.S. government agencies 3,200 -- (2) 3,198
Corporate bonds 1,905 7 1,912
------- ------- ------- -------
Total $ 5,625 $ 7 $ (2) $ 5,630
======= ======= ======= =======
</TABLE>
Of the fiscal 1999 securities listed above, $4.6 million of debt securities (at
estimated fair market value) mature within one year and $0.4 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. Amounts listed as mutual funds and
$23,000 of money market funds are included in the Company's deferred
compensation program.
28
<PAGE>
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.
A significant portion of the Company's sales are to customers whose activities
are related to computer and computer peripherals, wireless communications,
networking, medical, and consumer electronics industries, including some who are
located in foreign countries. The Company generally extends credit to these
customers and, therefore, the aforementioned industries and economic influences
of customers' geographic locations affect collection of receivables. 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 into 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 customers' 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
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, process changes, as well as other factors that can affect yields.
Subcontractors
The Company uses subcontractors in Asia, primarily Thailand and 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.
29
<PAGE>
7. INVENTORIES
Inventories consist of the following (amounts in thousands):
March 31, March 31,
1999 1998
------ ------
Raw materials $ 428 $ 775
Work-in-process 5,263 5,480
Finished goods 2,747 1,837
------ ------
$8,438 $8,092
====== ======
In the fourth quarter of fiscal 1998, the Company made adjustments to its
inventory valuations to reflect the increased risk of obsolescence due to the
Company's increasing emphasis on higher volume standard products as compared to
low volume custom products and to reflect increasing pricing pressure in
Southeast Asia. The effect of these valuation adjustments was to reduce
inventories by approximately $900,000.
8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (amounts in thousands):
March 31, March 31,
1999 1998
------- -------
Land $ 137 $ 137
Buildings 3,030 3,030
Machinery, equipment and tooling 22,772 21,282
Leasehold improvements 714 708
Furniture and fixtures 367 367
------- -------
27,020 25,524
Less accumulated depreciation and amortization 15,480 12,599
------- -------
$11,540 $12,925
======= =======
9. SHORT-TERM BORROWINGS
As of April 1999, the Company has a $3.0 million revolving secured line of
credit agreement that expires on July 31, 2000. Under the terms of the line of
credit, the Company can borrow up to $3.0 million at prime plus one-half
percent, collateralized by eligible receivables. This line of credit is a
replacement for a $3.0 million facility, collateralized by cash, scheduled to
expire on July 31, 1999. There were no bank borrowings at March 31, 1999, 1998,
and 1997 and there were no borrowings during fiscal 1999, 1998, and 1997. The
Company is in compliance with its financial covenants.
30
<PAGE>
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 values of short-term investments are
estimated based on quoted market prices. 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) $7,809 $8,689
11. LONG-TERM DEBT
Long-term debt consists of the following (amounts in thousands):
March 31, March 31,
1999 1998
------ ------
Industrial revenue bonds at 10.5%, due
through March 1, 2018 $7,185 $7,315
Equipment financing agreement due through
June 14, 2002 624 --
------ ------
7,809 7,315
Less current maturities 306 130
------ ------
$7,503 $7,185
====== ======
In January 1999, the Company borrowed $650,000 under a credit agreement
collateralized by certain of the Company's equipment. The agreement extends for
42 months, carries an interest rate of 9.9%, and has a prepayment option.
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 $140,000 in fiscal 2000 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, 1999, with penalties
declining from 1% on March 1, 1999, to zero at March 1, 2000. At March 31, 1999,
cash of $900,000 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, and the balance to be used for semi-annual interest and principal
payments.
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, 1999. As a result of these covenants, the Company's
ability to pay dividends is restricted.
Future maturities of long-term debt at March 31, 1999 are as follows (amounts in
thousands):
2000 $ 306
2001 338
2002 372
2003 257
2004 205
2005 and thereafter 6,331
---------
$ 7,809
=========
31
<PAGE>
12. LEASE COMMITMENTS
Operating Leases
The Company leases certain manufacturing facilities under operating leases
expiring in 2001 and 2002. The Company sublets a 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 ending
March 31 are as follows (amounts in thousands):
2000 $ 560
2001 544
2002 413
2003 69
---------
1,586
Sublease receipts (294)
---------
$ 1,292
=========
Rent expense net of sublease income was $450,000, $417,000, and $524,000 in
fiscal 1999, 1998, and 1997, respectively.
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 ending March 31, are as follows (amounts in thousands):
2000 $ 455
2001 455
2002 181
---------
Total minimum lease payments 1,091
Less amount representing interest 117
---------
Present value of net minimum lease payments 974
Less current portion 379
---------
$ 595
=========
Machinery and equipment under capital leases are as follows (amounts in
thousands):
March 31, March 31,
1999 1998
------ ------
Cost $1,619 $1,619
Less accumulated depreciation 377 145
------ ------
$1,242 $1,474
====== ======
32
<PAGE>
13. INCOME TAXES
Due to current year losses and the availability of tax loss carryforwards, there
was no provision for income taxes for the periods ended March 31, 1999, 1998,
and 1997.
A reconciliation of the Company's effective tax rate to the federal statutory
rate is as follows:
Years Ended March 31,
1999 1998 1997
---- ---- ----
Federal statutory tax rate (34)% (34)% 34%
Losses with no current benefit 34 34 --
Utilization of loss carryforward -- -- (34)
--- --- ---
Effective income tax rate 0% 0% 0%
==== ==== ====
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 and
liabilities are as follows (amounts in thousands):
March 31, March 31,
1999 1998
-------- --------
Deferred tax assets:
Net operating loss carryforwards $ 10,500 $ 10,000
Tax credit carryforwards 450 350
Inventory reserves 3,500 3,500
Other non-deductible accruals and reserves 900 750
-------- --------
Total deferred tax assets 15,350 14,600
Less valuation allowance (15,050) (14,100)
-------- --------
Net deferred tax asset 300 500
-------- --------
Deferred tax liabilities:
Tax over book depreciation 300 500
-------- --------
Total net deferred tax asset $ -- $ --
======== ========
The valuation allowance increased by $950,000 and $5,046,000 during the years
ended March 31, 1999 and 1998, respectively. Approximately $450,000 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.
FASB Statement No. 109 provides for the recognition of deferred tax assets if
realization of such assets is more likely than not. Based on the weight of
available evidence, the Company has provided a valuation allowance against total
deferred tax assets. The Company will continue to evaluate the ability to
realize the deferred tax asset on a quarterly basis.
At March 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $29,000,000 and $7,000,000 respectively. In
addition, the Company had federal and California credit carryforwards of
approximately $350,000 and $150,000, respectively. These carryforwards will
expire at various dates beginning in 2008 through 2018, except for certain state
net operating losses which expire from 2000 through 2004.
33
<PAGE>
14. INTEREST INCOME AND OTHER, NET
Interest income and other, net, consists of (amounts in thousands):
Years Ended March 31,
1999 1998 1997
------ ------ ------
Interest income $ 295 $ 403 $1,024
Other (expense) income (76) 108 330
------ ------ ------
$ 219 $ 511 $1,354
====== ====== ======
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.
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. During fiscal 1999,
1998, and 1997, the Company expensed $217,000, $210,000, and $136,000,
respectively, relating to its contributions under the plan.
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. During fiscal 1999 and 1998, the Company expensed $8,000 and $21,000,
respectively, for this plan. No expense was recognized in fiscal 1997 as the
plan was not implemented until fiscal 1998.
Stock Option Plans
The 1995 Employee Stock Option Plan, Amended as of July 26, 1996, July 18, 1997,
and August 7, 1998 (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 Non-Employee Directors Plan Amended as of July 26, 1996, July 18, 1997, and
August 7, 1998, (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, for fiscal year-ended March 31, 1999 and 1998,
2,433,563 and 2,165,163 shares of common stock are reserved for issuance,
respectively. 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.
34
<PAGE>
Under the Directors Plan, for fiscal year-ended March 31, 1999 and 1998, 274,875
and 214,875 shares of common stock are reserved for issuance, respectively. 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 that was adopted in
1981 (The Employee Incentive Stock Option Plan), and another plan that 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 four 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 Board of Directors may terminate the 1981 Plan at
any time. 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.
In January 1998, the Board of Directors ratified the decision of the
Compensation Committee to reprice all current employee stock options (except for
those granted to Jeffrey C. Kalb) with an exercise price in excess of $6.00. A
total of 692,150 options were repriced. The repricing did not apply to options
held by directors or other non-employee option holders.
On December 10, 1998, the Board of Directors ratified the decision of the
Compensation Committee to reprice all current non-officer employee stock options
with an exercise price in excess of $2.8125. The repricing was to be the higher
of $2.8125 or the closing market price of the Company's stock on the effective
date of the repricing, December 10, 1998. The closing price on December 10 was
$2.75; therefore the applicable options were repriced at $2.8125. Pursuant to
the terms of the repriced options, the repriced options may not be exercised in
whole or in part until December 10, 1999, that is, one year after the effective
date.
On December 10, 1998, the Board of Directors also ratified the decision of the
Compensation Committee to reprice all current officer employee stock options
with an exercise price in excess of $4.00. The repricing was to be the higher of
20% above either $2.8125 or the closing market price of the Company's stock on
the effective date of the repricing, December 10, 1998. The closing price on
December 10 was $2.75; therefore the applicable options were repriced at 20 %
above the $2.8125 price or $3.30. Pursuant to the terms of the repriced options,
the repriced options may not be exercised in whole or in part until December 10,
1999, that is, one year after the effective date.
The Board's action was in response to a decline in the market price of the
Company's stock during the preceding months which had effectively eliminated the
incentive value of options with significantly higher exercise prices. A total of
1,325,742 options were repriced. The repricing did not apply to options held by
non-employee directors or other non-employee option holders.
35
<PAGE>
<TABLE>
The following is a summary of stock option activity and related information,
including the effect of repricing in grants and cancellations during fiscal 1999
and 1998 of 1,325,742 shares and 692,150 shares, respectively:
1999 1998 1997
-------------------------- ------------------------ ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Options:
Outstanding at
beginning of year 2,315,331 $ 5.4395 2,032,446 $ 6.1255 1,841,864 $ 5.7560
Granted 1,756,742 $ 3.0222 1,178,297 $ 6.1174 515,517 $ 6.7402
Exercised (6,600) $ 3.9300 (51,742) $ 4.1914 (214,389) $ 4.1285
Canceled (1,587,878) $ 5.6772 (843,670) $ 8.1121 (110,546) $ 6.4146
---------- -------- --------- -------- --------- --------
Outstanding at
end of year 2,477,595 $ 3.5837 2,315,331 $ 5.4395 2,032,446 $ 6.1255
========== ======== ========= ======== ========= ========
Available for grant*:
Beginning 182,016 137,454 68,198
Ending 325,760 182,016 137,454
<FN>
* Available for grant under plans which are currently active.
</FN>
</TABLE>
<TABLE>
The following table summarizes information about options outstanding at March
31, 1999:
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- -----------------------------
Weighted-Average Weighted- Weighted-
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life (Years) Price Exercisable Price
- ------------------------ ----------- ------------ ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$2.6573 - $2.6573 26,500 9.87 $ 2.6573 -- --
$2.8125 - $2.8125 1,045,220 7.46 $ 2.8125 -- --
$2.8750 - $3.3000 543,047 7.86 $ 3.2120 -- --
$3.5000 - $3.8500 81,665 8.63 $ 3.5531 6,665 $ 3.6250
$3.9300 - $12.7500 781,163 6.03 $ 4.9088 710,536 $ 4.6868
--------- ------ -------- --------- ---------
2,477,595 7.16 $ 3.5837 717,201 $ 4.6770
========= ======= ======== ========= =========
</TABLE>
Employee Stock Purchase Plan
The 1995 Employee Stock Purchase Plan as Amended August 7, 1998, (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 460,000 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. As of fiscal
year-end March 31, 1999, 1998, and 1997, 64,571, 5,564 and 141,049 shares were
reserved for issuance, respectively.
The following is a summary of stock purchased under the plan:
1999 1998 1997
-------- -------- --------
Aggregate purchase price $211,000 $858,000 $592,000
Shares purchased 100,993 185,485 108,951
Employee participants as of March 31 161 151 150
36
<PAGE>
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 employee 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 that 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 provide a reliable single measure of the fair value of its grants.
<TABLE>
The fair value of the Company's stock-based grants for the years ended March 31,
was estimated assuming no expected dividends and the following weighted-average
assumptions:
<CAPTION>
Options Purchase Plan
---------------------------- ---------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life years 2.81 3.02 3.17 .21 .34 .5
Volatility .96% .61% .64% 1.29% .64% .64%
Risk-free interest rate 4.69% 5.77% 6.20% 5.00% 5.43% 5.25%
</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 purchase period for stock
purchases under the Purchase Plan. The Company's pro forma information follows
(amounts in thousands except per share amounts):
Years Ended March 31,
1999 1998 1997
--------- --------- ---------
Net (loss) - pro forma $ (5,112) $ (5,073) $ (1,148)
Diluted net (loss) per share - pro forma $ (0.51) $ (0.51) $ (0.11)
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 granted in fiscal
1999 and 1998 were $4.04 and $2.30 per share, respectively. The weighted-average
fair value of the option element of the Purchase Plan stock granted in fiscal
1999 and 1998 was $0.95 and $1.88 per share, respectively.
16. LITIGATION
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.
By court order dated May 20, 1997, these actions have been settled. The
Company's contribution towards the settlement consisted of 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 was 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 a three year period. The CVR expires at the end of that three-year
period or when the $11.50 price is met, whichever occurs first. The total amount
of this settlement, $13,000,000, was expensed in the fiscal year ended March 31,
1995. In addition, the Company has put $2,000,000 into a restricted account as a
guarantee for performance under the CVR. The cash will
37
<PAGE>
cease to be restricted, without interest, if and when the CVR is extinguished.
Should any payment to the class be required under the terms of the CVR, it will
be charged to equity, since the full amount of $11.50 per share was included in
the $13,000,000 previously expensed.
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 party to or target of lawsuits, claims, investigations, and
proceedings, including commercial and employment matters, which are being
handled and defended in the ordinary 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 and those previously
reported, 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.
17. SEGMENT INFORMATION
During 1998, the Company adopted Financial Accounting Standards Board Statement
of Financial Standards No. 131 ("SFAS 131"), "Disclosures About Segments of an
Enterprise and Related Information." The Company's operations are classified
into one reportable segment. Substantially all of the Company's operations and
long-lived assets reside in the United States although the Company has sales
operations in Europe, Japan, Hong Kong and Taiwan. In fiscal 1999, no single
customer accounted for greater than 10% of net sales. In fiscal 1998, Bell
Milgray Inc., a distributor, accounted for approximately 10% of net product
sales, and during fiscal 1997, Motorola accounted for 11% of the net product
sales. Other than the United States, no one country accounted for more than 10%
of net sales in fiscal 1999, 1998 and 1997. Foreign currency transaction gains
and losses are not significant.
Net sales to geographic regions reported below are based upon the customers'
locations (amounts in thousands):
Years Ended March 31,
1999 1998 1997
------- ------- -------
Net product sales to geographic regions:
United States $20,476 $21,776 $20,003
Europe 3,126 3,411 3,288
Far East and other 10,015 7,287 8,213
------- ------- -------
Net product sales $33,617 $32,474 $31,504
======= ======= =======
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There were no disagreements with the independent auditors in the three years
ended March 31, 1999, March 31, 1998, and March 31, 1997.
38
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is set forth in the 1999 Proxy Statement
under the captions "Directors and Executive Officers of the Registrant" and
"Executive Compensation" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is set forth in the 1999 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 1999 Proxy Statement under
the caption "Security Ownership of Certain Beneficial Owners and Management" and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
No reportable relationships and transactions.
39
<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").
10.11 Commitment letter from
Comerica Bank.
27* Financial Data Schedule
</TABLE>
(b) 1. Reports on Form 8-K:
None
*Exhibit on EDGAR filing only.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement in connection with its 1999 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, 1999)
are incorporated by reference into Part III.
40
<PAGE>
<TABLE>
SCHEDULE 2
CALIFORNIA MICRO DEVICES CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Years Ended March 31, 1999, 1998, and 1997
(Amounts in Thousands)
<CAPTION>
Additions
Balance at Charged to Charged to Balance at
Beginning Cost and Other Deductions End of
of Year Expense Accounts (1) Year
------- ------- -------- --- ----
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1999
Allowance for doubtful accounts
(deducted from accounts receivable) $380 $-- $-- $156 $224
==== ===== === ==== ====
Year ended March 31, 1998
Allowance for doubtful accounts
(deducted from accounts receivable) $437 $-- $-- $ 57 $380
==== ===== === ==== ====
Year ended March 31, 1997
Allowance for doubtful accounts
(deducted from accounts receivable) $900 $ (15) $-- $448 $437
==== ===== === ==== ====
<FN>
(1) Represents write-offs net of recovery of receivables.
</FN>
</TABLE>
41
<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 15th day of June
1999.
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 15th day of June 1999.
By:
/s/ Jeffrey C. Kalb President and Chief Executive Officer
----------------------- and Director
JEFFREY C. KALB (Principal Executive Officer)
/s/ John E. Trewin Vice President and Chief Financial
----------------------- Officer
JOHN E. TREWIN (Principal Financial and Accounting
Officer)
/s/ Wade Meyercord Chairman of the Board
-----------------------
WADE MEYERCORD
/s/ Angel G. Jordan Director
-----------------------
ANGEL G. JORDAN
/s/ J. Daniel McCranie Director
-----------------------
J. DANIEL MCCRANIE
/s/ Stuart Schube Director
-----------------------
STUART SCHUBE
/s/ John Sprague Director
-----------------------
JOHN SPRAGUE
/s/ Donald Waite Director
-----------------------
DONALD WAITE
42
EXHIBIT 10.11
Commitment Letter Comerica Bank
COMERICA
- -------------------------------- -------------------------------------
Comerica Bank-California HIGH TECHNOLOGY BANKING DIVISION
55 Almaden Boulevard, 2nd Floor
San Jose, CA 95113
March 15, 1999
John Trewin
Chief Financial Officer
California Micro Devices Corp.
215 Topaz Street
Milpitas, Ca 95035
Dear John,
Comerica Bank - California ("Bank") is please to commit to California Micro
Devices Corp. ("Borrower") the following credit facility:
FACILITY #1
TYPE/AMOUNT: $3,000,000 revolving secured accounts receivable line of
credit including a within line facility for letters of
credit up to $500,000.
PURPOSE: For short term operating needs and for letters of credit.
ADVANCE: 75% of eligible receivables. Ineligible accounts are
contra, foreign not covered by a letter of credit or credit
insurance acceptable to the Bank, affiliate, employee,
government, consignment, C.O.D., over 90 day accounts, all
accounts from companies which have more than 25% if its
accounts over 90 days past due as well as account
concentrations in excess of 20% of the total. If borrowings
exceed $500,000 then the facility converts to a D.O.F.
(Daily Dominion of Funds reporting) until Borrower reports
two consecutive increasing quarters of operating profits
and NPAT of at least $100,000 per quarter.
PRICING: Prime rate plus .50%.
$25,000 up-front fee.
REPAYMENT: Interest is to be paid monthly. Principal is limited to the
borrowing Base and is due at maturity.
EXPIRATION: 6/30/2000 (15 months). Documentary and Standby Letters of
Credit are not to expire after the line expiration. If the
line of credit is not renewed then the letters of credit
outstanding are to be cash secured.
<PAGE>
Page 2
SECURITY: Perfected first security interest in all of borrower's
assets (unencumbered fixed assets) and other intangibles.
Borrower is to not have a second lien on its assets.
Borrower is not to pledge its intellectual property or
grant a non-pledge of its intellectual property to another
party.
OTHER CONDITIONS:
This credit facility will be subject to a satisfactory pre-loan audit and be
governed by a loan agreement that will include but will not be limited to the
following:
1) Borrower is to maintain the following financial covenants at all times:
a) Minimum monthly quick ratio of 1.25 (excludes restricted
cash).
b) Maximum total liabilities to tangible net worth of 1.0
c) Minimum tangible net worth of $15,000,000 increasing by 75% of
quarterly profits and by 100% of any new equity and/or
subordinated debt raised and return of restricted cash. (TNW
excludes restricted cash)
d) Borrower is to achieve quarterly profitability beginning with
the quarter ending 12- 31-99. Thereafter, Borrower may have
one loss quarter per fiscal year with a maximum loss of
$250,000 with no two consecutive quarterly losses.
2) Borrower to provide Bank with:
a) Monthly financial statements within twenty (20) days of month
end if borrowing.
b) Annual unqualified CPA audited financial statements with
ninety (90) days of FYE.
c) Monthly borrowing base certificate, accounts receivable, and
payable agings within 15 days of month end if borrowing.
d) Quarterly borrowing base certificate, accounts receivable, and
payable agings within 15 days of quarter end if not borrowing.
If borrowing, borrowing base certificate is to be no more than
thirty days old.
e) Budgets, sell through reports, projections or other financial
exhibits which Bank may reasonably request.
f) Satisfactory disclosure of status of legal actions against
Borrower.
3) Without Bank's prior written approval, Borrower will not:
a) Pledge assets other than to the Bank except for purchase money
(lease) transactions.
b) Enter into any other direct borrowings, lend money or enter
into guarantees.
c) Enter into any merger or acquisition.
d) Repurchase stock, declare or pay cash dividends.
e) Make capital expenditures or lease equipment (purchase money
transactions) in excess of $1,500,000 per year.
4) Bank will have the right to audit the Borrower's financial records.
Audit costs are for the account of the Borrower and are on a
semi-annual schedule. Audit costs are not to exceed $750 per audit.
<PAGE>
Page 3
5) Borrower is to provide evidence of full risk insurance covering all
assets pledged to the Bank and loss payable endorsement naming lender
as loss payee.
6) There shall be a cross default provision between this credit and any
existing or future credit arrangements.
7) Borrower's demonstration to the satisfaction of the Bank that Borrower
has taken and is taking all necessary and appropriate steps to ensure
that Borrower, its businesses, and its material customers, suppliers
and vendors are year 2000 Compliant in a timely manner.
"Year 2000 Compliant".
8) Reasonable out of pocket costs, legal and filing fees are for the
account of the Borrower.
9) Borrower is to maintain its primary depository accounts with the Bank.
If the above commitment is acceptable please sign, date and return this
commitment letter along with the commitment fees by March 25, 1999 at which time
this commitment expires. We are pleased To offer this credit facility and to
assist California Micro Devices in its growth plans.
Sincerely,
/s/ Alan Jepsen
- ----------------------------------------
Alan Jepsen
Vice President and Assistant Manager
Comerica Bank - California
High Technology Division
Agreed to and accepted by:
/s/John Trewin
- ----------------------------------------
John Trewin
Chief Financial Officer
California Micro Devices Corp.
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 the 1995 Non-Employee Directors' Stock Option Plan,
as amended, and in the Registration Statements on Form S-8 (Nos. 333-44959,
333-61833) pertaining to the 1995 Stock Option Plan, as amended, and 1995
Non-Employee Directors' Stock Option Plan, as amended, and the 1995 Employee
Stock Purchase Plan, as amended, of California Micro Devices Corporation of our
report dated April 28, 1999, 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, 1999.
/s/ERNST & YOUNG LLP
San Jose, California
June 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000800460
<NAME> California Micro Devices Corporation
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 762
<SECURITIES> 4,171
<RECEIVABLES> 4,471
<ALLOWANCES> (224)
<INVENTORY> 8,438
<CURRENT-ASSETS> 18,434<F1>
<PP&E> 27,020
<DEPRECIATION> (15,480)
<TOTAL-ASSETS> 33,644<F2>
<CURRENT-LIABILITIES> 6,052
<BONDS> 0
0
0
<COMMON> 53,328
<OTHER-SE> (34,160)
<TOTAL-LIABILITY-AND-EQUITY> 33,644<F3>
<SALES> 33,617
<TOTAL-REVENUES> 33,617
<CGS> 24,730
<TOTAL-COSTS> 35,725<F4>
<OTHER-EXPENSES> (219)<F5>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 892
<INCOME-PRETAX> (2,771)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,771)
<EPS-BASIC> (0.28)
<EPS-DILUTED> (0.28)
<FN>
<F1>Includes - Other Assets $592K.
<F2>Includes - Restricted cash $2,900K; and Other long-term assets $770K.
<F3>Includes - Long-term debt, less current maturities $7,503K; and Capital
lease obligations less current maturities $919K.
<F4>Includes - Research and development $3,685K; Selling, marketing and
administrative $7,300K;
<F5>Includes - Interest (income) $(295)K; and Other(income)/expense, net $76K.
</FN>
</TABLE>
