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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 0-15449
CALIFORNIA MICRO DEVICES CORPORATION
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(Exact name of registrant as specified in its charter)
California 94-2672609
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(State or other jurisdiction of incorporation) (IRS Employer Identification No.)
215 Topaz Street, Milpitas, CA 95035-5430
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (408)263-3214
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
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 31, 2000, was approximately $211,090,000 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, 2000, the number of shares of the Registrant's common stock
outstanding were 11,037,543.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the Registrant's Annual Meeting of Shareholders to be
held August 1, 2000.
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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.
In this report, "CAMD," "we," "us" and "our" refer to California Micro Devices
Corporation. All trademarks appearing in this report are the property of their
respective owners.
ITEM 1. BUSINESS.
General
We are a leading supplier of thin film integrated passive devices and
complementary analog semiconductors. Through proprietary manufacturing
processes, we integrate multiple thin film passive components onto single chips
and enhance their functionality with discrete semiconductor functions to provide
single chip solutions for densely populated, high performance electronic
systems. Our integrated passive devices are significantly smaller and provide
more functionality than competitive discrete products. Integrated passive
devices replace functional clusters of discrete passive components that are used
for signal filtering and termination at busses and ports, wave shaping, clock
signal filtering, biasing, and other traditional discrete component functions.
In some instances our integrated passive devices also provide semiconductor
functions, such as electrostatic discharge protection.
We also offer analog semiconductor solutions that complement our
integrated passive devices, providing electrostatic discharge protection for
ports, smart power management functions and micro-power operational amplifiers.
We use our thin film passive component technology to enhance the functionality
of our semiconductor products. Additionally, we manufacture and sell an
established line of telecommunications related semiconductor products.
We focus our expertise on providing high volume, cost effective,
standard and custom solutions for computer systems and peripherals, high
performance networking, and the mobile communications and telecommunications
infrastructure markets. Our customers include original equipment manufacturers,
such as 3 COM Corporation, the Acer Group, Cisco Systems, Intel Corporation,
Inventec, Nortel Networks, and Samsung Electronics Co. Ltd., and contract
manufacturers, including Celestica, Inc., Jabil Circuits Inc., and Solectron
Corporation.
Industry Background
Passive components - principally resistors and capacitors - are used in
virtually all electronic products. Resistors impede the flow of electrical
current and dissipate electrical energy as heat. They are used to divide
voltage, pull-up/pull-down voltage, and terminate and control current.
Capacitors store electrical charges and pass alternating current while blocking
direct current. Capacitors are used to filter noise and shape waveforms.
Historically, passive components have been discrete devices that perform one
specific function per device. Individually and in combination,
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resistors and capacitors are used to filter, condition, shape, bias, terminate
and improve the characteristics of the electrical signals used and transmitted
by active components such as microprocessors, application specific integrated
circuits, dynamic random access memories, and analog integrated circuits.
The demand for discrete and integrated passive components is being
driven by both the increasing number of components per system, and the
increasing number of systems produced. For example, the number of passives in a
personal computer increased from a few hundred in the 486 generation of personal
computers to as many as 1,000 in the Pentium III series of products. Similar
trends are occurring in mobile phones, where multiple bands, new functionality
and higher frequencies are being incorporated, driving the number of passive
components from 300 in older analog phones to 600 in current devices. According
to a 1997 report by Frost & Sullivan, the worldwide market for passive
components included over $5.0 billion for resistors and resistor networks and
over $9.0 billion for capacitors. Integrated passive devices address a small but
growing portion of this market, particularly in the personal computer,
networking, and mobile phone segments.
The technological progress of the semiconductor industry has been the
driving force behind the electronics industry, and higher levels of integration
on a single chip have been the underlying factor that has made this possible.
Higher levels of integration lead to products that are smaller with higher
performance and functionality and lower cost.
The semiconductor industry has segmented into two major technology
types - digital circuits, and analog circuits. Digital circuits are used most
heavily in computationally intensive functions such as computing and digital
signal processing. Manufacturers of digital integrated circuits operate on the
leading edge of process technology (e.g. sub-micron line width) to maximize the
performance and component density of their products.
Analog circuits are more typically found in applications requiring
precise voltage/power control, amplification, and other specialized functions.
They are used throughout all system types, providing the power management and
ancillary functions necessary for system operation. Manufacturers of analog
integrated circuits are able to use manufacturing facilities that are much lower
cost and older in technology (e.g. larger line width) than digital circuit
manufacturers. The analog circuit market tends to be less cyclical and less
capital intensive than the digital, and is more fragmented in terms of products.
This can provide greater opportunities for executing a niche strategy. The
analog circuit market is large and growing, with the Gartner Group reporting
that this market increased from $7.6 billion in 1988 to $21.2 billion in 1998
and has shown a compound annual growth rate of 16.7% over 24 years, compared to
16.1% for the total semiconductor market.
Industry Challenges
Some of the fastest growing segments of the electronic products markets
are:
o personal computers and servers
o networking products
o wireless communications, including mobile phones
o communications infrastructure, including fiber optic
transmission
o personal digital assistants and other portable electronic
devices
The technological advances in these market segments and the demands of consumers
are requiring companies to design products with the following characteristics:
Reduced Size and Weight. Consumer demand for smaller, more portable
products has created a need to reduce component size and minimize the required
space between components. For example, laptop computers and mobile phones have
continued to get smaller and lighter while at the same time the functionality of
these products has increased dramatically.
Increased Performance and Functionality. The increasing use of faster
microprocessors in computers and higher frequencies in communication products
require more passive components that can function properly at the high operating
speeds. For example, the number of busses, along with their speed and width, has
increased significantly
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from the 486 generation to the Pentium III series of personal computers. Each of
these busses requires passive components to terminate their transmission lines.
Also, as the number of clock lines that serve to transmit timing signals
increased from a few in earlier personal computers to 27 in the Pentium III,
additional passive components are needed for filtering, wave shaping, and
termination.
Greater Reliability. As electronic systems become a more integral part
of our lives, and more systems become portable, manufacturers must provide
greater reliability and the ability to withstand hostile environmental
conditions. For example, we depend on computer systems in almost every aspect of
our day-to-day lives, including financial transactions, email, health records,
the Internet, and emergency response systems; and on mobile communications to
keep in touch on the road or when we are out of the office.
Electrostatic Discharge Protection. As electronic systems move out of
controlled environments and become more portable and user configurable, they are
more susceptible to damage from electrostatic discharge. Protecting connectors
and other places where people touch sensitive electronic devices is vital to
assuring long, reliable operation.
Shorter Time to Market. The rapid changes in technology and intense
competition have shortened product life cycles dramatically and required
manufacturers to seek shorter time to market. Products such as personal
computers and cell phones, which used to have life cycles of one or two years,
are now replaced by newer versions as frequently as every six to nine months,
requiring new products with new functions to quickly ramp into high volume
production. The use of standard circuits reduces the time required to design new
products.
Lower Total Cost. Manufacturers of electronic systems are facing
intense price competition and are seeking ways of lowering the overall cost of
their products. Lowering the cost of electronic systems is fundamental to
increasing their affordability and allowing them to be applied to new tasks,
which allows more people access to better, faster technology. There is also a
strong correlation between reducing size and reducing cost.
Reduced Power Consumption. As devices become more portable and need to
operate for longer periods of time, there is an increasing need for power
reduction and power management to increase battery life in portables and reduce
power consumption in other systems. At the same time, enhanced functionality and
performance increases power requirements, demanding that new functions be more
power efficient, and techniques be developed to power-down unused parts of
systems.
Discrete passive components, because of their size and performance
characteristics, may not effectively meet these needs of system designers. In
addition, there is a need for analog semiconductors that provide better power
management and operate at increasingly lower voltages and power levels.
Our Solution
We meet the needs of our customers through our innovative approach of
integrating thin film passive components and our patented technique of combining
these integrated passive components with semiconductors. Our thin film
technology allows us to combine multiple resistors, capacitors, diodes and other
components into a single, high-density device we market under the brand name
"P/Active". We also design and manufacture analog semiconductors that provide
power management functions, and offer low voltage, micro power operational
amplifiers that we can enhance by adding thin film passive devices. We believe
these solutions provide the following benefits:
Smaller Size for Miniaturization and Portability. Our integration of
multiple passive devices into a single integrated device reduces the area
required for the passive components by as much as 80% compared to discrete
passive elements. Discrete passive components typically consume a significant
part of the space in an electronic system, limiting either the ability to reduce
product size or to incorporate additional features. For example, in a typical
mobile phone, as much as two thirds of the printed circuit board space is
consumed by passive components.
Increased Performance at Higher Frequencies. Our thin film technology
components are designed to perform consistently at frequencies up to 3 GHz,
unlike discrete passive components that behave unpredictably at today's higher
frequencies, particularly in excess of 300 MHz. Our PAC RC family of filters
operates properly at up to
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10 times the frequency of traditional discrete components, and can suppress
electromagnetic interference/radio frequency interference noise by as much as 10
times more than combinations of thick film components at very high frequencies.
The operating frequency of our integrated passive components is further extended
when combined with our new chip scale packaging technology.
Improved Reliability. We reduce the number of connections through
higher levels of integration, thus improving reliability and eliminating many of
the problems encountered in the manufacture of printed circuit boards. These
problems include solder migration, cracking and peeling, sensitivity to
environmental conditions and poor solder joints that often accompany the use of
numerous discrete passive components. Depending on the system, up to 40% of all
system failures can be attributed to poor solder interconnections.
Improved Electrostatic Discharge Protection. All of our P/Active
products have been designed to tolerate high levels of electrostatic discharge,
and also to help protect increasingly sensitive integrated circuits. We produce
a family of dedicated electrostatic discharge protection devices, some of them
application specific, as well as other standard products which combine
electrostatic discharge protection with passive and active functions. We
continue to enhance these products to meet increasingly stringent industry
requirements for electrostatic discharge protection.
Shorter Time to Market. We provide standardized solutions to common
problems that assist design engineers in their efforts to bring products to
market more quickly. These solutions eliminate the need for engineers to design,
layout, and test their own solution using numerous discrete components. For
example, our Super 1284 is a single component that combines 26 resistors, 17
capacitors, and 34 diodes to provide the complete filtering and termination
functionality, plus electrostatic discharge protection needed on the parallel
printer port of a computer.
Lower Total Cost Solutions. We offer a lower total cost solution
compared with most discrete passive component manufacturers by integrating
multiple passive components into a single chip. Taking into account the per
component costs of assembly, solder, testing, repair/rework, and warranty, we
believe a single integrated passive device offers an overall lower cost solution
even though the materials cost of the discrete passive components is usually
less. As noted above, our Super 1284 device combines 77 previously discrete or
low integration level components into a single package.
Lower Power Consumption and Enhanced Power Management. We have
developed a product family combining low power CMOS technology with some passive
components to address the problems associated with smart power management
techniques. These techniques are used to support devices which must remain
operational when major parts of a system are powered down or in a "sleep mode"
to save electricity. In addition, we build small, cost effective operational
amplifiers that are designed to operate in small, low power, hand held devices
that must conserve battery power. All of our products use CMOS technology
similar to that used in high component count VLSI, instead of the bipolar
semiconductor technology which is more typically used in higher power drivers
and power supplies.
Our Strategy
Our objective is to use our leadership position in the design and
manufacture of integrated passive devices to capture a greater share of the
market currently served by discrete passive components. We also want to become a
leading manufacturer of analog semiconductors that are complementary to our
integrated passive devices. Our strategy includes the following key elements:
Leverage Our Technology Leadership Position. We intend to continue to
use our extensive thin film processing and materials expertise in combination
with our semiconductor capabilities to create value added devices for our
customers. In passive components, we provide higher levels of integration, using
our thin film capabilities. We use our applications engineering capability and
system level expertise to design products that are application specific
solutions to customer problems, as opposed to providing discrete components from
which the customer constructs their own solution. Using our ability to combine
thin film passive devices with semiconductors, we are developing new
semiconductor products in power management, micro power amplifiers,
electrostatic discharge protection, as well as custom applications. We are
leveraging our success with power management products into additional products
and applications where we can achieve a leadership position.
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Focus on High Volume Solutions. We focus on manufacturers of products
in growth markets such as personal computers and servers, mobile phones and
telecommunications infrastructure, networking equipment that supports the growth
of the internet and internal computer networks, high performance graphics
workstations, and personal digital assistants, all of which have an increasing
need for higher density and higher performance passive components. We work with
customers to identify common, high volume applications or, when appropriate,
design customized solutions to meet particular customer applications. We have
the ability to expand our production volumes substantially without adding
significant new facilities or overhead, either in our Milpitas, California or
Tempe, Arizona manufacturing facilities.
Expand Our Sales and Marketing Efforts Internationally and
Domestically. We are continuing to expand both the breadth and intensity of our
sales coverage. We recently added sales personnel to cover Japan, Taiwan, China,
South Korea and other parts of Southeast Asia. In addition, we have added sales
capabilities in Europe and increased the number of area managers in the U.S. To
support our enhanced sales efforts and to define more new products, we have
expanded our internal marketing capabilities.
Develop Highly Responsive Product Development and Production
Capabilities. Many system designers leave decisions regarding passive components
to the end of the design cycle, and they often require custom devices to meet
their specific needs. We continue to invest in both development capability and
inventory planning and production capabilities to allow us to respond quickly
and shorten design and manufacturing cycles.
Develop Standard Products to Shorten Customer Time to Market. We
continue to work with existing and potential customers to identify their passive
and specialized semiconductor requirements. We use this information to provide
customized solutions that often become standard products and solutions that
shorten our customer's time to market.
Educate the Market on our Value Proposition. We are educating the
market that our thin film integrated devices are a lower total cost solution
than discrete passive components when the total cost of manufacturing and
support is considered. We also take an aggressive pricing approach to make our
solutions more attractive in connection with certain high volume market
opportunities.
Our Competitive Advantages
We believe that we have the following competitive advantages that will
assist us in implementing solutions to satisfy our customers' needs:
Extensive Experience in Thin Film Technologies. We have extensive
experience in creating thin film passive components. We can use many different
substrates, including silicon, ceramic and glass while our competitors are
generally limited to one type of substrate. This allows us to apply the
technology best suited to a given problem. We can deposit multiple different
resistive materials, use different dielectric materials and add plating of
different materials to address a wide variety of resistor and capacitor needs.
Extensive Experience in Combining Thin Film Passive Components and
Semiconductors. We believe our in-house ability to combine thin film technology
with semiconductors is unique among passive device manufacturers. Most of our
competitors in the passive component area lack internal semiconductor design and
manufacturing capability. While there are some semiconductor manufacturers who
have limited capabilities to combine semiconductors with passive components, at
present we know of none that are selling integrated thin film passive devices
incorporating semiconductor functions.
Application Engineering Expertise. Our application engineers define
products that are application specific solutions to our customers' problems. Our
goal is to be able to specify and design application specific devices that not
only meet the needs of the specific customer, but may also be used to meet the
needs of other customers. Traditional passive component manufacturers provide
components from which customers construct their own solution.
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Control of Wafer Fabrication Facilities With Available Capacity. We
currently operate wafer fabrication facilities in Milpitas, California and
Tempe, Arizona. The processes that we use to build integrated passive devices
are not standard, nor are many of the processes used to build analog
semiconductors. Outsourcing the required manufacturing technology can be quite
difficult for our competitors. We have the capacity at our facilities to
significantly increase production with additional staffing and minimal
additional capital expenditures.
Integrated Manufacturing Capabilities. We bring together within our
company the specialized capabilities necessary to build a broad range of
integrated passive devices. These include laser trimming, noise and temperature
coefficient control, testing, plating, optical inspection and chip scale bumping
technologies. Our competitors generally must outsource one or more of these
capabilities, raising issues of availability, cost, quality control, and time to
market.
<TABLE>
Products
Our products consist of thin film integrated passive products and
semiconductor products and generally range in price from $0.20 to $1.00 per
unit, with some specialized or special purpose products priced up to $10.00 per
unit. The following table provides information regarding our product families by
application:
<CAPTION>
Application Product Name Typical Markets
----------- ------------ ---------------
<S> <C> <C>
Filters ........................... PAC 1284, PRC 1284, PRC, PACT, Computers, Mobile Phones, Personal
PAC USB, PAC GAME, PACKBM Digital Assistants, Set Top Boxes
Termination Devices................ PACDN, PACR, PRN, PACRAMBUS, Computers, Base Stations, Networks
PACGTL, PACAS, PRC, PACTF, PACV
Resistor Networks.................. PACAC 97, PAC27A, PRN Computers, Automobiles, Medical Devices,
Audio Equipment, Test Equipment, Power
Supplies, Networks
ESD Protection..................... PACDN, DN, PDN, PACVGA Mobile Phones, Personal Digital
Assistants, Computers, Set Top Boxes
Power Management................... CMPWR, PAC27 Network Interface Cards, Modems, Cable
Modems
Amplifiers......................... CMC7, CMAMP, AMPM Audio Equipment, Instrumentation, Mobile
Phones
Microprocessors and Peripherals.... G655, G65SC Telephone Switching
Dual Tone Multiple Frequency....... CM8870, CM8880, CM8888, G8912 10-10 XXX Dialers, Telephone Switching,
Answering Machines, Caller ID, PBX, Smart
Phones
</TABLE>
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Thin Film Integrated Passive Products
Our integrated passive devices are application specific, high volume
standard and lower volume custom products. They represent complete solutions to
the electronic problems of termination, filtering, and electrostatic discharge
protection that plague many system designers. Most of the systems in our target
markets include a core of highly integrated circuits, accompanied by discrete
passive components, and low integration level integrated circuits or discrete
semiconductors. We service the need for the integration of these companion
components, which in recent years have come to dominate the size and
significantly impact the cost of most systems. Our thin film product offerings
fall into two categories:
o Our P/Active family of components, called "PAC" in the above table,
optimizes 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. They take
full advantage of the inherent capabilities of the silicon substrate to be
used as interconnect between devices, shield for low noise capabilities,
and even impedance control. They often include some semiconductor devices
as part of the solution, particularly when electrostatic discharge
protection is required.
o Our Integrated Passive Electronic Component products are cost effective for
customers with high volume requirements or that can take advantage of our
capabilities to provide tight tolerances, low temperature coefficients,
tight matching between components, or other special characteristics. These
products are often custom in nature. They are typically simpler in function
and easier to manufacture and are often well suited for very low cost
applications.
We also offer a variety of precision and non-precision thin film
resistors and capacitors as well as combinations of those elements with and
without semiconductor devices. Devices can be manufactured on a variety of
different substrates. We have particular strength in the area of
resistor-capacitor filters, a rapidly growing and complex segment of the
integrated passive component business. We sell these products both in standard
semiconductor industry packages, primarily surface mount technology, as chip
scale packages, and as un-packaged die. Packaged devices currently represent the
dominant portion of our business, although we expect chip scale packages to
represent an increasing portion.
Semiconductor Products
We manufacture CMOS based analog circuits, utilizing feature sizes of
1.5 microns or greater. In fiscal 1999 and 2000, we developed and introduced
four new semiconductor product families: power management solutions, operational
amplifiers, electrostatic discharge protection devices, and combination devices
targeted at the multiple functions on the VGA port of computers.
o Our power management devices are single chip solutions that implement the
power management techniques used in computer and network enhancements such
as network interface cards, modems, and other system functions which must
remain operational when major parts of systems are powered down.
o Our operational amplifier focus is on providing extremely low power
consumption products that are attractive in the portable systems markets.
Operational amplifiers are used in the processing of analog electrical
signals. We can integrate multiple operational amplifiers with passive
components to provide higher level functions.
o Our electrostatic discharge protection devices are typically used to
protect connector interfaces and other external elements. These devices are
often combined with signal termination and filtering functions.
o We have introduced a family of products for the VGA port on personal
computers. These devices combine buffer amplifiers, electrostatic discharge
protection, level shifting functions, and termination and biasing resistors
for handling the multiplicity of needs on the video port of computers.
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o Our traditional semiconductor business includes 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
products. These products are used in customer applications such as
10-10-XXX dialers, answering machines, portable telephones and switching
systems. Additionally, we continue to manufacture the 65CXX family of
microprocessors.
Foundry Operations
We participate 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 that do not directly compete with the
larger foundries in Southeast Asia and elsewhere. Our intent is to do foundry
work to leverage the utilization of our facilities in Tempe, Arizona, while
building our own products and establishing relationships with key partners. In
fiscal 1999 and 2000, our major foundry customer was Sipex Corporation, which
recently announced the opening of its own facility. Sipex represented
approximately 2.5% of product sales in fiscal 2000 and we do not believe the
potential loss of this revenue will have a material impact on our business.
Customers
Our products are incorporated into products manufactured by other
companies. In fiscal 2000 approximately 52% of our revenues came from the sale
of our products directly to original equipment manufacturers and contract
manufacturers. No single end use customer accounted for over 10% of net product
sales and the following were our major customers for fiscal 2000:
ACER Group ITI Limited
Celestica, Inc. Nortel Networks
Cisco Systems Samsung Electronics Co. Ltd.
Guidant Corporation Solectron Corporation
Intel Corporation 3 COM Corporation
In fiscal 2000, 48% of our revenues came from sale of our products
through distributors. Arrow Inc. and Excelpoint Systems, our two largest
distributors, accounted for approximately 17% and 14% of net product sales,
respectively. In fiscal 1999, no single distributor accounted for greater than
10% of net sales. In fiscal 1998, Bell Milgray Inc., a distributor, later
acquired by Arrow Electronics, accounted for approximately 10% of net product
sales.
Sales and Marketing
We focus our marketing efforts on high growth electronics sectors,
including the areas of computers and peripherals, portable communications
devices and telecommunications infrastructure, and network systems.
Additionally, we concentrate our efforts on major worldwide electronic system
manufacturers who are considered market leaders in these segments, and where we
feel we have the greatest opportunities and ability to influence the industry at
large. This often involves a longer design-in cycle, but we believe it has
greater long-term business potential.
Our products are primarily specified through contact with customers'
engineering departments, as well as their procurement and manufacturing
personnel. Most of the systems into which our products are designed have short
life cycles. As a result, we require a significant number of new design wins on
an ongoing basis to maintain and grow revenue.
We work with existing and potential customers to identify passive and
specialized semiconductor component needs that our capabilities address, and
seek to have customers design our solutions into their products. We facilitate
these efforts by providing customized solutions as necessary to meet customer
design requirements. These customized designs, and the knowledge acquired during
the design process, can often be used to create standard products, which we can
then offer for similar applications in other areas. In this respect, our
business style is closer to that of a semiconductor company, than that of the
traditional passives company.
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Our sales channels consist primarily of independent regional sales
representatives managed by our sales force, with its headquarters Milpitas,
California and regional sales offices throughout the United States, Europe, and
Asia. We sell through distributors, in the United States, Asia and Europe, to
provide sources of our products at locations closer to the customers. As our
standard product line expands, more of our sales may be through distributors.
There is a distinct shift from original equipment manufacturing towards
the use of contract manufacturing within our customer base, and we believe that
this trend will continue. Since the end of fiscal 1998 and continuing through
fiscal 2000, a contract manufacturer has been our single largest direct
purchaser of product. In response to this trend, we have a separate contract
manufacturing account program to further develop sales opportunities in this
area.
Foreign sales accounted for 43%, 39%, and 33% of product sales for
fiscal years ended March 31, 2000, 1999, and 1998, respectively. Many of those
products were designed into United States based OEM's and subcontracted through
overseas assemblers. We use independent foreign sales representatives and
distributors to provide international sales support, along with our employees
based abroad. We expect that international sales will continue to represent a
significant portion of our sales for the foreseeable future. Our sales are
denominated in U.S. dollars.
Manufacturing
Our manufacturing processes are complex, and require production in a
highly controlled, clean environment suitable for fine tolerances. We currently
operate wafer fabrication facilities in Milpitas, California and Tempe, Arizona
that are ISO 9000 certified. The Milpitas facility includes a 10,000 square foot
clean room and primarily uses four and five 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 passive components and semiconductor products. We use
subcontractors in Asia, primarily in Thailand and Malaysia, for assembly,
packaging, and testing of most of our products.
We manufacture our products using industry standard semiconductor wafer
fabrication equipment that we modify as necessary. We have historically
purchased used processing equipment at significantly lower cost than new
equipment, but have also purchased new equipment for some operations when it
could be shown to be more cost effective or where used equipment was not
available.
Research and Development
Our research and development programs consist primarily of developing
new products, processes and materials in response to identified market needs.
Additionally, we redesign existing products to reduce costs and expand their
capabilities and performance. On March 31, 2000, we had 30 engineers in our
research and development department and process development and improvement
organizations who averaged 17 years of experience.
For the fiscal years ended March 31, 2000, 1999, and 1998, we spent
$3.4 million, $3.7 million, and $3.0 million, respectively, on research and
development activities.
Intellectual Property
In the last five years, we have been granted 12 U.S. patents related to
our thin film and semiconductor technologies. We have seven U.S. patent
applications pending relating to specific embodiments of our proprietary
resistor, capacitor, diode, process and semiconductor product technologies. We
have also established domestic and international trademarks for our P/Active
family of devices.
We have acquired a non-exclusive, non-assignable license with respect
to manufacturing flip chip, or "bumped" die, from Flip Chip Technologies. Under
the terms of this license, we can utilize certain of Flip Chip's Ultra Chip
Scale packaging technologies.
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Our policy is to apply for patent protection for our unique products
and manufacturing processes where such protection is warranted. Process
technologies are more often designated as trade secrets. With respect to mask
works, our policy is to selectively seek copyright protection. We protect our
trade secrets by having our employees sign confidentiality and non-disclosure
agreements as part of our personnel policy. It is not our intention to rely
solely on protection of intellectual property rights to deter competition.
However, when and where appropriate, we have taken aggressive action to protect
our intellectual property rights.
Competition
Competition in the passive component industry is based on a number of
factors, including price, product performance, established customer
relationships, manufacturing capabilities, product development and customer
support. Our primary competition has come from established competitors and from
pre-existing technologies. Many of our competitors have announced that they are
or will be providing thin film products in addition to their traditional thick
film devices. We have seen only sporadic thin film competition but continue to
believe that this market will become more competitive.
Because our markets are highly fragmented, we generally encounter
different competitors in our various market areas. Competitors with respect to
our integrated passive products include AVX/Kyocera, Beckman Industrial Corp.,
Intarsia, IRC, KOA-Speer, Matsushita Electronics Components, Ltd., Murata-Eirie
of North America, Inc., Phillips Electronics N.V. Ltd, ROHM Co., ST Micro, TDK
Corp. of America, Vishay Intertechnology, Inc., and others. In the semiconductor
area, we encounter Cherry Semiconductor, Linear Technology, Maxim, Mitel,
Motorola Semiconductor, Fairchild Semiconductor, Semtech, ST Micro, Telcom
Semiconductor, Texas Instruments, and others.
Environmental
We are subject to a variety of federal, state and local regulations in
connection with the discharge and storage of certain chemicals during our
manufacturing processes. We believe that we are in compliance with all such
environmental regulations. Industrial waste generated at our facilities is
either processed prior to discharge or stored in barrels with double containment
methods until removed by an independent contractor. We have obtained all
necessary permits for such discharges and storage.
Employees
As of March 31, 2000, we had 285 full-time and part-time employees,
including 29 in sales and marketing, 30 in engineering and research and
development activities and process development and improvement organizations,
and 205 in manufacturing. Of these employees, 151 were located in Milpitas,
California and 134 in Tempe, Arizona.
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Risk Factors
We have incurred losses in our fiscal years 1998 and 1999 and we may be unable
to sustain profitability.
We have experienced losses for each quarter and fiscal year from June
30, 1998 through September 30, 1999. We incurred net losses of $2.8 million for
our fiscal year ended March 31, 1999 and $594,000 for the nine months ended
December 31, 1999. Our accumulated deficit at March 31, 2000 was $33.5 million.
Although our revenues have grown in recent quarters, and profits in the quarters
ended December 31, 1999 and March 31, 2000 were sufficient to make the fiscal
year ended March 31, 2000 profitable, we cannot assure you that we will be able
to sustain revenue growth and profitability.
Our operating results may fluctuate significantly because of a number of
factors, many of which are beyond our control.
Our operating results may fluctuate significantly. Some of the factors
that affect our quarterly and annual operating results, many of which are
difficult to control or predict, are:
o the reduction, rescheduling or cancellation of orders by
customers;
o fluctuations in the timing and amount of customer requests for
product shipments;
o fluctuations in the manufacturing output, yields and inventory
levels of our suppliers;
o changes in the mix of products that our customers purchase;
o our ability to introduce new products on a timely basis;
o the announcement or introduction of products by our
competitors;
o the availability of third-party assembly capacity and raw
materials;
o competitive pressures on selling prices;
o market acceptance of our products;
o general conditions in the computer, telecommunications,
networking, and general semiconductor and passives industries;
and
o general economic conditions.
Our markets are subject to rapid technological change. Therefore, our success
depends on our ability to develop and introduce new products.
The markets for our products are characterized by:
o rapidly changing technologies;
o changing customer needs;
o frequent new product introductions and enhancements;
o increased integration with other functions; and
o rapid product obsolescence.
To develop new products for our target markets, we must develop, gain
access to, and use leading technologies in a cost-effective and timely manner,
and continue to expand our technical and design expertise. In addition, we must
have our products designed into our customers' future products and maintain
close working relationships with key customers in order to develop new products
that meet their changing needs.
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In addition, products for some applications are based on new and
continually evolving industry standards. Our ability to compete will depend on
our ability to identify and ensure compliance with these industry standards. As
a result, we could be required to invest significant time and effort and to
incur significant expense to redesign our products to ensure compliance with
relevant standards.
We may not be able to identify new product opportunities, successfully
develop and bring to market new products, achieve design wins or respond
effectively to new technological changes or product announcements by our
competitors. In addition, we may not be successful in developing or using new
technologies or in developing new products or product enhancements that achieve
market acceptance. Our pursuit of necessary technological advances may require
substantial time and expense. Failure in any of these areas could harm our
operating results.
Our future success depends in part on the continued service of our key
engineering and management personnel and our ability to identify, hire and
retain additional personnel.
There is intense competition for qualified personnel in the
semiconductor industry, in particular the highly skilled design, applications
and test engineers involved in the development of new analog integrated
circuits. Competition is especially intense in the San Francisco Bay area, where
our corporate headquarters and our Milpitas factory are located, as well as in
the Tempe, Arizona, area, where our other factory is located. We may not be able
to continue to attract and retain engineers or other qualified personnel
necessary for the development of our business or to replace engineers or other
qualified personnel who may leave our employ in the future. Any growth is
expected to place increased demands on our resources and will likely require the
addition of additional management and engineering personnel, and the development
of additional expertise by existing management personnel. Loss of the services
of, or failure to recruit, key engineers or other key technical and management
personnel, or key top management, could harm our business.
We do our own wafer fabrication and do not have alternate sources for most of
our processes.
We operate our own semiconductor and thin film wafer manufacturing
facilities. While some of the processes from our Milpitas factory can be run in
our Tempe facility, and vice versa, in general our processes are unique to the
factory in which they are being produced. We provide these fabrication
facilities with rolling forecasts of our production requirements. However, the
ability of each facility to provide wafers to us is limited by the foundry's
available capacity and influenced by rapid changes in mix. Accordingly, we
cannot be certain that these facilities will be able to supply sufficient
capacity to satisfy our requirements. In addition, much of our equipment has
been utilized for a long time, and can be subject to excessive downtime. Other
significant risks associated with our wafer manufacturing include:
o the lack of assured wafer supply, chemicals, or other
materials, and control over delivery schedules;
o the unavailability of, or delays in obtaining access to, key
process technologies;
o the unavailability of, or delays in the ability to hire,
sufficient manufacturing personnel;
o the variability in manufacturing yields and productivity; and
o the availability of spare parts and maintenance service for
aging equipment.
We could experience a substantial delay or interruption in the shipment
of our products or an increase in our costs due to many reasons, including:
o a sudden, unanticipated demand for our products;
o a manufacturing disruption experienced by one or more of our
wafer fabrication facilities;
o errors in fabrication or defects in raw materials;
o the time required, or the inability to identify or qualify
alternative manufacturing sources for existing or new products
in the case of disruption; or
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o failure of our suppliers to obtain the raw materials and
equipment used in the production of our integrated circuits
and integrated passives.
The markets in which we participate are intensely competitive and our products
are not sold pursuant to long term contracts.
Our target markets are intensely competitive. Our ability to compete
successfully in our target markets depends on the following factors:
o designing new products that implement new technologies;
o subcontracting the assembly of new products and delivering
them in a timely manner;
o product quality and reliability;
o technical support and service;
o timely product introduction;
o product performance and features;
o price;
o end-user acceptance of our customers' products;
o compliance with evolving standards; and
o market acceptance of competitors' products.
In addition, our competitors or customers may offer new products based
on new technologies, industry standards or end-user or customer requirements,
including products that have the potential to replace or provide lower-cost or
higher-performance alternatives to our products. The introduction of new
products by our competitors or customers could render our existing and future
products obsolete or unmarketable. In addition, our competitors and customers
may introduce products that integrate the functions performed by our integrated
circuits on a single integrated circuit, or combine our integrated passives onto
the integrated circuit, thus eliminating the need for our products.
Generally, our sales are not subject to long-term contracts but rather
to short-term releases of customer purchase orders, most of which are cancelable
on relatively short notice. The timing of these releases for production as well
as custom design work is not in our control. The percentage of revenues from
turns orders (orders booked and shipped in the same quarter) has ranged from 61%
in the quarter ended June 30, 1999 to as low as 41% for the quarter ended March
31, 2000, making our quarterly revenue dependent on short term orders. Because
of the short life cycles involved with our customers' products, the order
pattern from individual customers can be erratic with inventory accumulation and
de-accumulation during phases of the life cycle for our customers' products. As
a result, we may experience quarterly fluctuations in revenue and operating
results and the risk of inventory write-offs.
Because our markets are highly fragmented, we generally encounter
different competitors in our various market areas. Competitors with respect to
our integrated passive products include AVX/Kyocera, Beckman Industrial Corp.,
Intarsia, IRC, KOA-Speer, Matsushita Electronics Components., Ltd., Murata-Eirie
of North America, Inc., Phillips Electronics, ROHM Co., ST Micro, TDK Corp. of
America, Vishay Intertechnology, Inc., N.V., Ltd., and others. In the
semiconductor area, we encounter competition from Cherry Semiconductor, Linear
Technology, Maxim, Mitel, Motorola Semiconductor, National Semiconductor,
Semtech, ST Micro, Telcom Semiconductor, Texas Instruments, and others. Many of
our competitors are greater than us in size and have larger financial and other
resources than we do.
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If we are unable to further penetrate the markets for PCs, telecommunications,
or networking devices, or if these markets fail to grow as expected, our
revenues could stop growing and may decline.
A significant portion of our revenues in recent periods has been, and
is expected to continue to be, derived from sales of PC, telecommunications, and
networking products. In order for us to be successful, we must continue to
penetrate these markets. Furthermore, if these markets fail to grow as expected,
our business could be materially harmed.
If we are unable to maintain our present foundry relationship with the Sipex
Corporation, or if their use of our capabilities were to decline, our revenues
would be impacted.
In the last three fiscal years we have derived approximately 2.5 to 5%
of our revenue from foundry business with the Sipex Corporation. In the last
year, Sipex built its own facility. It is likely that Sipex will attempt to
install the process we run for them in their own facility. If that happens, we
will likely lose this business. We may not be able to find replacement foundry
business at that time or in the future.
We expect that revenues currently derived from some older communications
products will decline in future periods, and our business will be harmed if our
other products fail to compensate for this decline.
We manufacture some older microprocessor products that are currently
used in places such as India's telephone system and other telecommunications
products. Since all other significant manufacturers of these products are no
longer participating in these markets, our revenues have increased. However,
these devices are not being designed into new systems, so the business will
eventually decline. Additionally, we manufacture a family of old tone generator
products, called DTMF circuits, which are used for tone recognition on analog
telephone systems. As long as this communication system is in use, there will be
periodic spurts of revenue from increased usage when new functions are
introduced, but the long-term business trend is most likely down. If we are
unable to find replacement business for this revenue, our overall business will
suffer.
Our dependence on third-party subcontractors to assemble and test our products
subjects us to a number of risks, including an inadequate supply of products and
higher manufacturing costs.
We depend on independent subcontractors for the assembly and most of
the testing of our products. As a result, we face significant risks including:
o reduced control over delivery schedules and quality;
o the potential lack of adequate capacity during periods of
excess industry demand;
o difficulties selecting and integrating new subcontractors;
o limited warranties on products supplied to us;
o potential increases in prices due to capacity shortages and
other factors; and
o potential misappropriation of our intellectual property.
If we fail to deliver our products on time or if the costs of our
products increase, then our profitability and customer relationships could be
harmed.
Our reliance upon foreign suppliers exposes us to risks associated with
international operations.
We use assembly and test subcontractors in Asia, primarily in Thailand
and Malaysia for most of our products. We intend to continue transferring our
testing and shipping operations to foreign subcontractors. Our dependence on
these subcontractors involves the following substantial risks:
o political and economic instability;
o disruption to air transportation from Asia; and
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o changes in tax laws, tariffs and freight rates.
These risks may lead to delayed product delivery or increased costs,
which would harm our profitability and customer relationships. In addition, we
maintain significant inventory of die at our foreign subcontractors that could
be at risk.
We also "drop-ship" product from these foreign subcontractors to
customers. This has the effect of both saving freight charges and reducing the
delivery cycle time. However, it increases our exposure to disruptions in
operations not under our direct control and has required us to enhance our
computer and information systems to coordinate this remote activity.
The limited number of subcontractors we use may expose us to an increased risk
of manufacturing disruption or uncontrolled price changes.
Due to the volume of our products, we believe it is impractical for us
to spread our use of subcontractors over more than a few suppliers without
significant increases in our costs. Although to date we have not experienced any
material disruptions with respect to our subcontractors, if the operations of
one or more of our subcontractors should be disrupted, our business may be
adversely impacted. In addition, the volatility of the semiconductor industry
has occasionally resulted in shortages of subcontractor capacity and other
disruption of supplies. We may not be able to find sufficient subcontractors at
a reasonable price or at all if such disruptions occur.
Our reliance on foreign customers could cause fluctuations in our operating
results.
International sales accounted for 43% of net sales for fiscal year
2000, 39% for fiscal 1999 and 33% of net sales for fiscal 1998. International
sales may account for an increasing portion of our revenues, which would subject
us to the following risks:
o changes in regulatory requirements;
o tariffs and other barriers;
o timing and availability of export licenses;
o political and economic instability;
o difficulties in accounts receivable collections;
o difficulties in staffing and managing foreign subsidiary and
branch operations;
o difficulties in managing distributors;
o difficulties in obtaining governmental approvals for certain
products;
o limited intellectual property protection;
o foreign currency exchange fluctuations;
o the burden of complying with and the risk of violating a wide
variety of complex foreign laws and treaties; and
o potentially adverse tax consequences.
In addition, because sales of our products have been denominated to
date in United States dollars, increases in the value of the United States
dollar could increase the relative price of our products so that they become
more expensive to customers in the local currency of a particular country.
Furthermore, because some of our customer purchase orders and agreements are
influenced, if not governed, by foreign laws, we may be limited in our ability
to enforce our rights under these agreements and to collect damages, if awarded.
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We rely on our distributors and sales representatives to sell many of our
products.
We sell many of our products through distributors and sales
representatives. Our distributors and sales representatives could reduce or
discontinue sales of our products or may sell our competitor's products. They
may not devote the resources necessary to sell our products in the volumes and
within the time frames that we expect. In addition, we depend upon the continued
viability and financial resources of these distributors and sales
representatives, some of which are small organizations with limited working
capital. These distributors and sales representatives, in turn, depend
substantially on general economic conditions and conditions within the
electronics industry. We believe that our success will continue to depend upon
these distributors and sales representatives. If our distributor Arrow Inc., in
particular, or some of our other distributors and sales representatives
experience financial difficulties, or otherwise become unable or unwilling to
promote and sell our products, our business could be harmed.
Many of our products have long, high-risk sales cycles that expose us to the
possibility of delayed return, or complete loss of our research and development
investment.
Due to the nature of our products, we not only have a long design-in
cycle, but many of the design wins risk replacement with other competing
components until the time the system is released to manufacturing. It typically
takes us more than 12 months to realize volume shipments after we first achieve
a design win with a customer. We first work with customers to achieve a design
win, which may take nine months or longer. Our customers then complete the
design, testing and evaluation process and begin to ramp up production, a period
which typically lasts an additional three months or longer. At any point during
this time, we may lose the design. As a result, a significant period of time may
elapse between our research and development efforts and our realization of
revenue, if any, from volume purchasing of our products by our customers.
Due to the volatility of demand for our products, our inventory may from
time-to-time be in excess of our needs, which could cause write-downs of our
inventory.
Generally our products are sold pursuant to short-term releases of
customer purchase orders and some orders must be filled on an expedited basis.
In addition, many of our products are specific to individual customers. We
typically plan our production and inventory levels based on internal forecasts
of customer demand, which is highly unpredictable and can fluctuate
substantially. Therefore, we often order materials and at least partially
fabricate product in anticipation of customer requirements. In order to achieve
level line loading and efficiencies in manufacturing, we may also order and
process materials in advance of anticipated customer demand.
In the last two years, there has been a trend toward vendor-managed
inventory among some large customers. In such situations, we do not recognize
either revenue or bookings until such time as the customer withdraws inventory
from stock. This imposes the burden upon us of carrying additional inventory
that is on customer premises.
The Company values its inventories 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. 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 result in
adjustments to inventory valuations in the future.
Our backlog may not result in future revenue.
Due to possible customer changes in delivery schedules and
cancellations of orders, our backlog at any particular point in time is not
necessarily indicative of actual sales for any succeeding period. A reduction of
backlog during any particular period, or the failure of our backlog to result in
future revenue, could harm our business.
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Our operating expenses are relatively fixed. Therefore, we have limited ability
to reduce expenses quickly in response to any revenue shortfalls.
Our operating expenses are relatively fixed, and therefore, we have
limited ability to reduce expenses quickly in response to any revenue
shortfalls. Consequently, our operating results will be harmed if our revenues
do not meet our projections. We may experience revenue shortfalls for the
following and other reasons:
o significant pricing pressures that occur because of declines
in average selling prices over the life of a product;
o sudden shortages of raw materials or fabrication, test or
assembly capacity constraints that lead our suppliers to
allocate available supplies or capacity to other customers
and, in turn, harm our ability to meet our sales obligations;
and
o reduction, rescheduling, or cancellation of customer orders.
We may, in the future, make acquisitions that will involve numerous risks. We
cannot assure you that we will be able to address these risks successfully
without substantial expense, delay or other operational or financial problems.
The risks involved with acquisitions include:
o diversion of management's attention;
o failure to retain key personnel;
o amortization of acquired intangible assets;
o customer dissatisfaction or performance problems with an
acquired company;
o the cost associated with acquisitions and the integration of
acquired operations; and
o assumption of known or unknown liabilities or other
unanticipated events or circumstances.
We cannot assure you that we will be able to address these risks
successfully without substantial expense, delay or other operational or
financial problems.
We may not be able to protect our intellectual property rights adequately.
Our ability to compete is affected by our ability to protect our
intellectual property rights. We rely on a combination of patents, trademarks,
copyrights, mask work registrations, trade secrets, confidentiality procedures
and non-disclosure and licensing arrangements to protect our intellectual
property rights. Despite these efforts, the steps we take to protect our
proprietary information may not be adequate to prevent misappropriation of our
technology, and our competitors may independently develop technology that is
substantially similar or superior to our technology.
More specifically, our pending patent applications or any future
applications may not be approved, and any issued patents may not provide us with
competitive advantages and may be challenged by third parties. If challenged,
our patents may be found to be invalid or unenforceable, and the patents of
others may have an adverse effect on our ability to do business. Furthermore,
others may independently develop similar products or processes, duplicate our
products or processes, or design around any patents that may be issued to us.
We could be harmed by litigation involving patents and other intellectual
property rights.
As a general matter, the semiconductor and related industries are
characterized by substantial litigation regarding patent and other intellectual
property rights. We may be accused of infringing the intellectual property
rights of third parties. Furthermore, we may have certain indemnification
obligations to customers with respect to the infringement of third-party
intellectual property rights by our products. Infringement claims by third
parties or claims
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for indemnification by customers or end users of our products resulting from
infringement claims may be asserted in the future and such assertions, if proven
to be true, may harm our business.
Any litigation relating to the intellectual property rights of third
parties, whether or not determined in our favor or settled by us, would at a
minimum be costly and could divert the efforts and attention of our management
and technical personnel. In the event of any adverse ruling in any such
litigation, we could be required to pay substantial damages, cease the
manufacturing, use and sale of infringing products, discontinue the use of
certain processes or obtain a license under the intellectual property rights of
the third party claiming infringement. A license might not be available on
reasonable terms, or at all.
Earthquakes and other natural disasters may damage our facilities or those of
our suppliers.
Our Milpitas facility, including our corporate headquarters, is located
in California near major earthquake faults that have experienced earthquakes in
the past. In addition, some of our suppliers are located near fault lines. In
the event of a major earthquake or other natural disaster near our headquarters,
our operations could be harmed. Similarly, a major earthquake or other natural
disaster near one or more of our major suppliers, like the one that occurred in
Taiwan in September 1999, could disrupt the operations of those suppliers, which
could limit the supply of our products and harm our business.
Additionally, our facility in Tempe, Arizona is located in a desert
region of the southwestern United States. Disruption of water supplies or other
infrastructure support could limit the supply of our products and harm our
business.
Our stock price is volatile.
The market price of our common stock has fluctuated significantly to
date. In the future, the market price of our common stock could be subject to
significant fluctuations due to general market conditions and in response to
quarter-to-quarter variations in:
o our anticipated or actual operating results;
o announcements or introductions of new products;
o technological innovations or setbacks by us or our
competitors;
o conditions in the semiconductor and passive components
markets;
o the commencement of litigation;
o changes in estimates of our performance by securities
analysts;
o announcements of merger or acquisition transactions; and
o general economic and market conditions.
In addition, the stock market in recent years has experienced extreme
price and volume fluctuations that have affected the market prices of many high
technology companies, particularly semiconductor companies, that have often been
unrelated or disproportionate to the operating performance of companies. These
fluctuations, as well as general economic and market conditions may harm the
market price of our common stock.
The anti-takeover provision of our certificate of incorporation and of the
California General Corporation Law may delay, defer or prevent a change of
control.
Our board of directors has the authority to issue up to 10,000,000
shares of preferred stock and to determine the price, rights, preferences and
privileges and restrictions, including voting rights of those shares without any
further vote or action by our stockholders. The rights of the holders of common
stock will be subject to, and may be harmed by, the rights of the holders of any
shares of preferred stock that may be issued in the future. The issuance of
preferred stock may delay, defer or prevent a change in control. The terms of
the preferred stock that might be issued could
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potentially make more difficult or expensive our consummation of any merger,
reorganization, sale of substantially all of our assets, liquidation or other
extraordinary corporate transaction. California Corporation law requires an
affirmative vote of all classes of stock voting independently in order to
approve a change in control. In addition, the issuance of preferred stock could
have a dilutive effect on our stockholders. Further, our stockholders must give
30 days advance notice prior to the relevant meeting to nominate a candidate for
director or present a proposal to our stockholders at a meeting. These notice
requirements could inhibit a takeover by delaying stockholder action. The
California Corporation law also restricts business combinations with some
stockholders once the stockholder acquires 15% or more of our common stock.
There may be a substantial disbursement of shares from the former Chairman of
California Micro Devices that could negatively impact the stock price.
The former Chairman of California Micro Devices still controls
approximately 1,700,000 shares of the Company's stock. He has been convicted of
securities fraud and is appealing that decision. As part of the sentencing
related to this conviction, he was ordered to disgorge 1,500,000 shares to the
class of offended shareholders, in settlement of the class action suits that had
been filed in parallel civil actions. To date, nothing has been settled in this
matter, as the criminal appeal has not yet been adjudicated, and no other
interim settlement has been reached. Assuming that the present sentencing is
upheld, the 1,500,000 shares of stock would be disbursed over some 3,500
claimants. We do not know what effect disbursement of this amount of stock may
have on the price of our stock.
If we have not adequately prepared for the transition to Year 2000 and related
issues, our business, operating results and financial condition could suffer.
We have executed a plan designed to make our computer systems,
applications, computer and manufacturing equipment and facilities Year 2000
compliant. To date, none of our systems, applications, equipment or facilities
have experienced material difficulties from the transition to Year 2000, nor
have we been notified that any of our suppliers have had any such difficulties.
However, due to the breadth of potential issues related to the Year 2000, we may
yet experience problems in the future and the final determination may still take
several months. The effect on our operational results from any failure of our
systems, applications, equipment or facilities, or our critical external
suppliers, related to the Year 2000 issue cannot yet be finally determined.
Our failure to comply with environmental regulations could result in substantial
liability to us.
We are subject to a variety of federal, state and local laws, rules and
regulations relating to the protection of health and the environment. These
include laws, rules and regulations governing the use, storage, discharge,
release, treatment and disposal of hazardous chemicals during and after
manufacturing, research and development and sales demonstrations, as well as the
maintenance of healthy and environmentally sound conditions within our
facilities. If we fail to comply with present or future regulations, we could be
subject to substantial liability for clean up efforts, property damage, personal
injury and fines or suspension or cessation of our operations. Restrictions on
our ability to expand or continue to operate our present locations could be
imposed upon us or we could be required to acquire costly remediation equipment
or incur other significant expenses.
Issuance of new laws or accounting regulations, or re-interpretation of existing
laws or regulations, could materially impact our business or stated results.
From time to time, the government, courts, and financial accounting
boards issue new laws or accounting regulations, or modify or re-interpret
existing ones. We cannot guarantee that there will not be future changes in
laws, interpretations, or regulations that would effect our financial results or
the way in which we present them. Additionally, changes in the laws or
regulations could have adverse effects on hiring and many other aspects of our
business that would affect our ability to compete, both nationally and
internationally.
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ITEM 2. PROPERTIES.
We currently lease 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. We 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 as of March 31, 2000 is $11,152 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.
We estimate that our wafer fabrication capacity utilization was
approximately 45% in Tempe and 35% in Milpitas by the end of the year ended
March 31, 2000. Ramping up to full wafer fabrication capacity from both of these
locations would require moderate additional capital expenditures as well as an
ongoing replacement of aging equipment.
ITEM 3. LEGAL PROCEEDINGS.
From August 5, 1994 through February 16, 1995, eleven purported class
action complaints were filed against us in the United States District Court for
the Northern District of California.
By court order dated May 20, 1997, these actions have been settled. Our
contribution towards the settlement consisted of the payment of $6 million 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 guaranteed the shareholder would 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
defined period. As of January 5, 2000 the 20-day average trading price exceeded
$11.50 and the CVR was extinguished. We had put $2 million into a restricted
account as a guarantee for performance under the CVR. As a result of the CVR
being extinguished, this $2 million is no longer restricted and is included in
cash and short-term securities as of March 31, 2000.
The Company has cooperated with the Justice Department and the SEC in
their investigation of its former officers. The Justice Department has advised
we are not currently a target or subject of 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 lawsuits, claims, investigations, and
proceedings, including commercial and employment matters, which are being
handled and defended in the ordinary course of business. We are not aware of any
pending legal proceedings against the Company that, individually or in the
aggregate, would have a material adverse effect on our business, operating
results, or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
20
<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 2000 and 1999 are as follows:
Common Stock
Fiscal 2000 Q1 Q2 Q3 Q4
----------- -- -- -- --
High $2 11/16 $5 11/16 $13 3/8 $33 7/8
Low $1 7/8 $2 1/8 $4 12 15/16
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
Certain debt covenants restrict the payment of dividends. No dividends
were paid in fiscal 2000, 1999, or 1998. We expect to continue that policy in
the foreseeable future. There were approximately 10,000 common shareholders of
record as of March 31, 2000.
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data (in thousands except per common share
information) set forth below with respect to operating and balance sheet data
are derived from the financial statements of the Company.
<CAPTION>
Twelve Months Ended March 31,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total revenues $ 43,763 $ 33,617 $ 33,043 $ 32,936 $ 39,882
Income (loss) before income taxes $ 632 $ (2,771) $ (3,005) $ 704 $ 5,119
Net income (loss) $ 632 $ (2,771) $ (3,005) $ 704 $ 5,119
Net income (loss) per common share
Basic $ 0.06 $ (0.28) $ (0.30) $ 0.07 $ 0.48
Diluted $ 0.05 $ (0.28) $ (0.30) $ 0.07 $ 0.48
Total assets $ 39,086 $ 33,644 $ 35,994 $ 38,270 $ 44,928
Long-term obligations $ 8,116 $ 8,422 $ 8,159 $ 8,499 $ 7,896
</TABLE>
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In the following discussion, fiscal 2000, 1999, and 1998 refer to the
twelve months ended March 31, 2000, 1999, and 1998, respectively.
Results of Operations
Product sales for fiscal 2000 totaled $43.8 million compared to $33.6
million in fiscal 1999 and $32.5 million in fiscal 1998. The 30% increase in
product sales for fiscal 2000 was due primarily to increased sales of new
products, with the majority of the increase being in products for the networking
and telecommunications markets. Units shipped increased 53% in fiscal 2000
compared to the year-earlier period. Sales of new products (products introduced
within the past three years) for fiscal 2000 increased by 96% in dollars and
119% in units as compared to the year-earlier period. Thin film integrated
devices represented 69% of product sales and 73% of unit shipments for fiscal
2000 as compared to 69% of product sales and 82% of units shipped in fiscal
1999. In total the number of thin film parallel port solutions shipped increased
by 21% in fiscal 2000 as compared fiscal 1999, but the number of units shipped
declined due to increased mix of single chip and lower mix of two chip parallel
port solutions. The 3% increase in product sales for fiscal 1999 over fiscal
1998 reflects primarily the increase in unit sales of the Company's new P/Active
family of products (introduced in calendar 1997), partially offset by a decline
in demand for some of the older semiconductor products. Thin film products
(including P/Active) accounted for approximately 69% of product sales and 82% of
units shipped in fiscal 1999 compared to 66% of product sales and 79% of units
shipped in fiscal 1998.
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. There were no cost-sharing payments by
HML in fiscal 1999 and fiscal 2000 and we expect no further revenue from HML for
joint research and development in the future.
Research and development expenses were $3.4 million in fiscal 2000
compared to $3.7 million in fiscal 1999 and $3.0 million in fiscal 1998. The
higher level of expenditures in fiscal 1999 compared to fiscal 2000 and fiscal
1998 reflected a higher level of material costs associated with an emphasis on
process development efforts.
Selling, marketing, and administrative expenses in fiscal 2000 were $9.7
million compared to $7.3 million in fiscal 1999 and $7.9 million in 1998. The
increase in fiscal 2000 is primarily due to increased commissions, increased
personnel costs (including the expansion of our presence in Europe and the Far
East), and increased promotional activities. Fiscal 1999 expenses were lower
than fiscal 1998 primarily due to proceeds from a legal settlement achieved in
fiscal 1999.
Interest expense was $890,000, $892,000, and $941,000, in fiscal 2000,
1999, and 1998, respectively. The decrease in interest expense in fiscal 1999
compared to fiscal 1998 primarily reflects expiration of certain capital
equipment leases. Interest and other income was $419,000 in fiscal 2000 compared
to $219,000 in fiscal 1999 and $511,000 in fiscal 1998. The increase in fiscal
2000 compared to fiscal 1999 was largely due to increased investment income. The
decrease in fiscal 1999 as compared to fiscal 1998 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 net income of $632,000
in fiscal 2000 compared to a net loss of $2.8 million in fiscal 1999 and a net
loss of $3.0 million in fiscal 1998.
We did not incur income tax expense in fiscal 2000 due to the
availability of tax loss carryforwards, nor in fiscal 1999 and fiscal 1998 due
to having net losses in those years. On March 31, 2000, the Company had Federal
and State tax loss carryforwards of approximately $34.8 million and $6.1
million, respectively. See Note 13 of Notes to Financial Statements.
22
<PAGE>
Liquidity and Capital Resources
Total cash, short-term securities and investments as of March 31, 2000,
increased to $6.6 million compared to $4.9 million on March 31, 1999. This
increase was primarily attributable to the inclusion of previously restricted
cash associated with its 1997 class action settlement, since the stock price
guarantee included in the settlement has been met. Receivables increased $4.4
million, which was attributable to increased product sales during the three
months ended March 31, 2000. Inventories increased by $1.6 million during fiscal
2000, related to increased work-in-process to support new product introductions
and increased sales of new and existing products. But this was essentially
offset by a $1.6 million increase in accounts payable. Other current assets
increased $388,000, to $980,000 at March 31, 2000, due to increased annual
insurance payments and prepayments of payroll taxes made during the fiscal year.
We also received $3.2 million from the sale of common stock through our employee
stock plans during fiscal 2000.
We have a $3.0 million revolving secured line of credit agreement that
expires on July 31, 2000. Under the terms of the line of credit, we can borrow
at prime plus one-half percent, collateralized by eligible receivables. We also
have a $1.0 million capital equipment financing facility that expires on June
30, 2003; under the terms of this facility we can borrow at prime plus 0.75%.
During fiscal 2000 we borrowed $238,000 against the capital equipment financing
facility and there were no borrowings against the revolving line of credit.
There were no borrowings on either of these facilities on March 31, 1999. We are
in compliance with our financial covenants. On April 21, 2000 we secured an
additional $500,000 capital equipment financing facility under the same terms
and conditions of the original facility. The new line expires on August 3, 2003.
We expect to fund our future liquidity needs through 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, we may pursue other sources of liquidity.
We believe we have sufficient financial resources to fund our operations
for the foreseeable future.
Impact of the Year 2000
The Year 2000 issue is primarily the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year.
We have experienced no material impact on our operations as a result of
the transition to the Year 2000. Problems relating to the Year 2000 issue could
still arise, but we do not believe that they will have a material adverse effect
on our financial condition or results of operations. The Company considers its
operations to be Year 2000 functional and ready to support its customers,
however we continue to monitor our systems to watch for any potential issues in
the future.
23
<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 our cash until it is required to fund operations and capital
investments. None of these market-risk sensitive instruments are held for
trading purposes except for amounts related to our non-qualified deferred
compensation program. We do not own derivative financial instruments in our
investment portfolio. The investment portfolio contains instruments that are
subject to fluctuation in interest rates.
Our 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. Our
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, we do not believe that we have a material exposure to
interest rate risk.
The interest rates on nearly all of our 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.
24
<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 26
Balance Sheets 27
March 31, 2000 and March 31, 1999
Statements of Operations 28
Years ended March 31, 2000, March 31, 1999, and March 31, 1998
Statements of Shareholders' Equity 29
Years ended March 31, 2000, March 31, 1999, and March 31, 1998
Statements of Cash Flows 30
Years ended March 31, 2000, March 31, 1999, and March 31, 1998
Notes to Financial Statements 31
Financial Statement Schedule:
Schedule 2 Valuation and Qualifying Accounts 46
25
<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, 2000 and 1999, and the related statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended March 31, 2000. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of California Micro
Devices Corporation as of March 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
March 31, 2000 in conformity with accounting principles generally accepted in
the United States. 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 26, 2000
26
<PAGE>
<TABLE>
CALIFORNIA MICRO DEVICES CORPORATION
BALANCE SHEETS
(Amounts in Thousands, Except Per Share Data)
<CAPTION>
March 31, March 31,
2000 1999
-------- --------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 1,490 $ 764
Short-term investments 5,069 4,169
Accounts receivable, less allowance for doubtful
accounts of $219 in 2000 and $224 in 1999 8,875 4,471
Inventories 9,994 8,438
Other assets 980 592
-------- --------
Total current assets 26,408 18,434
Property and equipment, net 10,637 11,540
Restricted cash 902 2,900
Other long-term assets 1,139 770
-------- --------
Total assets $ 39,086 $ 33,644
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 4,821 $ 3,239
Accrued salaries and benefits 1,097 998
Other accrued liabilities 742 554
Deferred margin on shipments to distributors 516 576
Current maturities of long-term debt 398 306
Current maturities of capital lease obligations 417 379
-------- --------
Total current liabilities 7,991 6,052
Long-term debt, less current maturities 7,342 7,503
Other long-term liabilities and capital leases less current maturities 793 919
-------- --------
Total liabilities 16,126 14,474
Shareholders' equity:
Preferred stock - no par value; 10,000,000 shares authorized;
none issued and outstanding -- --
Common stock - no par value; 25,000,000 shares authorized;
shares issued and outstanding: 11,037,543 as of March 31, 2000
and 10,116,144 as of March 31, 1999 56,479 53,328
Accumulated deficit (33,528) (34,160)
Accumulated other comprehensive income 9 2
-------- --------
Total shareholders' equity 22,960 19,170
-------- --------
Total liabilities and shareholders' equity $ 39,086 $ 33,644
======== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
27
<PAGE>
<TABLE>
CALIFORNIA MICRO DEVICES CORPORATION
STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Data)
<CAPTION>
Years Ended March 31,
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Net product sales $ 43,763 $ 33,617 $ 32,474
Technology related revenues -- -- 569
-------- -------- --------
Total revenues 43,763 33,617 33,043
Cost and expenses:
Cost of sales 29,571 24,730 24,701
Research and development 3,366 3,685 3,017
Selling, marketing and administrative 9,723 7,300 7,900
-------- -------- --------
Total costs and expenses 42,660 35,715 35,618
-------- -------- --------
Operating income (loss) 1,103 (2,098) (2,575)
Interest expense 890 892 941
Interest income and other (income) expense, net (419) (219) (511)
-------- -------- --------
Net income (loss) $ 632 $ (2,771) $ (3,005)
======== ======== ========
Basic earnings (loss) per share $ 0.06 $ (0.28) $ (0.30)
======== ======== ========
Diluted earning (loss) per share $ 0.05 $ (0.28) $ (0.30)
======== ======== ========
Weighted average common shares outstanding
10,324 10,017 9,971
Dilutive effect of employee stock options
Weighted average common shares outstanding,
assuming dilution 1,318 -- --
-------- -------- --------
11,642 10,017 9,971
======== ======== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
28
<PAGE>
<TABLE>
CALIFORNIA MICRO DEVICES CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in Thousands, Except 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, 1997 9,741,124 $ 51,939 $ (28,384) $ 25 $ 23,580
Components of comprehensive loss:
Net loss -- -- (3,005) -- (3,005)
Change in unrealized loss on
available for sale investments -- -- -- (20) (20)
----------
Total comprehensive loss -- -- -- -- (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 loss:
Net loss
-- -- (2,771) -- (2,771)
Change in unrealized loss on
available for sale investments -- -- -- (3) (3)
----------
Total comprehensive loss -- -- -- -- (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
Components of comprehensive income
Net income -- -- 632 -- 632
Change in unrealized income on available
for sale investments -- -- -- 7 7
----------
Total comprehensive income -- -- -- -- 639
----------
Exercise of stock options 729,641 2,191 -- -- 2,191
Employee Stock Purchase Plan 191,758 960 -- -- 960
---------- ---------- ---------- ---------- ----------
Balance at March 31, 2000 11,037,543 $ 56,479 $ (33,528) $ 9 $ 22,960
========== ========== ========== ========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
29
<PAGE>
<TABLE>
CALIFORNIA MICRO DEVICES CORPORATION
STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
<CAPTION>
Years Ended March 31,
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 632 $(2,771) $(3,005)
Adjustments to reconcile net income (loss) to net cash (used in)
Provided by operating activities:
Depreciation and amortization 2,899 2,945 2,852
Issuance of common stock in exchange for licensing agreement -- 79 --
Change in operating assets and liabilities:
Accounts receivable (4,404) 616 (1,148)
Inventories (1,556) (346) 751
Other assets (388) 394 (113)
Trade accounts payable and other current liabilities 1,869 (347) 268
Other long-term assets (384) (381) 16
Other long-term liabilities 290 323 --
Deferred margin on shipments to distributors (60) (5) 5
------- ------- -------
Net cash provided by (used in) operating activities (1,102) 507 (374)
------- ------- -------
Investing activities:
Purchases of short-term investments (3,626) (4,822) (6,144)
Sales of short-term investments 2,735 5,760 7,481
Capital expenditures (1,981) (1,544) (1,132)
Net change in restricted cash 1,998 9 (6)
------- ------- -------
Net cash (used in) provided by investing activities (874) (597) 199
------- ------- -------
Financing activities:
Repayments of capital lease obligations (379) (357) (585)
Repayments of debt (306) (157) (175)
Additions of long-term debt 238 650 --
Proceeds from issuance of common stock 3,151 238 1,072
------- ------- -------
Net cash provided by financing activities 2,704 374 312
------- ------- -------
Net increase in cash and cash equivalents 728 284 137
Cash and cash equivalents at beginning of period 762 480 343
======= ======= =======
Cash and cash equivalents at end of period $ 1,490 $ 764 $ 480
======= ======= =======
Supplemental disclosures of cash flow information:
Interest paid $ 890 $ 892 $ 941
Supplemental disclosures of non-cash investing and financing activities:
Capital expenditures financed through capital lease obligations $ -- $ -- $ 163
Unrealized gain (loss) on securities $ 7 $ (3) $ (20)
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
30
<PAGE>
CALIFORNIA MICRO DEVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
We design, develop, manufacture and market thin film integrated passive
devices and complementary analog semiconductors for Original Equipment
Manufacturers and contract manufacturers who need high density, high
performance, lower cost and unique functionality. The Company uses its
silicon-based thin film materials and semiconductor process technology to
integrate multiple passive and active elements onto a single integrated circuit.
Our analog semiconductor products include primarily analog and mixed
signal products for the telecommunications industry, electrostatic discharge
protection devices, power management devices and operational amplifiers.
Our 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 2000, 1999, and 1998
refer to twelve months ended March 31, 2000, 1999, and 1998, respectively.
Cash and Cash Equivalents
We consider 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 commercial paper, and money market funds.
Short-term Investments
We invest our excess cash in high quality instruments. All of our
marketable investments, except for investments related to our non-qualified
deferred compensation program, are classified as available-for-sale and we view
our available-for-sale portfolio as available for use in its current operations.
Accordingly, we have classified all investments, except for amounts related our
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.
31
<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 5-7 years
Furniture and fixtures 7 years
Revenue Recognition
Revenue from product sales to end user customers is recognized upon
shipment. We generally recognize 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 we believe that deferral of such
distributor sales and related cost of sales as deferred gross margins until the
merchandise is resold by the distributors results in a more meaningful
measurement of revenue from distributors.
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.
Advertising
We expense all advertising as incurred.
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
77,000 shares of common stock outstanding during fiscal 2000 were not included
in the earnings per share computation, as the effect of including them would be
antidilutive. Options to purchase 2,478,000 and 2,315,000 shares of common stock
outstanding during fiscal 1999 and fiscal 1998, respectively, 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.
Employee Stock Plans
As allowed under Statement of Financial Accounting Standard No. 123
(SFAS 123), "Accounting for Stock Based Compensation," we account for our
employee stock plans in accordance with the provision of Accounting Principles
Board's Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." and
have adopted the disclosure provisions of SFAS 123.
Comprehensive Income
Accumulated other comprehensive income (loss) presented in the
accompanying balance sheets consists of the accumulated net unrealized losses on
available-for-sale securities.
32
<PAGE>
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133") requires that we
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through net income. SFAS No. 133
is effective for the our year ending December 31, 2001. We do not currently hold
any derivatives and do not anticipate holding any derivatives in the future.
Accordingly, we do not expect this pronouncement to materially impact future
results.
The Securities and Exchange Commission (SEC) Staff Accounting Bulletin
No. 101 (SAB 101), "Revenue Recognition in Financial Statements" summarizes
certain of the SEC's views in applying generally accepted accounting principles
to revenue recognition in financial statements. We are reviewing our compliance
with SAB 101, but do not expect it to have a material impact on our consolidated
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.
During fiscal 2000 we terminated our Joint Development Agreement with
Hitachi Metals Ltd. (HML). In prior years, HML may have shared in a percentage
of the actual expenditures for mutually agreed upon joint product development.
We included HML's share of product development expenses in the Statements of
Operations as "Technology related revenues". Additionally, HML has stopped
selling our product subject to a private label agreement we had with them. We do
not expect to receive revenue from HML for joint research and development or
from product sales in the future.
Sales to and receivables from Hitachi Metals, Ltd., and its subsidiary,
Hitachi Kinzoku Shoji, Ltd., were not material in fiscal years 2000, 1999, and
1998.
33
<PAGE>
4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The following is a summary of cash, cash equivalents and marketable
securities at March 31, 2000 and March 31, 1999, respectively (amounts in
thousands):
March 31, March 31,
2000 1999
------- -------
Cash equivalents
Money market funds $ 1,136 $ 2,251
Commercial paper 354 535
Less:
Amount classified as restricted cash* -- (2,000)
------- -------
Total cash equivalents $ 1,490 $ 786
======= =======
Short-term investments
Commercial paper $ 1,694 $ --
U. S. Treasuries & U.S. Government agencies 1,493 2,251
Corporate bonds 1,882 1,918
======= =======
Total short-term investments $ 5,069 $ 4,169
======= =======
*See Note 16 of Notes to Financial Statements.
Money market funds of $23,000, related to a benefit plan, are included
in the above table.
<TABLE>
The following is a summary of available-for-sale securities at March 31,
2000 and March 31, 1999, respectively, (amounts in thousands):
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------ ------ ------ ------
<S> <C> <C> <C> <C>
March 31, 2000:
Commercial paper $2,029 $ 19 $ -- $2,048
U.S. Treasuries & U.S. government agencies 1,497 -- (4) 1,493
Corporate bonds 1,890 -- (8) 1,882
------ ------ ------ ------
Total $5,416 $ 19 $ (12) $5,423
====== ====== ====== ======
March 31, 1999:
Commercial paper $ 535 $ -- $ -- $ 535
U.S. Treasuries & U.S. government agencies 2,254 1 (4) 2,251
Corporate bonds 1,918 3 (3) 1,918
------ ------ ------ ------
Total $4,707 $ 4 $ (7) $4,704
====== ====== ====== ======
</TABLE>
Of the fiscal 2000 securities listed above, $4.9 million of debt
securities (at estimated fair market value) mature within one year and $0.5
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.
34
<PAGE>
5. CONCENTRATIONS OF CREDIT RISK
Our financial instruments that are exposed to concentrations of credit
risk consist primarily of temporary cash investments and trade accounts
receivable.
We place our temporary cash investments and short-term securities with
substantial financial service institutions.
A significant portion of our 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. We generally extend credit to these customers and,
therefore, the aforementioned industries and economic influences of customers'
geographic locations affect collection of accounts receivable. However, we
monitor extensions of credit and requires collateral, such as letters of credit,
whenever deemed necessary.
6. CONCENTRATION OF OTHER RISKS
Markets
We market our 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, we require a significant number of new
design wins on an ongoing basis to maintain and grow revenue.
Customers
Generally, our 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
us. Because of the short life cycles involved with our 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, our backlog and bookings as of any particular date may not be
representative of actual sales for any succeeding period.
Inventories
We value our inventories 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. However, due to the
volatility of demand, and the fact that many of our products are specific to
individual customers, backlog is subject to revisions and cancellations and
anticipated demand is constantly changing, which may require adjustments to
inventory valuations in the future.
Manufacturing
Our 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
We use subcontractors in Asia, primarily Thailand and Malaysia, for
assembly, packaging, and test of most of our 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.
35
<PAGE>
7. INVENTORIES
Inventories consist of the following (amounts in thousands):
March 31, March 31,
2000 1999
------ ------
Raw materials $ 452 $ 428
Work-in-process 6,473 5,263
Finished goods 3,069 2,747
------ ------
$9,994 $8,438
====== ======
8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (amounts in thousands):
March 31, March 31,
2000 1999
------- -------
Land $ 137 $ 137
Buildings 3,030 3,030
Machinery, equipment and tooling 24,709 22,772
Leasehold improvements 758 714
Furniture and fixtures 367 367
------- -------
29,001 27,020
Less accumulated depreciation and amortization 18,364 15,480
======= =======
$10,637 $11,540
======= =======
9. SHORT-TERM BORROWINGS
We have a $3.0 million revolving secured line of credit agreement that
expires on July 31, 2000. Under the terms of the line of credit, we can borrow
at prime plus one-half percent, collateralized by eligible accounts receivable.
We also have a $1.0 million capital equipment financing facility that expires on
June 30, 2003; under the terms of this facility we can borrow at prime plus
0.75%. There were no borrowings on either of these facilities at March 31, 1999.
During fiscal 2000 there were no borrowings against the revolving line of
credit. We borrowed $238,000 against the capital equipment financing facility
during fiscal 2000. We are in compliance with our financial covenants. On April
21, 2000 we secured an additional $500,000 capital equipment financing facility
under the same terms and conditions that expires August 3, 2003.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
We have evaluated the estimated fair value of its 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 our long-term debt are
as follows (amounts in thousands):
Carrying Fair
Amount Value
------ -----
Long-term debt (excluding capital leases) $7,740 $8,320
36
<PAGE>
11. LONG-TERM DEBT
<TABLE>
Long-term debt consists of the following (amounts in thousands):
<CAPTION>
March 31, March 31,
2000 1999
------ ------
<S> <C> <C>
Industrial revenue bonds at 10.5%, due through March 1, 2018 $7,045 $7,185
Equipment financing agreement due through June 14, 2002 457 624
Equipment financing agreement due through June 30, 2003 238 --
------ ------
7,740 7,809
Less current maturities 398 306
------ ------
$7,342 $7,503
====== ======
</TABLE>
In January 1999, we borrowed $650,000 under a credit agreement, due June
14, 2002, collateralized by certain of our equipment. The agreement extends for
42 months, carries an interest rate of 9.9%, and has a prepayment option.
In September 1999 we secured capital equipment financing agreement
collateralized by accounts receivable and other assets. The agreement carries an
interest rate of prime plus 3/4 of 1% and expires in June 2003. In April 2000 we
secured additional capital equipment financing from the same institution under
the same terms and conditions with an expiration date of August 2003.
Our industrial revenue bonds are collateralized by a lien on all of our
land and buildings in Tempe, Arizona, and certain equipment acquired with the
proceeds of the bonds, and require certain minimum annual sinking fund payments
ranging from $155,000 in fiscal 2001 to $780,000 in fiscal 2018. As of March 1,
2000, we may prepay the 10.5% Industrial Revenue Bond by redeeming all or part
of the outstanding principal amounts without penalty. At March 31, 2000, 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. We are in compliance with these
covenants at March 31, 2000. As a result of these covenants, our ability to pay
dividends is restricted.
Future maturities of long-term debt at March 31, 2000 are as follows
(amounts in thousands):
2001 $ 398
2002 451
2003 336
2004 225
2005 225
2006 and thereafter 6,105
---------
$ 7,740
=========
37
<PAGE>
12. LEASE COMMITMENTS
Operating Leases
We lease certain manufacturing facilities under operating leases
expiring in fiscal 2001 and 2003. We sublets a leased facility in Arizona for
the remaining period of the lease. The rents received should equal the amounts
we owe 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):
2001 $ 548
2002 414
2003 104
----------
1,066
Sublease receipts (148)
----------
$ 918
==========
Rent expense was $445,000, $450,000, and $417,000 net of sublease income
of $148,000, $147,000, and $143,000 in fiscal 2000, 1999, and 1998,
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):
2001 $ 455
2002 181
-------
Total minimum lease payments 636
Less amount representing interest 41
-------
Present value of net minimum lease payments 595
Less current maturities 417
-------
$ 178
=======
Machinery and equipment under capital leases are as follows (amounts in
thousands):
March 31, March 31,
2000 1999
------------ -----------
Cost $ 1,619 $ 1,619
Less accumulated depreciation 609 377
------------ -----------
$ 1,010 $ 1,242
============ ===========
38
<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, 2000, 1999, and 1998. A reconciliation of our effective tax rate to
the federal statutory rate is as follows:
Years Ended March 31,
2000 1999 1998
---- ---- ----
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 our deferred tax assets and
liabilities are as follows (amounts in thousands):
March 31, March 31,
2000 1999
-------- --------
Deferred tax assets:
Net operating loss carryforwards $ 12,200 $ 10,500
Tax credit carryforwards 500 450
Inventory reserves 3,500 3,500
Other non-deductible accruals and reserves 400 900
-------- --------
Total deferred tax assets 16,600 15,350
Less valuation allowance (16,300) (15,050)
-------- --------
Net deferred tax asset 300 300
-------- --------
Deferred tax liabilities:
Tax over book depreciation 300 300
-------- --------
Total net deferred tax asset $ -- $ --
======== ========
As we had net losses in fiscal 1998 and fiscal 1999, and the first two
quarters of fiscal 2000, we have provided a valuation allowance against total
deferred tax assets. We will continue to evaluate our ability to realize the
deferred tax asset on a quarterly basis. The valuation allowance increased by
$1,250,000 and $950,000 during the years ended March 31, 2000 and 1999,
respectively. Approximately $3,000,000 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.
At March 31, 2000, we had federal and state net operating loss
carryforwards of approximately $34,800,000 and $6,100,000 respectively. In
addition, we had federal and California credit carryforwards of approximately
$300,000 and $200,000, respectively. These carryforwards will expire at various
dates beginning in 2008 through 2020, except for certain state net operating
losses which expire from 2000 through 2005.
Utilization of the net operating losses and credit carryforwards may be
subject to substantial annual limitation due to ownership change provisions of
the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
39
<PAGE>
14. INTEREST INCOME AND OTHER, NET
Interest income and other, net, consists of (amounts in thousands):
Years Ended March 31,
2000 1999 1998
----- ----- -----
Interest income $ 300 $ 295 $ 403
Other income (expense) 119 (76) 108
----- ----- -----
$ 419 $ 219 $ 511
===== ===== =====
Interest income reflects the amounts earned from investments in
short-term securities.
15. EMPLOYEE BENEFIT PLANS
401(K) Savings Plan
We maintain a 401(K) Savings Plan covering substantially all of our
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 2000,
1999, and 1998, we expensed $278,000, $217,000, and $210,000, respectively,
relating to our contributions under the plan.
Nonqualified Deferred Compensation Plan
In April 1997, we 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. Company assets earmarked to pay benefits under the plan are held by a
rabbi trust. We have classified the diversified assets held by the rabbi trust
as trading, and recorded them at fair market value. Under current accounting
rules, assets of a rabbi trust must be accounted for as if they are assets of
the Company; therefore, all earnings and expenses are recorded in our financial
statements. Compensation expense of $151,000 was recognized in fiscal 2000 as a
result of increases in the market value of the trust assets, with the same
amount being recorded as securities gains included in interest income. In fiscal
1999 and fiscal 1998 the market value change in trust assets was not
significant. Additionally, during fiscal 2000, 1999 and 1998, we expensed zero,
$8,000 and $21,000, respectively, relating to our contributions under the plan.
Stock Option Plans
The 1995 Employee Stock Option Plan is administered by a stock option
committee consisting of not less than two qualified directors. The 1995
Non-Employee Directors Plan (the "Directors Plan") is administered by not less
than three members of the Board and the amount of shares granted to the
directors on an annual basis are fixed in amount, as approved by the
shareholders.
Under our 1995 Plan, for fiscal year-ended March 31, 2000 and 1999,
1,779,933 and 2,433,563 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.
Under the Directors Plan, for fiscal year-ended March 31, 2000 and 1999,
254,250 and 274,875 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.
40
<PAGE>
In addition to the two 1995 plans, we have 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 extant
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 options may be granted during any period of suspension
or after termination of any plan. Unexercised options expire upon, or within,
three months of termination of employment, depending upon the circumstances
surrounding termination.
<TABLE>
The following is a summary of stock option activity and related
information, including the effect of repricing in grants and cancellations
during fiscal 1999 and 1998 of 1,325,742 shares and 692,150 shares,
respectively:
<CAPTION>
2000 1999 1998
----------------------------- --------------------------- ----------------------------
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 2,477,595 $ 3.58 2,315,331 $ 5.44 2,032,446 $ 6.13
Granted 455,210 $ 5.80 1,756,742 $ 3.02 1,178,297 $ 6.12
Exercised (729,641) $ 3.00 (6,600) $ 3.93 (51,742) $ 4.19
Canceled (250,703) $ 3.69 (1,587,878) $ 5.68 (843,670) $ 8.11
--------- -------- --------- -------- --------- --------
Outstanding at
end of year 1,952,461 $ 4.27 2,477,595 $ 3.58 2,315,331 $ 5.44
========= ======== ========= ======== ========= ========
Exercisable 1,044,826 $ 4.06 717,201 $ 4.68 861,577 $ 4.91
Available for grant* 106,031 -- 325,760 -- 182,016 --
<FN>
* Available for grant under plans which are currently active.
</FN>
</TABLE>
<TABLE>
The following table summarizes information about options outstanding at
March 31, 2000:
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Weighted-Average
Remaining Weighted-Average
Range Of Number Contractual Weighted-Average Number Exercise
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Price
----------------------- -------------- --------------- --------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
$2.25 - $2.66 35,000 8.89 $2.49 4,999 $2.66
$2.81 - $2.81 543,086 7.02 $2.81 288,985 $2.81
$2.87 - $3.50 371,326 7.05 $3.17 110,629 $3.31
$3.93 - $3.93 488,798 4.87 $3.93 488,798 $3.93
$4.12 - $9.00 501,751 8.25 $6.78 150,915 $7.43
$12.75 - $17.94 12.500 9.63 $17.73 500 $12.75
-------------- --------------- --------------- -------------- ------------
1,952,461 7.04 $4.27 1,044,826 $4.06
============== =============== =============== ============== ============
</TABLE>
41
<PAGE>
Employee Stock Purchase Plan
The 1995 Employee Stock Purchase Plan as Amended June 15, 1999, (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 960,000 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, 2000, 1999, and 1998, 372,813,
64,571, and 5,564 shares were reserved for issuance, respectively.
The following is a summary of stock purchased under the plan:
2000 1999 1998
-------- -------- --------
Aggregate purchase price $680,004 $211,000 $858,000
Shares purchased 191,758 100,993 185,485
Employee participants as of March 31 185 161 151
Stock-Based Compensation
In accordance with the intrinsic value method, we generally recognize no
compensation expense with respect to employee stock grants. Pro forma
information regarding net (loss) and net (loss) per share is required by SFAS
123 for grants after April 1, 1995, as if we had accounted for stock grants
under the fair value method is and presented below. The fair value of our
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 our stock-based grants was estimated assuming no
expected dividends and the following weighted-average assumptions:
<CAPTION>
Options Purchase Plan
----------------------------------- -----------------------------------
2000 1999 1998 2000 1999 1998
---------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Expected life years 3.43 2.81 3.02 0.25 0.21 0.34
Volatility 1.03% 0.96% .61% 1.13% 1.29% 0.64%
Risk-free interest rate 6.13% 4.69% 5.77% 5.06% 5.00% 5.43%
</TABLE>
<TABLE>
For pro forma purposes, the estimated fair value of our 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 pro forma information follows (amounts in
thousands except per share amounts):
<CAPTION>
Years Ended March 31,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net (loss) - pro forma $ (786) $ (5,112) $ (5,073)
Diluted net (loss) per share - pro forma $ (0.08) $ (0.51) $ (0.51)
</TABLE>
The weighted-average fair value of stock options granted in fiscal 2000
and 1999 were $5.80 and $4.04 per share, respectively. The weighted-average fair
value of the option element of the Purchase Plan stock granted in fiscal 2000
and 1999 was $1.39 and $0.95 per share, respectively.
42
<PAGE>
16. LITIGATION
From August 5, 1994 through February 16, 1995, eleven purported class
action complaints were filed against us in the United States District Court for
the Northern District of California.
By court order dated May 20, 1997, these actions were settled. Our
contribution towards the settlement consisted of the payment of $6 million 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 guaranteed the shareholder would 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
defined period. As of January 5, 2000 the 20-day average trading price exceeded
$11.50 and the CVR was extinguished. We had put $2 million into a restricted
account as a guarantee for performance under the CVR. As a result of the CVR
being extinguished this $2 million is no longer restricted and is included in
cash and short-term securities as of March 31, 2000.
We have cooperated with the Justice Department and the SEC in their
investigation of its former officers. The Justice Department has advised us that
we are not currently a target or subject of 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 lawsuits, claims, investigations, and
proceedings, including commercial and employment matters, which are being
handled and defended in the ordinary course of business. We are not aware of any
pending legal proceedings against the Company that, individually or in the
aggregate, would have a material adverse effect on our business, operating
results, or financial condition
17. SEGMENT INFORMATION
Our operations are classified into one reportable segment. Substantially
all of our operations and long-lived assets reside in the United States although
we have sales operations in Europe, Japan, Hong Kong and Taiwan. In fiscal 2000,
Arrow Electronics and Excelpoint Systems PTE, both distributors, accounted for
17% and 14% of net sales, respectively. In fiscal 1999, no single customer
accounted for greater than 10% of net sales. In fiscal 1998, Bell Milgray Inc.,
a distributor, later acquired by Arrow Electronics, accounted for approximately
10% of net product sales. Other than the United States and Singapore (10.5% of
net sales in fiscal 2000), no one country accounted for more than 10% of net
sales in fiscal 2000, 1999 and 1998. Sales in to Singapore were $4,598,000,
$2,054,000 and $1,272,000 in fiscal 2000, 1999, and 1998, respectively.
<TABLE>
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):
<CAPTION>
Years Ended March 31,
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Net product sales to geographic regions:
United Stat es $ 24,836 $ 20,476 $ 21,776
Europe 3,882 3,126 3,411
Far East and other 15,045 10,015 7,287
------------ ----------- -----------
Net product sales $ 43,763 $ 33,617 $ 32,474
============ =========== ===========
</TABLE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There were no disagreements with the independent auditors in fiscal
2000, 1999, and 1998.
43
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is set forth in the 2000 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 2000 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 2000 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.
44
<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.
<TABLE>
3. Exhibit Index:
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.
23.1 Consent of Ernst & Young,
Independent Auditors
27* Financial Data Schedule
(b) 1. Reports on Form 8-K:
None
<FN>
*Exhibit on EDGAR filing only.
</FN>
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement in connection with its
August 1, 2000 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, 2000) are incorporated by reference into Part III.
45
<PAGE>
<TABLE>
SCHEDULE 2
CALIFORNIA MICRO DEVICES CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Years Ended March 31, 2000, 1999, and 1998
(Amounts in Thousands)
<CAPTION>
Additions
Balance at Charged to Balance at
Beginning Cost and Deductions End of
of Year Expense (1) Year
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Year ended March 31, 2000
Allowance for doubtful accounts
(deducted from accounts receivable) $ 224 $ - $ 5 $ 219
====== ==== ==== =====
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
====== ==== ===== =====
<FN>
(1) Represents write-offs net of recovery of receivables.
</FN>
</TABLE>
46
<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 27th day of
April 2000.
CALIFORNIA MICRO DEVICES CORPORATION
(Registrant)
By: /s/ Jeffrey C. Kalb
--------------------------------
JEFFREY C. KALB
President and Chief Executive Officer
<TABLE>
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 13th day of June 1999.
<CAPTION>
<S> <C>
By:
/s/ Jeffrey C. Kalb President and Chief Executive Officer and Director
---------------------------------- (Principal Executive Officer)
JEFFREY C. KALB
/s/ John E. Trewin Vice President and Chief Financial Officer
---------------------------------- (Principal Financial and Accounting Officer)
JOHN E. TREWIN
/s/ Wade Meyercord Chairman of the Board
----------------------------------
WADE MEYERCORD
/s/ Angel G. Jordan Director
----------------------------------
ANGEL G. JORDAN
/s/ 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
</TABLE>
47
