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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 28, 1997
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 0-8866
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MICROSEMI CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-2110371
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2830 SOUTH FAIRVIEW STREET, SANTA ANA, CA 92704
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (714) 979-8220
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
$.20 PAR VALUE COMMON STOCK
(TITLE OF CLASS)
5 7/8% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2012
(TITLE OF CLASS)
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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 filers pursuant to Item
405 of Regulation S-K ((S) 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on December
2, 1997 was approximately $95,030,000. Shares of Common Stock beneficially
held by each officer and director and by each person who owns 5% or more of
the outstanding Common Stock have been excluded in that such persons have been
assumed for this purpose to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of Common Stock on December 2, 1997 was
9,169,525.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Portions of the definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on or about February 24, 1998. This proxy statement
will be filed not later than 120 days after the close of Registrant's fiscal
year ended September 28, 1997.
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PART I
ITEM 1. BUSINESS
Introduction
Microsemi Corporation (the "Company") was incorporated in Delaware in 1960.
Its name was changed from Microsemiconductor Corporation in February 1983. The
principal executive offices of the Company are located at 2830 South Fairview
Street, Santa Ana, California 92704 and its telephone number is (714) 979-
8220. Unless the context otherwise requires, the "Company" and "Microsemi"
refer to Microsemi Corporation and its consolidated subsidiaries.
Microsemi Corporation is a multinational supplier of high-reliability
discrete semiconductors, surface mounted assemblies and hi-rel screening and
testing services. Microsemi's power conditioning semiconductor products and
custom assemblies are employed by the Company's customers in a wide array of
space, defense, medical and other applications ranging from the
telecommunication satellites to heart pacemakers, x-ray and other medical
equipment, automotive, computer and automation products and communications
equipment.
Important Factors Related to Forward-Looking Statements and Associated Risks
This Form 10-K contains certain forward-looking statements that are based on
current expectations and involve a number of risks and uncertainties. The
forward-looking statements included herein are based on, among other items,
current assumptions that the Company will be able to meet its current
operating cash and debt service requirements with internally generated funds
and its available line of credit, that it will be able to successfully resolve
disputes and other business matters as anticipated, that competitive
conditions within the semiconductor, surface mount and custom diode assembly
industries will not change materially or adversely, that the Company will
retain existing key personnel, that the Company's forecasts will reasonably
anticipate market demand for its products, and that there will be no
materially adverse change in the Company's operations or business. Other
factors that could cause results to vary materially from current expectations
are discussed elsewhere in this Form 10-K. Assumptions relating to the
foregoing involve judgments that are difficult to predict accurately and are
subject to many factors that can materially affect results. Forecasting and
other management decisions are subjective in many respects and thus
susceptible to interpretations and periodic revisions based on actual
experience and business developments, the impact of which may cause the
Company to alter its forecasts, which may in turn affect the Company's
results. In light of the factors that can materially affect the forward-
looking information included herein, the inclusion of such information should
not be regarded as a representation by the Company or any other person that
the objectives or plans of the Company will be achieved.
Products
The Company's products include a broad line of discrete semiconductors and
other electronic component products and services principally for military,
space, medical, computer, telecommunications and other high reliability
applications. These components are used throughout the electronics industry,
with almost all electronic equipment employing zener diodes or rectifiers to
control the direction of electrical current flow, to regulate voltage and to
protect sensitive circuitry from line surges and transient voltage spikes.
Major products are silicon rectifiers, zener diodes, low leakage and high
voltage diodes, temperature compensated zener diodes, transistors and a family
of subminiature high power transient suppressor diodes.
A partial list of additional applications of the Company's products and
services includes: heart pacer transient shock protector diodes (where the
Company believes it is the leading supplier in that market), low leakage
diodes, transitors used in jet aircraft engines and high performance test
equipment, high temperature diodes used in oil drilling sensing elements
operating at 200 degrees centigrade, temperature compensated zener or
rectifier diodes used in missile systems, power transistors and other
electronic systems.
The Company also manufactures semiconductors for commercial applications,
such as automatic surge protectors, transient suppressor diodes used for
telephone applications and computer switching diodes used in
2
computer systems. The Company currently serves a broad group of customers
including Hughes, ITT, Bosch Telecom, Motorola, Lockheed-Martin, Loral, Lucent
Technologies and Boeing.
Microsemi's space level business was very strong for fiscal year 1997
resulting from the expanding commercial space market. Commercial space is
defined as non government sponsored satellites that are used primarily for
telecommunications, data and television broadcast uses. Government sponsored
satellites for weather, environmental, global positioning and surveillance
were also built in record numbers in fiscal year 1997. Since Microsemi has
long been a leader in space level diodes, we realized the benefits of these
strong market needs.
Marketing
The Company's marketing strategy has been to concentrate sales efforts in
high reliability and specialty markets. These markets require superior product
performance and design as well as technical assistance to satisfy demanding
customer needs.
The Company's products are marketed through domestic electronic component
sales representatives and the Company's inside sales force directly to
original equipment manufacturers. The Company also employs industrial
distributors to service its customers' needs for standard catalog products.
For fiscal year 1997, the Company's domestic sales accounted for 78% of the
Company's revenues of which sales representatives and distributors accounted
for approximately 20% and 20%, respectively. The Company has direct sales
offices in many metropolitan areas including Los Angeles, Long Island,
Phoenix, Boston, Santa Ana, Denver, Chicago, West Palm Beach, Minneapolis,
Atlanta, Montgomeryville, Hong Kong and Ireland. Sales to foreign customers,
made through the Company's direct domestic sales force and 36 overseas sales
representatives and distributors, accounted for approximately 22% of fiscal
year 1997 sales.
No one customer accounted for more than 4% of the Company's revenue in
fiscal year 1997. However, approximately 30% of the Company's business is to
customers whose principal sales are to the U.S. Government.
In the ordinary course of business, Microsemi Corporation enters into
purchase agreements with some of its major customers to supply the Company's
products over periods of up to 18 months.
Research and Development
The Company spent approximately $1,161,000, $1,020,000 and $755,000 in
fiscal years 1997, 1996 and 1995, respectively, for research and development,
none of which was customer sponsored.
The principal focus of the Company's research and development activities has
been to improve processes and to develop new products that support the growth
of its high reliability and commercial businesses.
Manufacturing and Suppliers
The Company's principal domestic semiconductor manufacturing operations are
located in Santa Ana, California; Broomfield, Colorado; Scottsdale, Arizona
and Watertown, Massachusetts. Each operates its own wafer processing,
assembly, testing and high reliability testing and screening departments.
The Company's domestic semiconductor plants manufacture and process all
products and assemblies starting from purchased silicon wafers and piece
parts. Manufacturing and processing operations are controlled in accordance
with military as well as other rigid commercial and industrial specifications.
A major portion of the Company's semiconductor manufacturing effort takes
place after the semiconductor is assembled. Parts are tested a number of
times, visually screened and environmentally subjected to shock, vibration,
"burn in" and electrical tests in order to prove and assure reliability.
3
The Company's Bombay, India facility assembles a commercial zener diode line
for the purpose of competing in the lower-cost commercial and consumer
markets. This plant also performs subcontract coil manufacturing.
The Company's Hong Kong subsidiary, Microsemi (H.K.) Ltd., produces diode
products for major commercial customers. The Hong Kong subsidiary utilizes
diode chips manufactured in the Company's U.S. plants and assembles, tests and
finishes the products. The plant is approved for assembly of certain military
specified diodes.
The Company's Ennis, Ireland operation manufactures diodes, rectifiers,
zeners, thyristors and transistors and supports the other Microsemi
operations. This plant is Defense Electronics Supply Center (DESC) approved by
the U.S. government to screen high reliability product to Military
Specification Standard MIL-S-19500 and is also European Space Agency
qualified. A trading company was established at this facility for
stocking/shipping products from U.S. and Asian locations for European
customers.
The Company purchases silicon wafers, glass sleeves, tungsten slugs and lead
wires from domestic and foreign suppliers generally on long-term purchase
commitments which are cancelable with 30 to 90 day notice. With the exception
of glass sleeves for the Santa Ana and Watertown high reliability diode
products and glass to metal sealed parts for a portion of the Santa Ana and
Scottsdale computer diode and zener diode business, all materials are
available from multiple sources. In the case of sole source items, the Company
has never suffered production delays as a result of vendors' inability to
supply the parts. The Company stocks what it believes are adequate supplies of
all materials based upon backlog, delivery lead time and anticipated new
business.
The Company's component testing and screening operations purchase
semiconductor die and assembled components. These parts are available from a
number of leading semiconductor manufacturers.
The Company's surface mounted assembly operations design custom circuit
boards and purchase component parts. These parts are then assembled using pick
and place machines as well as other sophisticated test equipment to meet
customer requirements.
Foreign Operations
The Company conducts a portion of its operations outside the United States
and its business is subject to risks associated with many factors beyond its
control, such as fluctuations in foreign currency rates, instability of
foreign economies and governments, and changes in U.S. and foreign laws and
policies affecting trade and investment. The Company owns or leases
manufacturing and assembling facilities in Ennis, Ireland; Bombay, India and
Hong Kong and is in the process of establishing a joint venture in The
People's Republic of China (PRC). On July 1, 1997, the sovereignty of Hong
Kong was returned to the PRC. Under the terms of the Sino-British Joint
Declaration, Hong Kong has a high degree of autonomy to enable Hong Kong to
decide its own economic, financial and trade policies and to participate in
international organizations and trade agreements; however, there can be no
assurance that changes will not be made in the future or that the transfer of
Hong Kong to the PRC will not have any adverse effects on the Company's assets
in Hong Kong or the results of operations of the Company.
Sales to Foreign Customers
Sales to foreign customers represented approximately 22%, 30% and 20% of net
sales for the 1997, 1996 and 1995 fiscal years, respectively. Foreign sales
may be subject to political and economic risks, including financial or
political instability, changes in import/export regulations, tariffs and
freight rates and difficulties in collecting receivables and enforcing
contracts generally. Changes in tariff structures, exchange rates and other
trade policies could adversely affect the Company's sales to foreign customers
or the collection of receivables generated from such sales.
4
Order Backlog
The Company's consolidated order backlog at September 28, 1997 (primarily
for delivery within nine months) increased to $77,100,000, as compared to
$68,000,000 at September 29, 1996. The mix of new orders reflects a flat
demand in military related business and an increase in commercial, industrial,
medical and space business. The Company's backlog as of any particular date
may not be representative of actual sales for any succeeding period because
lead times for the release of purchase orders depend upon the scheduling
practices of individual customers, the delivery times of new or non-standard
products can be affected by scheduling factors and other manufacturing
considerations, the rate of booking new orders can vary significantly from
month to month, and the possibility of customer changes in delivery schedules
or cancellations of orders.
A portion of the Company's sales are to military and aerospace markets which
are subject to the business risk of changes in governmental appropriations and
changes in national defense policies and priorities. See discussion of changes
in military procurement practices in Management's Discussion and Analysis of
Financial Condition and Results of Operations. All of the Company's contracts
with prime U.S. Government contractors contain customary provisions permitting
termination at any time at the convenience of the U.S. Government or the prime
contractors upon payment to the Company for costs incurred plus a reasonable
profit. Certain contracts are also subject to price re-negotiation in
accordance with U.S. Government sole source procurement provisions. No
material contract of the Company has been terminated or re-negotiated.
Competition
The Company competes primarily in the discrete semiconductor market,
particularly in the area of high reliability components. The Company has
numerous competitors across all of its product lines. In the defense market
arena, the Company possesses the major share of the market. In the
commercial/industrial arena, there are numerous competitors such as Motorola,
Inc., General Semiconductor, Inc., ITT Corp. and Fairchild Semiconductor and
International Rectifier which are significantly larger than Microsemi and have
greater resources and larger market shares. Competition in certain of its
product lines is dependent on price and performance. The Company believes that
it is well regarded by its customers in the high reliability area, where
competition is dependent less on price and more on product reliability and
performance.
Changes in Technology
The power semiconductor market is subject to changes in technologies and in
industry standards. To remain competitive, the Company must continue to devote
resources to advance process technologies, to increase product performance, to
improve manufacturing yields and to improve the mix between the Company's
shipment of military and commercial product and between its high cost and low
cost products. There can be no assurance that the Company's competitors will
not develop new technologies that are substantially equivalent or superior to
the Company's technology.
Proprietary Rights
The Company generally does not have, nor does it generally intend to apply
for, patent protection on any aspect of its technology. The Company believes
that patents often provide only narrow protection and require public
disclosure of information which may otherwise be subject to trade secret
protection. The Company's reliance upon protection of some of its technology
as "trade secrets" will not necessarily protect the Company from the use by
other persons of its technology, or their use of technology that is similar or
superior to that which is embodied in the Company's trade secrets. There can
be no assurance that others will not be able to independently duplicate or
exceed the Company's technology in whole or in part. No assurance can be made
that the Company will be able to maintain the confidentiality of the Company's
technology, dissemination of which could have an adverse effect on the
Company's business. In addition, litigation may be necessary to determine the
scope and the validity of the Company's proprietary rights. There can be no
assurance that patents held by the Company will not be challenged, invalidated
or circumvented, or that the rights granted thereunder will provide
competitive advantages to the Company.
5
Manufacturing Risks
The Company's manufacturing processes are highly complex, require advanced
and costly equipment and are continuously being modified in an effort to
improve yields and product performance. Minute impurities or other
difficulties in the manufacturing process can lower yields. In addition,
California and the Pacific Rim are known to contain various earthquake faults.
The Company's operations could be materially adversely affected if production
at any of its facilities were interrupted. There can be no assurance that the
Company will not experience manufacturing difficulties in the future.
Employees
On September 28, 1997, the Company employed 1,817 persons domestically
including 109 in engineering, 1,466 in manufacturing, 101 in marketing and 141
in general management and administration. Additionally, 686 persons were
employed in the Company's Hong Kong, Bombay, India, and Ennis, Ireland
operations. None of the Company's employees is represented by a labor union.
The Company has experienced no work stoppage and believes its employee
relations are good.
Dependence on Key Personnel
The Company's future performance is significantly dependent on the continued
active participation of members of its current management. The Company does
not have written employment contracts with its employees. Should one or more
of the Company's key management employees leave or otherwise become
unavailable to the Company, the Company's business and results of operations
may be materially adversely affected.
Product Liability
The Company's business exposes it to potential liability risks that are
inherent in the manufacturing and marketing of high-reliability electronic
components for critical applications. No assurance can be made that the
Company's product liability insurance coverage is adequate or that present
coverage will continue to be available at acceptable costs, or that a product
liability claim would not adversely affect the business or financial condition
of the Company.
Change of Control Provisions
The Company's Certificate of Incorporation, Bylaws, Shareholder Rights Plan
and certain employment compensation plans contain provisions that make it more
difficult for a third party to acquire, or that may discourage a third party
from attempting to acquire, control of the Company. In addition, as a Delaware
corporation, the Company is subject to the restrictions imposed under Section
203 of the Delaware General Corporation Law which may deter the Company from
engaging in certain change of control transactions with certain of its
stockholders under certain circumstances.
Environmental Regulation
While the Company believes that it has the environmental permits necessary
to conduct its business and that its operations conform to present
environmental regulations, increased public attention has been focused on the
environmental impact of semiconductor operations. The Company, in the conduct
of its manufacturing operations, has handled and does handle materials that
are considered hazardous, toxic or volatile under federal, state and local
laws and, therefore, is subject to regulations related to their use, storage,
discharge and disposal. No assurance can be made that the risk of accidental
release of such materials can be completely eliminated. In addition, the
Company operates or owns facilities located on or near real property that may
formerly have been used in ways that involved such materials. In the event of
a violation of environmental laws, the Company could be held liable for
damages and the costs of remediation, and, along with the rest of the
semiconductor industry,
6
is subject to variable interpretations and governmental priorities concerning
environmental laws and regulations. Environmental statutes have been
interpreted to provide for joint and several liability and strict liability
regardless of actual fault. There can be no assurance that the Company and its
subsidiaries will not be required to incur costs to comply with, or that the
operations, business, or financial condition of the Company will not be
materially adversely affected by, current or future environmental laws or
regulations. (See "Legal Proceedings")
Risks Related to Acquisitions
The Company's strategy to increase its revenue and the markets it serves has
included and may continue to include the acquisition of complementary
businesses. In and prior to fiscal year 1997 the Company has consummated
acquisitions of businesses and product lines and may continue to make
acquisitions. There can be no assurance that the Company will be able to
identify, acquire or manage such companies or products or successfully
integrate such operations into those of the Company without encountering
unanticipated costs, delays or other problems. The Company may compete for
acquisition and expansion opportunities with companies that have greater
resources than the Company. There can be no assurance that suitable
acquisition candidates will continue to be available or, that acquisitions
will be obtainable on terms acceptable to the Company.
Risks Related to Redemption of Debentures
The Company intends to effect a redemption of its 5.875% Convertible
Subordinated Debentures due in 2012 ("Debentures"), and anticipates that a
large portion of the Debentures will be converted if the Company's Common
Stock trades at a price in excess of the Debentures conversion price, which is
$13.55 of the face amount per share. The redemption price is 100% of the face
amount of Debentures. For a period of at least fifteen (15) days following the
Company giving notice to Debentureholders of redemption, who may elect to
convert Debentures into Common Stock pursuant to the terms of the Debentures.
However, no assurance is possible that the market price of the Common Stock
will remain above the conversion price of the Debentures during that period,
and redemptions therefore might be funded with cash or, if necessary, future
bank borrowings. There can be no assurance that the Company will be able to
obtain such future financing if and when it is needed on terms acceptable to
the Company. The inability of the Company to obtain financing accompanied by
the potential decline in the market price of Common Stock could have an
adverse effect on the Company's ability to effect a redemption.
ITEM 2. PROPERTIES
The Company's headquarters are located in a building complex located in
Santa Ana, California. This complex contains general offices, engineering and
manufacturing space. The Company owns office, engineering and production
facilities in Santa Ana, California; Broomfield, Colorado; Garland, Texas;
Watertown, Massachusetts; Montgomeryville, Pennsylvania; Riviera Beach,
Florida; Ennis, Ireland; Bombay, India and Hong Kong and leases office,
engineering and production facilities in Scottsdale, Arizona and Mooresville,
North Carolina. As described in Note 7 to the Consolidated Financial
Statements, the acquisitions of land, buildings and additions in Santa Ana and
Broomfield were accomplished through the issuance of Industrial Development
Bonds. Deeds of trust on the related properties were granted as security for
the bonds.
The Company believes that its existing facilities are well-maintained and in
good operating condition and that they are adequate for its immediately
foreseeable business needs.
ITEM 3. LEGAL PROCEEDINGS
The State of Washington, Department of Ecology proposed finding that the
Company was a potentially liable party for the study and cleanup of certain
hazardous substances which allegedly contaminated what has come to be known as
the Yakima Railroad Area Site. The State of Washington claimed that the
Company was one of the potentially liable parties that arranged for the
disposal of those hazardous substances through
7
Cameron-Yakima Incorporated, a company that the State of Washington claims has
caused or contributed to the contamination on the site through its operation
of a hazardous waste treatment facility. The Company joined a group of
companies, which anticipated resolving its liability with the State of
Washington. In July 1997, the Company paid $54,000 for its share in the final
settlement.
In Broomfield, Colorado, the owner of a property located adjacent to the
manufacturing facility owned by a subsidiary of the Company filed suit against
the subsidiary and other parties, claiming that contaminants migrated to his
property, thereby diminishing its value. In August 1995, the subsidiary,
together with the former owners of the manufacturing facility, agreed to
settle the claim and to indemnify the owner of the adjacent property from
remediation costs. Although TCE and other contaminants previously used at the
facility are present in soil and groundwater on the subsidiary's property, the
Company vigorously contests any assertion that the subsidiary is the cause of
the contamination; however, there can be no assurance that recourse will be
available against third parties. State and local agencies in Colorado are
reviewing current data and considering study and cleanup options, and it is
not yet possible to predict costs for remediation or the allocation thereof
among potentially responsible parties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's Common Stock is traded on the NASDAQ National Market under the
symbol MSCC. The following table sets forth the high and low closing prices at
which the Company's Common Stock traded as reported on the NASDAQ National
Market.
HIGH LOW
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Fiscal Year ended September 28, 1997
1st Quarter.......................................... $14 1/8 $ 9 5/8
2nd Quarter.......................................... 15 1/2 11 1/4
3rd Quarter.......................................... 14 11 11/16
4th Quarter.......................................... 17 1/2 12 5/8
HIGH LOW
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Fiscal Year ended September 29, 1996
1st Quarter.......................................... $11 3/4 $ 8 5/8
2nd Quarter.......................................... 10 1/2 7 1/2
3rd Quarter.......................................... 10 11/16 8 3/8
4th Quarter.......................................... 11 8 1/4
Possible Volatility of Stock Prices
The market prices of securities issued by technology companies, including
the Company, have been volatile. The securities of many technology companies
have experienced extreme price and volume fluctuations, which have often been
not necessarily related to the companies' respective operating performances.
Quarter to quarter variations in operating results, changes in earnings
estimates by analysts, announcements of technological innovations or new
products, announcements of major contract awards, events involving other
companies in the industry and other events or factors may have a significant
impact on the market price of the Company's Common Stock.
(b) Approximate Number of Common Equity Security Holders
APPROXIMATE NUMBER OF
RECORD HOLDERS
TITLE OF CLASS (AS OF SEPTEMBER 28, 1997)
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Common Stock, $.20 Par Value.................... 506(1)
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(1) The number of stockholders of record includes the beneficial holders of
shares held in "nominee" or "street name", as a unit.
(c) Dividends
The Company has not paid dividends in the last five years and has no current
plans to do so.
9
ITEM 6. SELECTED FINANCIAL DATA
FOR THE FIVE FISCAL YEARS IN THE PERIOD ENDED
SEPTEMBER 28, 1997
----------------------------------------------
1997 1996 1995 1994(1)(2) 1993
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(AMOUNTS IN 000'S EXCEPT PER SHARE AMOUNTS)
SELECTED INCOME STATEMENT DATA:
Net sales...................... $163,234 $157,435 $133,881 $119,230 $123,816
Gross profit................... $ 44,799 $ 42,115 $ 35,795 $ 22,438 $ 28,729
Operating expenses............. $ 22,280 $ 23,164 $ 20,279 $ 20,579 $ 19,938
Income (loss) before cumulative
effect of accounting change... $ 11,051 $ 8,100 $ 6,053 $ (2,130) $ 1,763
Earnings (loss) per share
before cumulative effect of
accounting change
Primary...................... $ 1.24 $ .98 $ .74 $ (.28) $ .23
Fully diluted................ $ 1.03 $ .80 $ .62 $ (.28) $ .21
Common and common equivalent
shares
Primary...................... 8,935 8,288 8,213 7,573 7,753
Fully diluted................ 11,970 11,805 11,861 7,573 9,043
SELECTED BALANCE SHEET DATA:
Working capital................ $ 55,813 $ 49,556 $ 45,714 $ 35,128 $ 35,315
Total assets................... $135,194 $113,014 $103,534 $ 97,865 $103,551
Long-term debt................. $ 47,621 $ 46,420 $ 48,398 $ 50,568 $ 51,871
Stockholders' equity........... $ 41,909 $ 29,408 $ 21,110 $ 14,788 $ 16,835
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(1) In September 1994, the Company recorded a charge of $9,973,000 to reduce
the carrying value of military related inventories and other assets and
certain non-military related assets where there had been a permanent
reduction in value.
(2) In 1994, the Company disposed of substantially all of the assets of Omni
Technology Corporation, a wholly owned subsidiary of the Company.
The selected financial data should be read in conjunction with the
Consolidated Financial Statements and Notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Capital Resources & Liquidity
Microsemi Corporation's operations in the fiscal year 1997 were funded with
internally generated funds and borrowings under the Company's line of credit.
In September 1996, the Company obtained a credit line with a bank. Under the
current line of credit, the Company can borrow up to $15,000,000. As of
September 28, 1997, $4,365,000 was borrowed under this credit facility. At
September 28, 1997, the Company had $6,145,000 in cash and cash equivalents.
A $5,350,000 Industrial Development Revenue Bond was originally issued in
April 1985, through the City of Santa Ana Industrial Development Authority for
the construction of improvements and new facilities at the Santa Ana plant. It
was remarketed in 1995 and carries an average interest rate of 6.75% per
annum. The terms of the bond require principal payments of $1,050,000 in 1998,
$100,000 annually from 1999 to 2004 and $3,700,000 in 2005. A $5,557,000
letter of credit is carried by a bank to guarantee the repayment of this bond.
There are no compensating balance requirements, however, the letter of credit
agreement requires the Company to make collateral payments of $350,000 on
February 1, 1996, 1997 and 1998, totaling $1,050,000, to ensure the payment of
principal scheduled for February 1, 1998.
10
Based upon information currently available, the Company believes that it can
meet its current operating cash and debt service requirements with internally
generated funds together with its available borrowings.
The Company's revenues continue to be partially dependent on military and
aerospace programs. Reductions in defense spending had and will continue to
have a negative impact on the Company's operations. Furthermore, there were
Department of Defense (DOD) announcements of major changes in defense
procurement policy, which included official notification, on August 22, 1994,
of Department of Defense acquisition reform to utilize best commercial
practices instead of mandatory use of military standard parts. In the past
four years, military related business has declined from approximately 50% to
30% of total revenues. The decrease in shipments of military related parts has
been more than offset by the increase in shipments of commercial, industrial,
medical and space related products. In addition, the Company continues to
develop commercial applications for its products to offset this decrease.
Although the final impact of the changes in Department of Defense procurement
practices is not known, management believes that, either through associated
cost reductions or increases in shipments of non Department of Defense
products, it will not have a significant impact on total future revenues,
operations or cash flows of the Company.
In October 1996, Microsemi purchased certain assets and the right to
manufacture a selected group of products of the high-reliability portion of
SGS Thomson's Radio Frequency (RF) Semiconductor business in Montgomeryville,
Pennsylvania (the RF Products acquisition). In September 1997, Microsemi PPC,
Inc. (PPC), formerly known as Micro PPC Acquisition Corp., a wholly owned
subsidiary of the Company, purchased substantially all of the assets and
assumed certain liabilities of PPC Products Corp., Technett Seals Inc., and
Semiconductors, Inc. (collectively referred to as PPC Products). PPC Products
is a supplier of power transistors, fixed and adjustable linear regulators,
and power rectifiers and is located in Riviera Beach, Florida. The aggregate
purchase price for both entities included approximately $5,201,000 in cash and
$3,070,000 in notes payable. (See Note 10 to the Consolidated Financial
Statements.)
In June 1997, the Company entered into a $2,700,000 equipment loan providing
for payments monthly through July 2002 of $45,000 of principal plus interest
at a 5.93% annual rate.
The Company's 5.875% Convertible Subordinated Debentures due 2012 provide
for semiannual interest payments of approximately $1,000,000. The Debentures
are callable at 100% of face value and are convertible at the option of the
holder into Common Stock at a converting price of $13.55 per share.
The average collection period on accounts receivable was 56 days for the
fiscal year 1997 and 52 days for fiscal year 1996.
The average days sales of product in inventories was 155 days for fiscal
year 1997 compared to 143 days for fiscal year 1996, primarily due to an
increase in inventory as a result of the acquisition of PPC Products at the
end of the fiscal year.
The Company has and will continue to make certain investments in its
software systems and applications to ensure the Company is year 2000
compliant. The financial impact to the Company has not been and is not
anticipated to be material to its financial position or results of operations
in any given year.
The Company has no other significant capital commitments.
Results of Operations for the Fiscal Year 1997 Compared to the Fiscal Year
1996
Net sales for fiscal year 1997 increased to $163,234,000, or 4%, from
$157,435,000 for fiscal year 1996. The increase of $5,799,000 was due
primarily to the RF Products acquisition in October 1996 which accounted for
approximately $2,900,000 of the increase in net sales. The remaining increase
in net sales is primarily due to the higher volume of shipments of commercial,
industrial and telecommunications applications, reflecting the increasing
demand for the Company's products in these markets.
11
Gross profit increased $2,684,000 to $44,799,000 for the current fiscal year
from $42,115,000 for the prior year, primarily due to the higher sales levels.
Gross profit, as a percentage of sales, increased slightly from 26.8% to 27.4%
for the fiscal years 1996 and 1997, respectively.
Selling expenses increased $199,000 to $9,226,000 for fiscal year 1997,
compared to fiscal year 1996, primarily due to an increase in salaries and
related costs. General and administrative expenses in the current year
decreased $1,083,000 as compared to those of the prior year, primarily due to
the elimination at the end of fiscal 1996 of certain administrative support
services and a reduction in certain other general and administrative expenses
at one of the Company's smaller subsidiaries whose operations have been
significantly downsized.
Interest expense decreased $756,000 to $3,684,000 for fiscal year 1997 from
$4,440,000 in fiscal year 1996, primarily due to lower average borrowings
throughout 1997 as compared to 1996.
The effective income tax rates of 40% and 42% for the fiscal years 1997 and
1996, respectively, are the combined results of income taxes computed on
foreign and domestic income.
Results of Operations for the Fiscal Year 1996 Compared to the Fiscal Year
1995
Net sales for fiscal year 1996 increased to $157,435,000, or 18%, from
$133,881,000 for fiscal year 1995. The increase of $23,554,000 was due to the
higher volume of shipments of commercial, industrial and telecommunications
applications, reflecting the increasing demand for the Company's products in
these markets.
Gross profit increased $6,320,000 to $42,115,000 for the current fiscal year
from $35,795,000 for the prior year, primarily due to the higher sales levels.
Gross profit, as a percentage of sales, has remained relatively consistent at
26.8% and 26.7% for fiscal years 1996 and 1995, respectively.
Selling expenses increased $1,163,000 to $9,027,000 for fiscal year 1996,
compared to fiscal year 1995, primarily due to increases in commission,
salaries and related costs consistent with the increase in sales and an
increase in marketing and promotional efforts during fiscal 1996. General and
administrative expenses in the current year increased $1,722,000 as compared
to those of the prior year. This increase was primarily the result of an
increase in general and administrative support services and related costs
needed to support the continuing growth of the Company.
Interest expense decreased $582,000 to $4,440,000 for fiscal year 1996 from
$5,022,000 in fiscal year 1995 primarily due to lower overall borrowings
throughout fiscal 1996 as compared to fiscal 1995, combined with a decrease in
interest rates on the Company's Industrial Development Revenue Bond which was
remarketed during fiscal 1995.
The effective income tax rates of 42% and 41% for the fiscal years 1996 and
1995, respectively, are the combined results of income taxes computed on
foreign and domestic income.
12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MICROSEMI CORPORATION--INDEX TO FINANCIAL STATEMENTS
PAGE
----
1.Consolidated Financial Statements
Report of Independent Accountants....................................... 14
Consolidated Balance Sheets at September 28, 1997 and September 29,
1996................................................................... 15
Consolidated Income Statements for each of the three fiscal years in the
period ended September 28, 1997........................................ 16
Consolidated Statements of Stockholders' Equity for each of the three
fiscal years in the period ended September 28, 1997.................... 17
Consolidated Statements of Cash Flows for each of the three fiscal years
in the period ended September 28, 1997................................. 18
Notes to Consolidated Financial Statements.............................. 19
2.Financial Statement Schedule
Schedule for the fiscal years ended September 28, 1997, September 29,
1996 and October 1, 1995.
Schedule
II--Valuation and Qualifying Accounts................................... 33
Financial statement schedules not listed above are either omitted because
they are not applicable or the required information is shown in the
consolidated financial statements or in the notes thereto.
13
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Microsemi Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Microsemi Corporation and its subsidiaries at September 28, 1997
and September 29, 1996, and the results of their operations and their cash
flows for each of the three fiscal years in the period ended September 28,
1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
Costa Mesa, California
November 25, 1997
14
MICROSEMI CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN 000'S)
SEPTEMBER 28, SEPTEMBER 29,
1997 1996
------------- -------------
ASSETS
Current assets
Cash and cash equivalents........................ $ 6,145 $ 4,059
Accounts receivable, less allowance for doubtful
accounts of $2,665 in 1997 and $2,159 in 1996... 25,093 24,740
Inventories...................................... 53,248 47,279
Deferred income taxes............................ 8,160 6,202
Other current assets............................. 4,363 1,202
-------- --------
Total current assets........................... 97,009 83,482
-------- --------
Property and equipment, net...................... 34,871 25,641
-------- --------
Other assets..................................... 3,314 3,891
-------- --------
$135,194 $113,014
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable to banks and others................ $ 4,633 $ 4,552
Current maturities of long-term debt............. 3,574 1,625
Accounts payable................................. 11,304 8,013
Accrued liabilities.............................. 15,942 15,042
Income taxes payable............................. 5,743 4,694
-------- --------
Total current liabilities...................... 41,196 33,926
-------- --------
Deferred income taxes............................ 2,544 1,298
Long-term debt................................... 47,621 46,420
-------- --------
Other long-term liabilities...................... 1,924 1,962
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.20 par value; authorized 20,000
shares; issued 8,736 in 1997 and 7,908 in 1996.. 1,747 1,582
Capital in excess of par value of stock.......... 16,197 14,895
Retained earnings................................ 23,965 12,931
-------- --------
Total stockholders' equity..................... 41,909 29,408
-------- --------
$135,194 $113,014
======== ========
The accompanying notes are an integral part of these statements.
15
MICROSEMI CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(AMOUNTS IN 000'S, EXCEPT EARNINGS PER SHARE)
FOR EACH OF THE THREE FISCAL YEARS IN THE PERIOD ENDED SEPTEMBER 28, 1997
1997 1996 1995
-------- -------- --------
Net sales......................................... $163,234 $157,435 $133,881
Cost of sales..................................... 118,435 115,320 98,086
-------- -------- --------
Gross profit.................................. 44,799 42,115 35,795
-------- -------- --------
Operating expenses
Selling......................................... 9,226 9,027 7,864
General and administrative...................... 13,054 14,137 12,415
-------- -------- --------
Total operating expenses...................... 22,280 23,164 20,279
-------- -------- --------
Income from operations........................ 22,519 18,951 15,516
-------- -------- --------
Other expenses
Interest expense, net........................... (3,684) (4,440) (5,022)
Other........................................... (329) (545) (234)
-------- -------- --------
Total other expenses.......................... (4,013) (4,985) (5,256)
-------- -------- --------
Income before income taxes........................ 18,506 13,966 10,260
Provision for income taxes........................ 7,455 5,866 4,207
-------- -------- --------
Net income........................................ $ 11,051 $ 8,100 $ 6,053
======== ======== ========
Primary earnings per share........................ $ 1.24 $ .98 $ .74
======== ======== ========
Fully diluted earnings per share.................. $ 1.03 $ .80 $ .62
======== ======== ========
The accompanying notes are an integral part of these statements.
16
MICROSEMI CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN 000'S)
FOR EACH OF THE THREE FISCAL YEARS IN THE PERIOD ENDED SEPTEMBER 28, 1997
CAPITAL IN RETAINED
COMMON STOCK EXCESS OF EARNINGS
-------------- PAR VALUE (ACCUMULATED
SHARES AMOUNT OF STOCK DEFICIT) TOTAL
------ ------ ---------- ------------ -------
BALANCE AT OCTOBER 2, 1994..... 7,595 $1,519 $14,397 $(1,128) $14,788
Net income................... -- -- -- 6,053 6,053
Exercise of employee stock
options..................... 194 39 247 -- 286
Currency translation loss.... -- -- -- (17) (17)
----- ------ ------- ------- -------
BALANCE AT OCTOBER 1, 1995..... 7,789 1,558 14,644 4,908 21,110
Net income................... -- -- -- 8,100 8,100
Exercise of employee stock
options..................... 66 13 162 -- 175
Conversion of debt (Note 7).. 53 11 89 -- 100
Currency translation loss.... -- -- -- (77) (77)
----- ------ ------- ------- -------
BALANCE AT SEPTEMBER 29, 1996.. 7,908 1,582 14,895 12,931 29,408
Net income................... -- -- -- 11,051 11,051
Exercise of employee stock
options..................... 228 45 442 -- 487
Treasury stock repurchased
and canceled................ (15) (3) (187) -- (190)
Conversion of debt (Note 7).. 615 123 1,047 -- 1,170
Currency translation loss.... -- -- -- (17) (17)
----- ------ ------- ------- -------
BALANCE AT SEPTEMBER 28, 1997.. 8,736 $1,747 $16,197 $23,965 $41,909
===== ====== ======= ======= =======
The accompanying notes are an integral part of these statements.
17
MICROSEMI CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN 000'S)
FOR EACH OF THE THREE FISCAL YEARS IN THE PERIOD ENDED SEPTEMBER 28, 1997
1997 1996 1995
-------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................ $ 11,051 $ 8,100 $ 6,053
Adjustments to reconcile net income to net cash
provided from operating activities:
Depreciation and amortization................... 4,257 3,861 3,888
Allowance for doubtful accounts................. 506 141 (155)
Reserve on notes receivable and other assets.... -- -- 1,070
Loss on disposition and retirement of assets.... 9 254 354
Deferred income taxes........................... (712) (1,440) 53
Change in assets and liabilities, net of
acquisitions:
Accounts receivable........................... (215) (4,690) (2,264)
Inventories................................... (1,719) (3,998) (3,223)
Other current assets.......................... (3,098) 3,173 (536)
Other assets.................................. 786 (1,131) 490
Accounts payable.............................. 2,853 1,239 (117)
Accrued liabilities........................... 820 1,864 3,190
Income taxes payable.......................... 1,049 678 2,804
Other long-term liabilities................... -- -- 938
Other........................................... (17) (77) (17)
-------- ------- -------
Net cash provided from operating activities. 15,570 7,974 12,528
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.............................. (6,052) (5,933) (3,765)
Proceeds from sale of assets...................... -- 380 --
Payments for acquisitions, net of cash acquired... (5,201) -- --
Increase in other assets.......................... -- -- (315)
-------- ------- -------
Net cash used in investing activities....... (11,253) (5,553) (4,080)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes payable to bank and
others........................................... 81 (9) (5,023)
Proceeds from long-term debt...................... -- 17 988
Payments on long-term debt........................ (2,571) (2,598) (4,648)
Increase (decrease) in other long-term
liabilities...................................... (38) 88 (80)
Exercise of employee stock options, net of
treasury stock repurchased....................... 297 175 286
-------- ------- -------
Net cash used in financing activities....... (2,231) (2,327) (8,477)
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents...................................... 2,086 94 (29)
Cash and cash equivalents at beginning of year.... 4,059 3,965 3,994
-------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.......... $ 6,145 $ 4,059 $ 3,965
======== ======= =======
The accompanying notes are an integral part of these statements.
18
MICROSEMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Company designs and manufactures a broad line of discrete semiconductors
and provides related services principally for military, aerospace, medical,
computer, telecommunications and other electronics markets. Major products are
silicon rectifiers, zener diodes, low leakage and high voltage diodes,
temperature compensated zener diodes and a family of subminiature high power
transient suppressor diodes.
Fiscal Year
The Company reports results of operations on the basis of fifty-two and
fifty-three week periods. The three fiscal years in the period ended September
28, 1997 consisted of fifty-two weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of Microsemi
Corporation and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated.
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
respective reporting periods. Actual results could differ from those
estimates.
Reclassifications
Certain reclassifications have been made to the fiscal year 1996 and 1995
balances to conform with the fiscal year 1997 presentation.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by
the first-in, first-out method except for inventories at the Scottsdale,
Arizona subsidiary, which cost is determined using the last-in, first-out
method (see Note 2).
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on the
straight-line method over the estimated useful lives or leasehold periods, as
appropriate. Maintenance and repairs are charged to expense as incurred and
the costs of additions and betterments that increase the useful lives of the
assets are capitalized.
Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121).
SFAS 121 establishes accounting standards for the impairment of long-lived
assets to be reviewed whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Under the
provisions of SFAS 121, companies are required to review the recoverability of
long-lived assets and intangible assets by comparing cash flows on an
undiscounted basis to the net book value
19
MICROSEMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of the assets. In the event the projected undiscounted cash flows are less
than the net book value of the assets, the carrying values of the assets are
written down to their fair value, less costs to sell. In addition, SFAS 121
requires that assets to be disposed of be measured at the lower of cost or
fair value, less costs to sell. The Company adopted SFAS 121 in fiscal year
1997. The adoption of SFAS 121 did not have a material effect upon the
Company's financial statements.
Investments
The Company's investments in certain unconsolidated affiliates are stated at
the lower of cost or estimated net realizable value.
Earnings Per Share
Earnings per common and common equivalent share have been computed based
upon the weighted average number of common and common equivalent shares
outstanding. Outstanding stock options are included as common stock
equivalents when the effect on earnings per share is dilutive. Earnings per
share for the fully diluted basis have been computed, when the result is
dilutive, based on the assumption that the convertible subordinated debentures
had been converted to common stock at the date of issuance, with a
corresponding increase in net income to reflect a reduction in related
interest expense, net of applicable taxes.
The weighted average number of primary common and common equivalent shares
was 8,935,000 in 1997, 8,288,000 in 1996 and 8,213,000 in 1995. Shares for the
computation of fully diluted earnings per share were 11,970,000 in 1997,
11,805,000 in 1996 and 11,861,000 in 1995.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share" (SFAS 128), which will require adoption in the first
quarter of fiscal year 1998. SFAS 128 specifies the computation, presentation
and disclosure requirements of earnings per share. The adoption of this
statement will not have a material effect on the Company's historical earnings
per share.
Accounting for Stock-Based Compensation
The Company accounts for its stock compensation plans under Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and
related interpretations. The disclosures required under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-based Compensation"
(SFAS 123) have been included in Note 8.
Disclosures About Fair Value of Financial Instruments
The carrying values of cash, cash equivalents, accounts receivable, accrued
liabilities and notes payable approximate their fair values because of the
short maturity of these instruments.
The carrying value of the Company's long-term debt approximates fair value
based upon the current rates offered to the Company for obligations of the
same remaining maturities except for the Company's 5.875% Convertible
Subordinated Debentures and 10% Convertible Subordinated Notes (Note 7). The
estimated fair values of these financial instruments at September 28, 1997 are
as follows:
CARRYING FAIR
AMOUNT VALUE
-------- -------
(AMOUNTS IN
000'S)
Convertible Subordinated Debentures bearing interest at
5.875% due 2012........................................ $33,261 $47,397
Convertible Subordinated Notes bearing interest at 10%
due 1999............................................... $ 750 $ 6,900
20
MICROSEMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The estimated fair value amounts above have been determined using available
market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data and to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in current
market exchanges.
Intangible Assets
Intangible assets, arising principally from differences between the cost of
acquired companies and the underlying values at dates of acquisition, are
amortized on a straight-line basis over periods not exceeding ten years.
Concentration of Credit Risk and Foreign Sales
The Company is potentially subject to concentrations of credit risk
consisting principally of trade receivables. Concentrations of credit risk
exist because the Company relies on a significant portion of customers whose
principal sales are to the U.S. Government. In addition, sales to foreign
customers represented approximately 22%, 30% and 20% of net sales for fiscal
years 1997, 1996 and 1995, respectively. These sales were principally to
customers in Europe and Asia. The Company maintains reserves for potential
credit losses and such losses have been within management's expectations.
2. INVENTORIES
Inventories used in the computation of cost of goods sold were:
SEPTEMBER 28, SEPTEMBER 29, OCTOBER 1,
1997 1996 1995
------------- ------------- ----------
(AMOUNTS IN 000'S)
Raw materials......................... $15,954 $14,310 $10,367
Work in process....................... 23,774 19,493 20,847
Finished goods........................ 13,520 13,476 12,067
------- ------- -------
$53,248 $47,279 $43,281
======= ======= =======
Inventories in the amount of $8,071,000 at Microsemi Scottsdale are stated
at cost under the last-in, first-out (LIFO) method. Had the first-in, first-
out method been used, total inventories would have been approximately $27,000,
$50,000 and $100,000 higher at each fiscal year end for 1997, 1996 and 1995,
respectively. The LIFO valuation method had the effect of increasing gross
profit by $23,000, $50,000 and $1,000,000 in fiscal years 1997, 1996 and 1995,
respectively.
21
MICROSEMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
SEPTEMBER 28, SEPTEMBER 29,
ASSET LIFE 1997 1996
------------- ------------- -------------
(AMOUNTS IN 000'S)
Buildings.......................... 20-40 years $ 17,400 $ 16,101
Property and equipment............. 3-10 years 38,758 32,683
Furniture and fixtures............. 5-10 years 965 922
Leasehold improvements............. Life of lease 1,868 1,472
-------- --------
58,991 51,178
Accumulated depreciation........... (35,614) (31,637)
Land............................... 5,004 4,072
Construction in progress........... 6,490 2,028
-------- --------
$ 34,871 $ 25,641
======== ========
Depreciation expense was $4,036,000, $3,640,000 and $3,674,000 in fiscal
years 1997, 1996 and 1995, respectively.
At September 28, 1997, land and buildings located at the Santa Ana,
California manufacturing and headquarters facility were pledged to the City of
Santa Ana under the provisions of the loan agreement with the Santa Ana
Industrial Development Authority. The land and building of the Microsemi
Colorado subsidiary were pledged to the City of Broomfield, Colorado under the
provisions of the loan agreement with the Colorado Industrial Development
Authority. The buildings in Watertown, Massachusetts and in Ennis, Ireland are
pledged to Unitrode Corporation under the provisions of the related
acquisition agreement. The building and land in Riviera Beach, Florida are
pledged to the former owner under the provisions of the related acquisition
agreement.
4. OTHER ASSETS
Other assets consisted of the following:
SEPTEMBER 28, SEPTEMBER 29,
1997 1996
------------- -------------
(AMOUNTS IN 000'S)
Investments in unconsolidated affiliates......... $ 962 $ 603
Deferred financing expenses, net................. 1,106 1,292
Cash surrender value of life insurance........... 418 378
Goodwill and other intangible assets, net........ 183 50
Notes receivable................................. 282 702
Restricted deposit (see Note 7).................. -- 353
Others........................................... 363 513
------ ------
$3,314 $3,891
====== ======
Accumulated amortization for deferred financing expenses, goodwill and other
intangible assets amounted to $2,733,000 and $2,512,000 as of September 28,
1997 and September 29, 1996, respectively.
22
MICROSEMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. ACCRUED LIABILITIES
Accrued liabilities consisted of:
SEPTEMBER 28, SEPTEMBER 29,
1997 1996
------------- -------------
(AMOUNTS IN 000'S)
Accrued payroll, profit sharing, benefits and
related taxes................................. $ 9,016 $ 7,980
Accrued interest............................... 2,641 2,301
Other accrued expenses......................... 4,285 4,761
------- -------
$15,942 $15,042
======= =======
6. INCOME TAXES
Pretax income from continuing operations was taxed under the following
jurisdictions:
FOR EACH OF THE THREE
FISCAL YEARS IN THE
PERIOD ENDED
SEPTEMBER 28, 1997
-----------------------
1997 1996 1995
------- ------- -------
(AMOUNTS IN 000'S)
Domestic............................................. $15,929 $11,255 $ 7,750
Foreign.............................................. 2,577 2,711 2,510
------- ------- -------
Total.............................................. $18,506 $13,966 $10,260
======= ======= =======
The provision for income taxes consisted of the following components:
FOR EACH OF THE THREE
FISCAL YEARS IN THE
PERIOD ENDED
SEPTEMBER 28, 1997
-----------------------
1997 1996 1995
------ ------- ------
(AMOUNTS IN 000'S)
Current
Federal............................................ $6,525 $ 5,414 $3,295
State.............................................. 1,332 1,314 293
Foreign............................................ 310 578 566
Deferred............................................. (712) (1,440) 53
------ ------- ------
$7,455 $ 5,866 $4,207
====== ======= ======
23
MICROSEMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets (liabilities) comprise the following:
SEPTEMBER 28, SEPTEMBER 29,
1997 1996
------------- -------------
(AMOUNTS IN 000'S)
Accounts receivable.............................. $ 1,142 $ 765
Inventories...................................... 1,564 1,594
Other assets..................................... 1,347 1,814
Fixed asset bases................................ 477 479
Accrued employee benefit expenses................ 2,734 2,708
Accrued other expenses........................... 2,383 1,820
Loss and credit carryforwards.................... 350 1,251
------- -------
Gross deferred tax assets........................ 9,997 10,431
------- -------
Deferred tax asset valuation allowance........... (1,878) (2,804)
------- -------
Inventory bases.................................. (763) (750)
Depreciation..................................... (1,740) (1,770)
Other............................................ -- (203)
------- -------
Gross deferred tax liabilities................... (2,503) (2,723)
------- -------
$ 5,616 $ 4,904
======= =======
The decrease in the valuation allowance during fiscal 1997 primarily relates
to the expiration of capital loss carryforwards that were still available in
fiscal 1996.
The following is a reconciliation of income tax computed at the federal
statutory rate to the Company's actual tax expense:
FOR THE THREE
FISCAL YEARS
IN THE PERIOD ENDED
SEPTEMBER 28, 1997
---------------------
1997 1996 1995
------ ------ ------
(AMOUNTS IN 000'S)
Tax computed at statutory rate........................ $6,477 $4,748 $3,488
State taxes, net of federal benefit................... 850 787 655
Foreign income taxed at different rates............... 339 314 (287)
Other differences, net................................ (211) 17 351
------ ------ ------
$7,455 $5,866 $4,207
====== ====== ======
The Company has the following tax loss carryforwards available as of
September 28, 1997:
AMOUNT EXPIRATION DATE
------ ---------------
(AMOUNTS IN 000'S)
Purchased net operating loss carryforwards............ $1,168 2003
Tax benefits realized in future periods from the purchased net operating
losses will be reflected as adjustments to goodwill and other intangible
assets which were recorded at the time of the acquisition of the related
subsidiaries. All or a portion of the capital loss carryforward amount may be
utilized to offset future capital gains.
24
MICROSEMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
No provision has been made for future U.S. income taxes on the undistributed
earnings of foreign operations since they have been, for the most part,
indefinitely reinvested in these operations. Determination of the amount of
unrecognized deferred tax liability for temporary differences related to the
undistributed earnings of the Company's foreign operations is not practicable.
At the end of fiscal year 1997, the undistributed earnings aggregated
approximately $15,695,000.
7. DEBT
SEPTEMBER 28, SEPTEMBER 29,
1997 1996
------------- -------------
(AMOUNTS IN 000'S)
Long-term debt consisted of:
Industrial Development Bond-bearing interest at
7.875% due May 2000; secured by first deed of
trust............................................ $ 2,520 $ 2,720
Industrial Development Bond-bearing interest at
6.75% due February 2005; secured by first deed of
trust............................................ 5,350 5,350
Convertible Subordinated Debentures-bearing
interest at 5.875% due 2012...................... 33,261 33,281
Convertible Subordinated Notes-bearing interest at
10% due 1999..................................... 750 1,900
Note payable-bearing interest at 5.93%, due
monthly through July 2002........................ 2,700 --
Notes payable (PPC acquisition) bearing interest
at 7% due monthly through September 2009......... 2,370 --
Notes payable-bearing interest at ranges of 5-10%
due between October 1997 and September 2009...... 4,244 4,794
------- -------
51,195 48,045
Less current portion.............................. (3,574) (1,625)
------- -------
$47,621 $46,420
======= =======
Sinking fund payment requirements under the Industrial Development Bonds,
and other long-term debt maturities, including the current portion, during the
next five years are as follows (amounts in 000's):
1998............................................................. $ 3,574
1999............................................................. 3,115
2000............................................................. 4,438
2001............................................................. 3,319
2002............................................................. 3,128
Thereafter....................................................... 33,621
-------
$51,195
=======
A $2,520,000 Industrial Revenue Bond was issued in November 1975 through the
City of Broomfield, Colorado and carries an interest rate of 7.875% per annum.
The terms of the bond require principal payments of $215,000 in 1998, $230,000
in 1999 and $2,075,000 in 2000.
A $5,350,000 Industrial Development Revenue Bond was originally issued in
April 1985, through the City of Santa Ana for the construction of improvements
and new facilities at the Santa Ana plant. It was remarketed in 1995 and
carries an average interest rate of 6.75% per annum. The terms of the bond
require principal payments of $1,050,000 in 1998, $100,000 annually from 1999
to 2004 and $3,700,000 in 2005. A $5,557,000 letter of credit is carried by a
bank to guarantee the repayment of this bond. There are no compensating
balance requirements, however, the letter of credit agreement requires the
Company to make collateral payments of
25
MICROSEMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$350,000 on February 1, 1996, 1997 and 1998, totaling $1,050,000 to assure the
payment of principal scheduled for February 1, 1998. An annual commitment fee
of 2% is charged on this letter of credit. In addition, the agreement contains
provisions regarding net worth and working capital. The Company was in
compliance with the aforementioned covenants at September 28, 1997.
In February 1987, the Company sold $40,250,000 of 5.875% convertible
subordinated debentures due 2012. The debentures are convertible into common
stock at $13.55 per share. As of September 28, 1997 they are redeemable at
100% of par plus accrued interest. In fiscal year 1997, $20,000 was converted
into 1,476 shares of common stock. Deferred debt issuance costs of $1,128,000
are included in other assets and are being amortized over the life of the
debentures on a straight-line basis. In fiscal years 1987, 1988, 1989 and
1991, the Company repurchased a total of $6,969,000 of these debentures due to
favorable market conditions. The debentures require annual sinking fund
payments in the amount of 5% of the principal amount thereof, commencing in
March 1997, less the principal amount of converted or redeemed debentures. As
of September 28, 1997, the amount of redeemed and converted debentures would
have satisfied this requirement through March 1, 1999.
In June 1992, the Company obtained $2,000,000 from an officer and two
existing shareholders to finance a portion of an acquisition completed in
fiscal year 1992. The related $2,000,000 of 10% notes are due in 1999 and
convertible into common stock at $1.875 per share. In fiscal years 1996 and
1997, $100,000 and $1,150,000 were converted into 53,333 and 613,331 shares of
common stock, respectively.
In June 1997, the Company entered into a $2,700,000 equipment loan providing
for monthly payments through July 2002 of $45,000 plus interest at 5.93% per
annum.
In September 1997, the Company issued notes payable of $2,370,000 related to
the PPC acquisition payable to the former owners, bearing an interest rate of
7%, due in monthly installments through September 2009. (See Note 10.)
The Company maintains a revolving credit facility with a domestic bank which
will continue through September 1998. Under the credit facility the Company
can borrow up to $15,000,000. The credit line has an interest rate of prime
and is secured by substantially all of the assets of the Company. In addition,
the credit agreement contains provisions regarding net worth and working
capital. The Company is in compliance with the aforementioned covenants at
September 28, 1997. At September 28, 1997, the balance on this credit facility
was $4,365,000.
Notes payable to banks and others at September 28, 1997 included a $12,000
($51,000 at September 29, 1996) overdraft facility due to a bank in Hong Kong,
a demand note payable to the former owner of the Bombay, India facility for
$47,000 ($47,000 at September 29, 1996) and $209,000 ($240,000 at September
29, 1996) due to a financial institution in Ireland under an accounts
receivable discounting agreement.
8. STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS
Stock Options
Under the terms of an incentive stock option plan adopted in fiscal year
1982 and amended in fiscal year 1985, nontransferable options to purchase
common stock may be granted to certain key employees. 750,000 shares have been
reserved for issuance under the terms of the plan. The options may be
exercised within ten years from the date they are granted, subject to early
termination upon death or cessation of employment, and are exercisable in
installments determined by the Board of Directors. For certain significant
shareholders, the exercise period is limited to five years and the exercise
price is higher.
26
MICROSEMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In December 1986, the Board of Directors adopted another incentive stock
option plan (The 1987 Plan) which reserved an additional 750,000 shares of
common stock for issuance. The 1987 Plan was approved by the shareholders in
February 1987 and is for the purpose of securing for the Company and its
shareholders the benefits arising from stock ownership by selected officers,
directors and other key executives and management employees. The plan provides
for the grant by the Company of stock options, stock appreciation rights,
shares of common stock or cash. As of September 28, 1997, options have only
been granted under the 1987 Plan. The options may be exercised within ten
years from the date they are granted, subject to early termination upon death
or cessation of employment, and are exercisable in installments determined by
the Board of Directors. For certain significant shareholders, the exercise
period is limited to five years and the exercise price is higher.
At their annual meeting on February 25, 1994, the shareholders approved
several amendments to the 1987 Plan which 1) extend its termination date to
December 15, 2000; 2) increase initially from 750,000 to 850,000 the number of
shares available for grants; 3) increase on the first day of each fiscal year,
the number of shares available for grant in increments of 2% of the Company's
issued and outstanding shares of common stock; 4) set a limit on the number of
options or shares which may be granted to any one individual in any year; 5)
eliminate limitations on the Board of Directors' designating one or more
committees of any size or composition to administer the 1987 Plan; and 6)
provide for automatic grants of stock options to non-employee directors.
Activity and price information regarding the plans are as follows:
STOCK OPTIONS
-----------------------
SHARES AVERAGE PRICE
-------- -------------
Outstanding October 2, 1994............................. 766,402 $ 2.57
Granted............................................... 156,800 $ 4.38
Exercised............................................. (194,629) $ 2.07
Expired or canceled................................... (12,300) $ 2.70
--------
Outstanding October 1, 1995............................. 716,273 $ 3.12
========
Granted............................................... 146,300 $ 9.93
Exercised............................................. (66,008) $ 2.81
Expired or canceled................................... (56,050) $ 3.12
--------
Outstanding September 29, 1996.......................... 740,515 $ 4.48
========
Granted............................................... 191,300 $11.45
Exercised............................................. (227,551) $ 1.97
--------
Outstanding September 28, 1997.......................... 704,264 $ 7.12
========
Stock options exercisable were 308,164, 421,590 and 414,264 at September 28,
1997, September 29, 1996 and October 1, 1995, respectively, at weighted
average exercise prices of $4.34, $2.56 and $2.33, respectively. Remaining
shares available for grant at September 28, 1997, September 29, 1996 and
October 1, 1995 under the plans were 262,000, 244,000 and 175,000,
respectively. All options were granted at the fair market value of the
Company's shares of common stock on the date of grant.
27
MICROSEMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at September 28, 1997, as required by SFAS 123:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE PRICES SHARES EXERCISE PRICE REMAINING LIFE SHARES EXERCISE PRICE
--------------- ------- -------------- -------------- ------- --------------
$1.00-$ 3.88... 155,225 $ 2.38 3.6 years 150,225 $ 2.33
$4.44-$ 5.63... 214,461 $ 4.83 6.8 years 117,386 $ 4.88
$9.88-$13.13... 334,578 $10.80 8.7 years 40,553 $10.20
------- -------
704,264 308,164
======= =======
The Company accounts for its option plans under APB Opinion No. 25. Had
compensation expense for the Company's option plans been determined based upon
an estimate of the fair value at the grant date consistent with the
requirements of SFAS 123, the Company's net income and earnings per share
would have been reduced to the pro forma amounts in the following table. The
SFAS 123 method of accounting was not applied to options granted prior to
fiscal 1996.
SEPTEMBER 28, SEPTEMBER 29,
1997 1996
------------- -------------
Net income
As Reported (in thousands)..................... 11,051 8,100
Pro Forma (in thousands)....................... 10,577 7,915
Primary earnings per share
As Reported.................................... $ 1.24 $ .98
Pro Forma...................................... $ 1.20 $ .96
Fully diluted earnings per share
As Reported.................................... $ 1.03 $ .80
Pro Forma...................................... $ 1.00 $ .79
The fair value of each stock option grant was estimated pursuant to SFAS 123
on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
1997 1996
------- -------
Risk free interest rates................................. 5.98% 5.55%
Expected dividend yield.................................. none none
Expected lives........................................... 5 years 5 years
Expected volatility...................................... 66.6% 76.4%
The weighted average grant date fair values of options granted during fiscal
years 1997 and 1996 were $11.45 and $9.88, respectively.
Employee Benefit Plans
The Microsemi Corporation Profit Sharing Plan, adopted by the Board of
Directors in fiscal year 1984, covers substantially all full-time employees
who meet certain minimum employment requirements and provides for current
bonuses based upon the Company's earnings. Annual contributions to the plan
are determined by the Board of Directors. Total charges to income were
$3,070,000, $2,557,000 and $2,882,000 in fiscal years 1997, 1996 and 1995,
respectively.
28
MICROSEMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
401(k) Plan
The Company sponsors a 401(k) Savings Plan whereby participating employees
may elect to contribute up to 15% of their eligible wages. The Company is
committed to match 50% of employee contributions, not exceeding 3% of the
employee's wages. The Company contributed $899,000, $821,000 and $583,000 to
this plan during fiscal years 1997, 1996 and 1995, respectively.
Supplemental Retirement Plan
In fiscal year 1994, the Company adopted a supplemental retirement plan
which provides certain long-term employees with retirement benefits based upon
a certain percentage of the employees' salaries. Included in other long-term
liabilities at September 28, 1997 and September 29, 1996, was $1,471,000 and
$1,501,000, respectively, related to the Company's estimated liability under
the plan.
9. COMMITMENTS AND CONTINGENCIES
The Company occupies premises under operating lease agreements expiring
through 2009. Aggregate future minimum rentals payable under these leases are
(amounts in 000's):
1998.............................................................. $ 716
1999.............................................................. 631
2000.............................................................. 643
2001.............................................................. 643
2002.............................................................. 584
Thereafter........................................................ 2,368
------
$5,585
======
Rental expense charged to income was $933,000 in fiscal year 1997,
$1,204,000 in fiscal year 1996 and $1,472,000 in fiscal year 1995. The
aforementioned amounts are net of sublease income amounting to $272,000,
$146,000 and $145,000 in fiscal years 1997, 1996 and 1995, respectively.
In July 1994, the Company received a letter from the State of Washington
Department of Ecology stating that it proposed finding the Company a
potentially liable party for alleged contamination of real property and ground
water in Yakima County, Washington. The letter alleges that the Company
arranged for disposal or treatment of the contaminates or arranged with a
transporter for the disposal or treatment of the contaminates in Yakima
County. The Company joined a group of companies, which anticipated resolving
its liability with the State of Washington. The Company paid $54,000 for its
share in the final settlement in July 1997.
In Broomfield, Colorado, an owner of property located adjacent to a
manufacturing facility owned by a subsidiary of the Company had filed suit
against the subsidiary and other parties, claiming that contaminants migrated
to his property, thereby diminishing its value. In August 1995, the
subsidiary, together with former owners of the manufacturing facility, agreed
to settle the claim and to indemnify the owner of the adjacent property for
remediation costs. Although TCE and other contaminants previously used at the
facility are present in soil and groundwater on the subsidiary's property, the
Company vigorously contests any assertion that the subsidiary is the cause of
the contamination; however, there can be no assurance that recourse will be
available against third parties. State and local agencies in Colorado are
reviewing current data and considering study and cleanup options, and it is
not yet possible to predict costs for remediation or the allocation thereof
among potentially responsible parties. In the opinion of management, based in
part on the opinion of legal counsel, the final outcome of the Broomfield,
Colorado environmental matter will not have a material adverse effect on the
Company's financial position or results of operations.
29
MICROSEMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company is involved in various pending litigation arising out of the
normal conduct of its business, including those relating to commercial
transactions, contracts, and environmental matters. In the opinion of
management, based in part on the opinion of legal counsel, the final outcome
of these matters will not have a material adverse effect on the Company's
financial position or results of operations.
10. ACQUISITIONS
In October 1996, Microsemi RF Products, Inc. (RF), formerly known as Micro
Acquisition Corp., a wholly owned subsidiary of the Company, purchased certain
assets and the right to manufacture a selected group of products of the high-
reliability portion of SGS Thomson's Radio Frequency Semiconductor business in
Montgomeryville, Pennsylvania (RF Products). In September 1997, Microsemi PPC,
Inc. (PPC), formerly known as Micro PPC Acquisition Corp., a wholly owned
subsidiary of the Company, purchased all of the assets and assumed certain
liabilities of three affiliated companies: PPC Products Corp., Technett Seals
Inc., and Semiconductors, Inc. (collectively referred to as PPC Products). PPC
Products is a supplier of power transistors, fixed and adjustable linear
regulators and power rectifiers and is located in Riviera Beach, Florida. The
aggregate purchase price for RF Products and PPC Products included $5,201,000
in cash and a $3,070,000 in notes payable. The acquisitions have been
accounted for by the purchase method. Accordingly, the costs of the
acquisitions were allocated to the assets acquired and liabilities assumed
based on their estimated fair market values to the extent of the purchase
price. The Company's consolidated results of operations include the operations
of RF Products and PPC Products since the respective dates of acquisition.
11. GEOGRAPHIC AREAS
The following table presents sales, income from operations and identifiable
assets and liabilities by geographic areas for fiscal years 1997, 1996 and
1995:
SALES TO INCOME
UNAFFILIATED FROM
GEOGRAPHIC AREAS CUSTOMERS OPERATIONS ASSETS LIABILITIES
---------------- ------------ ---------- -------- -----------
(AMOUNTS IN 000'S)
1997:
United States................. $147,094 $20,327 $123,293 $90,546
Europe........................ 13,885 1,983 5,148 1,750
Asia.......................... 2,255 209 6,753 989
-------- ------- -------- -------
Total....................... $163,234 $22,519 $135,194 $93,285
======== ======= ======== =======
1996:
United States................. $142,269 $16,319 $ 99,555 $80,377
Europe........................ 13,729 1,460 6,070 2,025
Asia.......................... 1,437 1,172 7,389 1,204
-------- ------- -------- -------
Total....................... $157,435 $18,951 $113,014 $83,606
======== ======= ======== =======
1995:
United States................. $120,263 $13,050 $ 89,750 $78,697
Europe........................ 12,725 1,348 6,460 2,602
Asia.......................... 893 1,118 7,324 1,125
-------- ------- -------- -------
Total....................... $133,881 $15,516 $103,534 $82,424
======== ======= ======== =======
30
MICROSEMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. STATEMENT OF CASH FLOWS
For purposes of the Consolidated Statement of Cash Flows, the Company
considers all short-term, highly liquid investments with maturities of three
months or less at date of acquisition to be cash equivalents.
FOR THE THREE
FISCAL YEARS
IN THE PERIOD ENDED
SEPTEMBER 28, 1997
----------------------
1997 1996 1995
------- ------ ------
(AMOUNTS IN 000'S)
SUPPLEMENTARY INFORMATION:
Cash paid during the year for:
Interest.............................................. $ 3,446 $3,745 $6,184
======= ====== ======
Income taxes.......................................... $ 6,707 $6,330 $1,350
======= ====== ======
Non-cash financing and investing activities:
Conversion of subordinated debt to 614,807 and 53,333
shares of common stock in fiscal years 1997 and 1996
(Note 7)............................................. $ 1,170 $ 100 $ --
======= ====== ======
Stock options
Exercises........................................... $ 487 $ -- $ --
Stock surrendered in lieu of cash................... (190) -- --
------- ------ ------
Net cash received................................... $ 297 $ -- $ --
======= ====== ======
Businesses acquired in purchase transaction (Note 10):
Fair values of assets acquired...................... $ 8,789 $ -- $ --
Less debt issued and liabilities assumed............ (3,588) -- --
------- ------ ------
Cash paid for acquisition........................... $ 5,201 -- --
======= ====== ======
Equipment purchased through issuance of long term debt.. $ 3,821 $ -- $ --
======= ====== ======
13. RESEARCH AND DEVELOPMENT
Research and development expenses charged to cost of sales and expenses were
$1,161,000, $1,020,000 and $755,000, for the fiscal years 1997, 1996 and 1995,
respectively.
31
MICROSEMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
Selected quarterly financial data are as follows:
QUARTERS ENDED IN FISCAL YEAR 1997
---------------------------------------------
DECEMBER 29, MARCH 30, JUNE 29, SEPTEMBER 28,
1996 1997 1997 1997
------------ --------- -------- -------------
(AMOUNTS IN 000'S, EXCEPT EARNINGS PER SHARE)
Net sales............... $35,759 $40,657 $42,648 $44,170
Gross profit............ $ 9,744 $11,042 $11,685 $12,328
Net income.............. $ 1,889 $ 2,395 $ 3,027 $ 3,740
Primary earnings per
share.................. $ 0.22 $ 0.27 $ 0.33 $ 0.41
Fully diluted earnings
per share.............. $ 0.19 $ 0.23 $ 0.28 $ 0.34
QUARTERS ENDED IN FISCAL YEAR 1996
---------------------------------------------
DECEMBER 31, MARCH 31, JUNE 29, SEPTEMBER 29,
1995 1996 1996 1996
------------ --------- -------- -------------
(AMOUNTS IN 000'S, EXCEPT EARNINGS PER SHARE)
Net sales............... $35,299 $39,107 $41,261 $41,768
Gross profit............ $ 9,203 $10,309 $11,004 $11,599
Net income.............. $ 1,429 $ 1,828 $ 2,339 $ 2,504
Primary earnings per
share.................. $ 0.17 $ 0.22 $ 0.28 $ 0.30
Fully diluted earnings
per share.............. $ 0.15 $ 0.18 $ 0.23 $ 0.24
15. SUBSEQUENT EVENT (UNAUDITED)
In November 1997, the $750,000 of 10% Convertible Subordinated Notes were
converted into 400,000 shares of common stock.
32
MICROSEMI CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN 000'S)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- ---------- ---------- -------- ----------- --------
DEDUCTIONS- BALANCE
BALANCE AT CHARGED TO CHARGED RECOVERIES AT END
BEGINNING COSTS AND TO OTHER AND OF
CLASSIFICATION OF PERIOD EXPENSES ACCOUNTS WRITE-OFFS PERIOD
-------------- ---------- ---------- -------- ----------- --------
September 28, 1997
Allowance for doubtful
accounts and reserve for
returns.................. $2,159 $506 $-- $ -- $2,665
====== ==== ==== ===== ======
Reserve for investments in
and advances to
unconsolidated
affiliates............... $ 537 $760 $-- $ -- $1,297
====== ==== ==== ===== ======
September 29, 1996
Allowance for doubtful
accounts and reserve for
returns.................. $2,018 $ 91 $-- $ 50 $2,159
====== ==== ==== ===== ======
Reserve for investments in
and advances to
unconsolidated
affiliates............... $ 237 $300 $-- $ -- $ 537
====== ==== ==== ===== ======
October 1, 1995
Allowance for doubtful
accounts and reserve for
returns.................. $2,173 $421 $-- $(576) $2,018
====== ==== ==== ===== ======
Reserve for investments in
and advances to
unconsolidated
affiliates............... $ 237 $-- $-- $ -- $ 237
====== ==== ==== ===== ======
ITEM 16. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
33
PART III
Items 10, 11, 12 and 13 are omitted since the Registrant intends to file a
definitive proxy statement with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days after the end of Registrant's
fiscal year ended September 28, 1997. The information required by those items
is set forth in that certain proxy statement and such information is
incorporated in this Form 10-K.
PART IV
ITEM 17. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements. See Index under Item 8.
2. Financial Statement Schedules. See Index under Item 8.
3. Exhibits:
The exhibits which are filed with this report are listed in the Exhibit
Index.
(b) Reports on Form 8-K.
None
34
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.
MICROSEMI CORPORATION
/s/ David R. Sonksen
By: _________________________________
David R. Sonksen
Vice President--Finance and
Chief Financial Officer
(Principal Financial Officer
and Chief Accounting Officer
and duly authorized to sign on
behalf of the Registrant)
Dated: December 23, 1997
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Philip Frey, Jr. and David
R. Sonksen, or either of them, his true and lawful attorney-in-fact and agent,
with full power of substitution and re-substitution, to sign the report on
Form 10-K and any or all amendments thereto and to file the same, with all
exhibits thereto, and other documents in connection therewith with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof in any and all capacities.
Pursuant to the requirements of Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Philip Frey, Jr. Chairman of the Board, December 9, 1997
________________________________ President and Chief
Philip Frey, Jr. Executive Officer
/s/ David R. Sonksen Vice President--Finance, December 9, 1997
________________________________ Treasurer and Secretary
David R. Sonksen (principal financial and
accounting officer)
/s/ Joseph M. Scheer Director December 9, 1997
________________________________
Joseph M. Scheer
/s/ Brad Davidson Director December 9, 1997
________________________________
Brad Davidson
/s/ Robert B. Phinizy Director December 9, 1997
________________________________
Robert B. Phinizy
/s/ Martin H. Jurick Director December 9, 1997
________________________________
Martin H. Jurick
35
Exhibits.
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
3 Restated Certificate of Incorporation and Bylaws of the
Registrant(1)
4 Form of Indenture, including form of 5 7/8% Convertible
Subordinated Debenture due 2012(2)
4.1 Subordinated Convertible Note Purchase Agreement dated
June 26, 1992 among the Registrant and the Purchasers
named therein and Exhibit A hereto, a form of
Subordinated Convertible Note(29)
10.1 1984 Incentive Stock Option Plan (as amended December 13,
1984)(3)
10.2 Form of Incentive Stock Option Agreement pursuant to 1984
Incentive Stock Option Plan(3)
10.3 Form of Stock Option Agreement, dated October 17, 1985,
between the Registrant and members of the Registrant's
Board of Directors(1)
10.5 Credit Agreement between the Registrant and Security
Pacific National Bank, dated as of September 3, 1984, and
First Amendment to Credit Agreement dated as of May 1,
1985(1)
10.6 Lease dated June 29, 1982 between Ulrich Layher and MSC
Phoenix, Inc.(1)
10.11 1986 Nonqualified Stock Option Plan of the Registrant
(Exhibit 10.9)(5)
10.13 The Registrant's 1987 Stock Plan(6)
10.14 Indenture dated as of February 1, 1985, and related Loan
Agreement and Reimbursement Agreement both dated as of
February 1, 1985, relating to the Industrial Revenue
Bonds issued to finance additions to the Santa Ana
facility of the Registrant(2)
10.15 Stock Sale Agreement, dated November 12, 1987 between
Coors Porcelain Company and the Registrant, relating to
the acquisition of Coors Components, Inc.(7)
10.16 Press Release distributed by the Registrant on November
12, 1987, announcing the acquisition of Coors Components,
Inc.(7)
10.29 Subscription Agreement dated July 24, 1987 between the
Registrant and Diodes Incorporated for the subscription
of 800,000 shares of Diodes Incorporated(8)
10.32 Agreement of Purchase and Sale of Stock dated April 6,
1988, between General Microcircuits, Inc. and the
Registrant relating to the purchase of all of the
outstanding stock of General Microcircuits(9)
10.37 Stock Purchase Agreement dated as of February 17, 1989 by
and between Avnet, Inc., a New York corporation, and
Salem Scientific, Inc., a Microsemi Company, a Delaware
corporation and a wholly-owned subsidiary of the
Registrant(10)
10.48 First Amendment and Forbearance to the Registrant's
Second Amended and Restated Credit Agreement dated as of
November 1, 1990(15)
10.49 Confirmation dated December 10, 1990 from Security
Pacific National Bank concerning the extension of the
Registrant's line of credit and standby letters of credit
to February 1, 1991(15)
10.52 Assignment and Assumption Agreement dated September 23,
1991 by and among Dynamic Circuits, Inc., a California
corporation ("Dynamic"), Surface Mounted Technology
Corporation, a California corporation ("SMTC") and the
Registrant, pertaining to Dynamic's purchase from SMTC of
the SMTC assets, together with the following supplemental
documentation: (a) Letter of Intent dated August 14, 1991
(and Addendum thereto); (b) Equipment Lease Agreement;
(c) Promissory Note; and (d) Security Agreement(16)
36
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
10.54 Asset Purchase Agreement dated May 28, 1992 between Micro
USPD, Inc., a Delaware corporation and wholly-owned
subsidiary of the Registrant ("Micro USPD"), and Unitrode
Corporation, a Maryland corporation ("Unitrode")(17)
10.55 Irish Acquisition Agreement dated July 2, 1992 among
Unitrode Ireland, Ltd., an Irish corporation and wholly-
owned subsidiary of Unitrode; Unitrode B.V., a Dutch
corporation and wholly-owned subsidiary of Unitrode; and
Micro (Bermuda), Ltd., a Bermudian corporation and
wholly-owned subsidiary of the Registrant ("Micro
Bermuda")(18)
10.56 Dutch Acquisition Agreement dated July 2, 1992 among
Unitrode Europe B.V., a Dutch corporation and wholly-
owned subsidiary of Unitrode; Unitrode; and
MicroBermuda(19)
10.64 Promissory Note dated December 21, 1992 made by the
Registrant and payable to Norman Wechsler in the original
principal amount of $150,000 and extension letter
agreement dated April 23, 1993(21)
10.65 Waiver and First Amendment to Reimbursement Agreement
dated as of January 8, 1993 between the Registrant and
Bank of America NT&SA with respect to the Reimbursement
Agreement (See Exhibit 10.14) dated as of February 1,
1988(21)
10.66 Senior Note Purchase Agreement dated March 25, 1993
between the Registrant and Norman Wechsler, including as
an exhibit thereto the form of Senior Promissory Note
dated March 25, 1993(21)
10.69 Letter dated August 31, 1993 from Unitrode to the
Registrant providing for amendments with respect to the
Asset Purchase Agreement (See Exhibit 10.54) dated May
28, 1992 between Micro USPD and Unitrode excluding
exhibits as follows(22):
Amendments to Promissory Notes dated as of September 3,
1993 between Micro USPD and Unitrode and the respective
Promissory Notes dated July 2, 1992 attached as exhibits
thereto
10.73 Amendment to the Registrant's 1987 Stock Plan(25)
10.74 Executive Compensation Plans and Arrangements(26)
10.75 Bill of Sales and Purchase agreement between Telcom
Universal Inc. and Microsemi Corporation(6)
10.76 Supplement to financing documents (Indenture of Trust and
Loan agreement) relating to Industrial Development
Authority of the City of Santa Ana, 1985 Industrial
Development Revenue Bonds Microsemi Corporation Project
dated as of January 15, 1995.(26)
10.77 Amendments of the 1987 Microsemi Corporation Stock Plan.
Adopted on May 16, 1995(27)
10.78 Motorola-Microsemi PowerMite Technology Agreement.
Portions omitted from this Exhibit have been separately
filed with the Commission pursuant to a request for
confidential treatment.(28)
10.79 Revolving Line of Credit Agreement Between Microsemi
Corporation and Imperial Bank.(29)
10.80 Purchase agreement dated as of between SGS-Thomson
Microelectronics, Inc. and Microsemi RF Products, Inc.,
formerly known as Micro Acquisition Corp., a Delaware
Corporation and a wholly owned subsidiary of the
Company.(30)
10.81 Retirement agreement with Dr. Sandera(31)
11 Earnings per share calculation.
23.1 Consent of Independent Accountants (form S-3).
37
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
23.2 Consent of Independent Accountants (form S-8).
27 Financial data schedule.
- --------
(1) Filed in Registration Statement (No. 33-3845) and incorporated herein by
this reference.
(2) Filed in Registration Statement (No. 33-11967) and incorporated herein by
this reference.
(3) Filed with the Registrant's S-8 dated January 27, 1986 and incorporated
herein by this reference.
(6) Incorporated by reference form Exhibit A to the Registrant's definitive
Proxy Statement dated January 19, 1987.
(7) Incorporated by reference to the indicated Exhibit to the Registrant's
Current Report on Form 8-K filed with the Commission on or about December
23, 1987.
(9) Incorporated by reference to the indicated Exhibit to the Registrant's
Annual Report on Form 10-K filed with the Commission for the fiscal year
ended October 2, 1988.
(10) Incorporated by reference to Exhibit 10.33 to the Registrant's Current
Report on Form 8-K, as amended, as filed with Commission on or about
(15) Incorporated by reference to the indicated Exhibit to the Registrant's
Annual Report on Form 10-K filed with the Commission for the fiscal year
ended September 30, 1990.
(16) Incorporated by reference to the indicated Exhibit to the Registrant's
Annual Report on Form 10-K filed with the Commission for the fiscal year
ended September 29, 1991.
(17) Incorporated by reference to Exhibit 2.1 to the Registrant's Form 8
Amendment No. 1, as filed with the Commission on September 8, 1992, to
its Current Report on Form 8-K dated July 2, 1992.
(18) Incorporated by reference to Exhibit 2.2 to the Registrant's Form 8
Amendment No. 1, as filed with the Commission on September 8, 1992, to
its Current Report on Form 8-K dated July 2, 1992.
(19) Incorporated by reference to Exhibit 2.3 to the Registrant's Form 8
Amendment No. 1, as filed with the Commission on September 8, 1992, to
its Current Report on Form 8-K dated July 2, 1992.
(21) Incorporated by reference to the indicated Exhibit to the Registrant's
Quarterly Report on Form 10-Q filed with the Commission for the fiscal
quarter ended July 4, 1993.
(22) Incorporated by reference to the indicated Exhibit to the Registrant's
Annual Report on Form 10-K filed with the Commission for the fiscal year
ended October 3, 1993.
(23) Incorporated by reference to the indicated Exhibit to the Registrant's
Quarterly Report on Form 10-Q filed with the Commission for the fiscal
quarter ended April 3, 1994.
(24) Incorporated by reference to the indicated Exhibit to the Registrant's
Current Report on Form 8-K, as filed with the Commission dated June 8,
1994.
(25) Incorporated by reference to the indicated Exhibit to the Registrant's
Current Report on Form 10-K as filed with the Commission for the fiscal
year ended October 2, 1994.
(26) Incorporated by reference to the indicated Exhibit to the Registrant's
Quarterly Report on Form 10-Q filed with the Commission for the fiscal
quarter ended April 2, 1995
(27) Incorporated by reference to the indicated Exhibit to the Registrant's
Quarterly Report on Form 10-Q filed with the Commission for the fiscal
quarter ended July 2, 1995.
(28) Incorporated by reference to the indicated Exhibit to the Registrant's
Quarterly Report on Form 10-Q filed with the Commission for the fiscal
quarter ended March 31, 1996.
(29) Incorporated by reference to the indicated Exhibit to the Registrant's
Current Report on Form 8-K, as filed with the Commission dated June 26,
1992.
(30) Incorporated by reference to the indicated Exhibit to the Registrant's
Quarterly Report on Form 10-Q filed with the Commission for the fiscal
quarter ended December 29, 1996.
(31) Incorporated by reference to the indicated Exhibit to the Registrant's
Current Report on Form 10-K filed with the Commission for the fiscal year
ended September 28, 1997.
38