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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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 27, 1998
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______to______
Commission file number # 0-8866
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
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(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:
Title of each class Name of each exchange 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)
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,
1998 was approximately $77,974,000. 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, 1998 was
11,326,277.
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 23, 1999. This proxy statement
will be filed not later than 120 days after the close of Registrant's fiscal
year ended September 27, 1998.
1
PART I
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ITEM 1. BUSINESS
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INTRODUCTION
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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 telecommunication
satellites to heart pacemakers and other medical equipment, computer, 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. All of
the information herein which is not historic, is forward-looking. The forward-
looking statements included herein and elsewhere in this filing 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 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. (See Part I, Item 3; and Part II, Items 5, 7 and 8). 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. Readers are cautioned against ascribing undue
weight to forward-looking statements.
PRODUCTS
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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
2
leakage diodes, transistors 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 computer systems. The Company
currently serves a broad group of customers including Motorola, Lockheed-Martin,
Boeing, Hughes, Lucent Technologies and Bosch Telecom.
Microsemi is a leader among the space level semiconductor suppliers for the
commercial space market. Commercial space is defined as non government
sponsored satellites that are used primarily for telecommunications, data and
television broadcast uses.
MARKETING
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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
1998, the Company's domestic sales accounted for 77% of the Company's revenues
of which sales representatives and distributors accounted for approximately 35%
and 23%, 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, Montgomeryville,
Pennsylvania, Hong Kong and Ireland. Sales to foreign customers, made through
the Company's direct domestic sales force and 26 overseas sales representatives
and distributors, accounted for approximately 23% of fiscal year 1998 sales.
No one customer accounted for more than 5% of the Company's revenue in fiscal
year 1998. However, approximately 30% of the Company's business is to customers
whose principal sales are to the U.S. Government.
RESEARCH AND DEVELOPMENT
- ------------------------
The Company spent approximately $1,532,000, $1,161,000 and $1,020,000 in fiscal
years 1998, 1997 and 1996, 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 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.
3
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.
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 believes that it stocks adequate supplies for all materials,
based upon backlog, delivery lead time and anticipated new business. 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.
The Company's component testing and screening operations purchase semiconductor
dice and assembled components. These parts are available from a number of
semiconductor manufacturers.
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 a
partner in a joint venture in The People's Republic of China (PRC). No
assurance can be made that political and economic factors in such countries will
not have material adverse effects on the assets, cash flows and results of
operations of the Company.
The Company's Bombay, India facility assembles a commercial zener diode line to
compete 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 also 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 at
this facility services European customers with products from Microsemi U.S. and
Asian locations.
SALES TO FOREIGN CUSTOMERS
- --------------------------
Sales to foreign customers represented approximately 23%, 22% and 30% of net
sales for the 1998, 1997 and 1996 fiscal years, respectively. Foreign sales may
be subject to political and economic risks, including financial or political
instability, currency fluctuations, changes in the effective price of goods in
local currencies, the effect of trade sanctions, embargoes, or 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
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The Company's consolidated order backlog at September 27, 1998, for delivery
within twelve months, was $51,000,000, as compared to $77,100,000 at September
28, 1997. The Company's backlog at 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.
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., Fairchild Semiconductor and International
Rectifier, which are significantly larger than Microsemi and have greater
resources and larger market shares. 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
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 rely on patent protection for 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 27, 1998, the Company employed 1,750 persons domestically including
103 in engineering, 1,439 in manufacturing, 98 in marketing and 110 in general
management and administration. Additionally, 549 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 formerly might 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, is
subject to variable interpretations and
6
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 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 acquisition of complementary businesses.
In and prior to fiscal year 1998 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, liabilities, obligations,
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 be available
or that acquisitions will be obtainable on terms acceptable to the Company.
ITEM 2. PROPERTIES
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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 Lawrence, Massachusetts. 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
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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. In November 1998, the Company signed an agreement with three
former owners of this facility whereby the former owners will 1) reimburse the
Company for $530,000 of past costs, 2) assume responsibility for 90% of all
future clean-up costs, and 3) indemnify and protect the Company against any and
all third-party claims relating to the contamination of the facility. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
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PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
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(a) Market Information
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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 27, 1998
1st Quarter $ 17 3/4 $ 13 7/8
2nd Quarter 22 15 1/2
3rd Quarter 16 1/2 9 9/16
4th Quarter 11 1/2 6 5/8
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
POSSIBLE VOLATILITY OF STOCK PRICES
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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 27, 1998)
-------------- --------------------------
Common Stock, $.20 Par Value 492 (1)
(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.
8
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
For the five fiscal years in the period ended
September 27, 1998
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1998 1997 1996 1995 1994(1)(2)
--------- --------- --------- -------- ----------
(Amounts in 000's except per share amounts)
Selected Income Statement Data:
- ------------------------------
Net sales $ 164,710 $ 163,234 $ 157,435 $ 133,881 $ 119,230
Gross profit $ 45,753 $ 44,799 $ 42,115 $ 35,795 $ 22,438
Operating expenses $ 25,294 $ 22,280 $ 23,164 $ 20,279 $ 20,579
Net income (loss) $ 11,322 $ 11,051 $ 8,100 $ 6,053 $ (2,130)
Earnings (loss) per share
Basic $ 1.05 $ 1.30 $ 1.03 $ .79 $ (.28)
Diluted $ 0.98 $ 1.03 $ .80 $ .64 $ (.28)
Weighted average shares outstanding
Basic 10,735 8,493 7,828 7,659 7,570
Diluted 11,956 11,901 11,772 11,606 7,570
Selected Balance Sheet Data:
- ---------------------------
Working capital $ 57,063 $ 55,813 $ 49,556 $ 45,714 $ 35,128
Total assets $ 145,088 $ 135,194 $ 113,014 $ 103,534 $ 97,865
Long-term debt $ 18,667 $ 47,621 $ 46,420 $ 48,398 $ 50,568
Stockholders' equity $ 87,017 $ 41,909 $ 29,408 $ 21,110 $ 14,788
(1) In 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 this Form 10-K.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
---------------------
See Part I, Item 1, under "Important Factors Related to Forward-Looking
Statements and Associated Risks", and the factors discussed in Part I, Items 1
and 3, and Part II, Item 5.
RESULTS OF OPERATIONS FOR THE FISCAL YEAR 1998 COMPARED TO THE FISCAL YEAR 1997.
- --------------------------------------------------------------------------------
Net sales for fiscal year 1998 increased $1,476,000 to $164,710,000, from
$163,234,000 for fiscal year 1997. The total revenues included $16,000,000
generated by GMI, PPC and BKC in fiscal year 1998. Revenues generated by GMI in
fiscal year 1997 were $13,500,000. During fiscal year 1998, the demand for
commercial space products was lower than in prior years; however, the decrease
was partially offset by an increase in other commercial products, and military
sales.
Gross profit increased $954,000 to $45,753,000 for the current fiscal year from
$44,799,000 for the prior year due to higher sales. As a percentage of sales,
gross profit increased to 27.8% for fiscal year 1998 from 27.4% for fiscal year
1997. The increase was primarily due to higher margin from PPC and BKC sales
compared to lower margins for GMI sales in fiscal year 1997.
Operating expenses increased $3,014,000 to $25,294,000 for fiscal year 1998
compared to fiscal year 1997. The increase was primarily due to the addition of
PPC and BKC, partially offset by the decrease in operating expenses from GMI,
which was sold in December 1997.
Interest expense decreased $1,536,000 to $2,148,000 for fiscal year 1998 from
$3,684,000 in fiscal year 1997, due to lower borrowings, principally due to the
conversions of debentures and notes payable into shares of common stock.
The effective income tax rates of 38% and 40% for fiscal years 1998 and 1997,
respectively, were the combined results of taxes computed on foreign and
domestic income. The decrease in the fiscal year 1998 effective tax rate was
primarily attributable to expected changes in the proportion of income earned
within various taxing jurisdictions and the tax rates applicable to such taxing
jurisdictions.
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.
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.
10
The effective income tax rates of 40% and 42% for the fiscal years 1997 and
1996, respectively, were the combined results of income taxes computed on
foreign and domestic income.
CAPITAL RESOURCES & LIQUIDITY
- -----------------------------
Microsemi Corporation's operations in the fiscal year 1998 were funded with
internally generated funds and borrowings under the Company's line of credit.
In September 1997, the Company renewed its credit line with a bank through
September 1999. Under the current line of credit, the Company can borrow up to
$15,000,000. As of September 27, 1998, $5,950,000 was borrowed under this
credit facility. At September 27, 1998, the Company had $9,610,000 in cash and
cash equivalents.
An 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 $100,000 annually from 1999 to
2004 and $3,700,000 in 2005. A $4,466,000 letter of credit is carried by a bank
to guarantee the repayment of this bond. An annual commitment fee of 2% is
charged on this letter of credit. A principal payment of $1,050,000, consisting
of $350,000 in cash and $700,000 in matured certificates of deposit, was made in
February 1998.
The Company's 5.875% Convertible Subordinated Debentures, which were due in
2012, required semiannual interest payments of approximately $977,000. The
Debentures were callable at 100% of face value and were convertible at the
option of the holder into Common Stock at a conversion price of $13.55. On
February 12, 1998, $33,236,000 in outstanding debentures were converted into
2,452,829 shares of Common Stock and $25,000 was redeemed in cash at par. (See
Note 7 of Notes to Consolidated Financial Statements).
In December 1997, the Company sold General Microcircuits, Inc. (GMI), a wholly
owned subsidiary in Mooresville, North Carolina, for $5,000,000 in cash and a
$2,000,000 note receivable. Microsemi did not realize any material gain or loss
from this transaction.
In January 1998, the Company announced that it had made an equity investment of
$1,000,000 in Xemod, Inc. Xemod, Inc. was founded in 1994 and is headquartered
in Sunnyvale, California. It designs, manufactures and markets power amplifier
semiconductor components targeted at the cellular and wireless communication
markets.
In May 1998, the Company acquired BKC Semiconductors Incorporated (BKC), located
in Lawrence, Massachusetts for approximately $13,740,000 in cash plus existing
indebtedness of BKC of approximately $3,359,000. Microsemi financed this
acquisition with cash on hand, a $10,000,000 term loan and borrowings under its
existing credit facilities. BKC was a publicly held company, which manufactures
discrete semiconductors with sales of approximately $11,000,000 for the fiscal
year ended September 28, 1997. The acquisition was accounted for under the
purchase method.
In August 1998, the Company's Board of Directors authorized management to
repurchase up to 1,500,000 shares of its outstanding common stock. Microsemi
repurchased 114,037 shares for $840,000 in September 1998.
The Company has no other significant capital commitments.
YEAR 2000
- ---------
Microsemi has made and will continue to make certain investments in its
equipment and business system and application software to ensure the Company is
year 2000 ("Y2K") compliant.
11
The Company has established a global Y2K team as well as local site teams to
address the issues and to ensure that all aspects of its business will be Y2K
compliant. These teams are studying business system software and hardware,
equipment and software used in the manufacturing of product, facilities,
telecommunications and internal network. The global and the local site teams
consist of management as well as operational and information technology staff
members. The global Y2K team was formed to address company-wide Y2K issues,
such as overall project integration and management, project schedules and report
to management. Local site teams address research and remediation for site-
specific equipment, facilities, customers, suppliers and other business
partners. The teams' responsibilities include the following functional areas:
(1) factory equipment and facilities, (2) business system software, (3) desktop
computers, telecommunications system and network hardware and software systems,
and (4) customers, suppliers, and business partners.
Factory equipment includes automated test equipment and test data collection
systems. The high reliability nature of the Company's products calls for test,
test data collection and data retention. This need is generally called for in
product performance specifications, such as mil PF 19500. Microsemi is taking
an inventory of factory and facility equipment to determine their Y2K readiness.
The Company estimates this inventory will be finished and a compliance plan will
be presented to management by March 31, 1999. A contingency plan will be
presented to management by June 30, 1999.
The initial study of the impact of the internal information system (business
system software) has been completed and non-compliant items have been
identified. Approximately 30% of the Company's business software is Y2K
compliant. The Company is in the process of installing Y2K compliant software
for the remainder of the Company. The Company is planning to complete the
installation of Y2K compliant business system software at its five largest units
by August 1999 and the remaining small units by December 1999. The Company is
planning to develop a contingency plan by August 1999.
Networking and telecommunication hardware and software are Y2K compliant. The
Company is taking an inventory and assessing Y2K compliance of desktop
computers. This project should be completed by March 31, 1999. The Company
anticipates that non-compliant equipment will be upgraded or replaced by June
30, 1999.
The Company is currently engaged in surveying customers, suppliers, service
providers and business partners, including banks and other financial
institutions to determine whether they are Y2K compliant. The survey is not yet
complete and, accordingly, Microsemi is unable to evaluate the extent to which
such entities may be Y2K compliant and the effect that any non-compliance might
have. The Company anticipates cooperation in these efforts from its customers,
suppliers, service providers and business partners; however, the Company has no
control and no assurance of their cooperation as well as their Y2K readiness.
Microsemi is expecting to have a contingency plan for non Y2K compliance of its
customers, suppliers, service providers and business partners by June 1999.
The activities of the Company's Y2K project teams include the development of
contingency plans in the event the Company and/or its related third parties have
not completed all remediation programs by December 1999. Due to the complexity
of the Y2K issues, there can be no assurance that such plans will be sufficient
to address all internal and external failures or that unresolved or undetected
Y2K issues will not have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows. The contingency
plans, even if successful and effective, may result in loss of efficiencies,
increased costs, and other adverse effects on the Company's business and
operations.
The Company estimates that the expenses to date for the Y2K project have been
approximately $750,000. Completion of the project is expected to require an
additional expenditure of $750,000 by December 1999.
Microsemi believes that its Y2K project teams will identify all of the Company's
material Y2K issues in the course of their assessments. However, given the
pervasiveness of Y2K issues and the complexity of and interrelationships among
Y2K issues, both internal and external, there can be no assurance that Microsemi
12
will be able to identify and accurately evaluate all such issues. Identification
of these issues is crucial to an effective remediation plan. In the process of
compiling an inventory of and developing the remediation plan for Y2K issues,
the Company may discover material undetected or unanticipated Y2K issues that
will require substantial time and significant expense to address and that
certain known issues may take longer and may be more costly to remedy. Further,
any delayed or unsuccessful remediation of Y2K issues could result in material
adverse effects on the Company, such as failure to efficiently utilize
manufacturing capacity, shipping delays, loss of critical data, disrupted
communications, product defects, inventory write-offs, waste of inventory and
supplies, personal injury, difficulties in managing international operations,
errors in accounting, and such indirect adverse effects as claims by third
parties against the Company that may relate thereto. In addition, if Y2K
problems experienced by any of the Company's significant customers, suppliers,
public utilities, service providers or business partners cause or contribute to
delays or interruptions in placing orders, or in delivery of products or
services to the Company, or in collection of receivables, or in interruptions in
the Company's electrical or telecommunications utilities, such delays or
interruptions could have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows. Disruption in and
throughout the global economy resulting from Y2K issues may have a chain
reaction and could also have materially adverse affects on the Company. The
Company believes that such disruption is especially likely is foreign countries,
including those of Europe and Asia, whose Y2K compliance programs are believed
to trail those in the United States. However, no assurance is given as to Y2K
readiness in the United States, whose technological infrastructure is especially
complex and interrelated. The occurrence of any of the aforementioned or other
the risks may have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows, including but not
limited to such effects on the Company's foreign operations. In addition,
insurance coverage for the risks described above may be unavailable or available
only at prohibitive costs, and the Company may be responsible itself for all of
the potential adverse financial effects thereof.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Microsemi Corporation - Index to Financial Statements
-----------------------------------------------------
1. Consolidated Financial Statements Page
--------------------------------- ----
Report of Independent Accountants 15
Consolidated Balance Sheets at September 27, 1998
and September 28, 1997 16
Consolidated Income Statements for each of the three fiscal years
in the period ended September 27, 1998 17
Consolidated Statements of Stockholders' Equity for each of the
three fiscal years in the period ended September 27, 1998 18
Consolidated Statements of Cash Flows for each of the three
fiscal years in the period ended September 27, 1998 19
Notes to Consolidated Financial Statements 20
2. Financial Statement Schedule
----------------------------
Schedule for the fiscal years ended September 27, 1998,
September 28, 1997 and September 29, 1996.
Schedule
--------
II - Valuation and Qualifying Accounts 35
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.
14
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 (the "Company") at September 27, 1998
and September 28, 1997, and the results of their operations and their cash flows
for each of the three fiscal years in the period ended September 27, 1998, 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.
PricewaterhouseCoopers LLP
Costa Mesa, California
November 16, 1998
15
MICROSEMI CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in 000's)
September 27, September 28,
1998 1997
------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 9,610 $ 6,145
Accounts receivable, less allowance for doubtful
accounts of $2,457 in 1998 and $2,665 in 1997 23,094 25,093
Inventories 54,433 53,248
Deferred income taxes 6,049 8,160
Other current assets 1,319 4,363
-------- --------
Total current assets 94,505 97,009
-------- --------
Property and equipment, net 35,554 34,871
-------- --------
Other assets 15,029 3,314
-------- --------
TOTAL ASSETS $145,088 $135,194
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable to banks and others $ 6,172 $ 4,633
Current maturities of long-term debt 4,339 3,574
Accounts payable 6,656 11,304
Accrued liabilities 14,401 15,942
Income taxes payable 5,874 5,743
-------- --------
Total current liabilities 37,442 41,196
-------- --------
Deferred income taxes - 2,544
-------- --------
Long-term debt 18,667 47,621
-------- --------
Other long-term liabilities 1,962 1,924
-------- --------
Commitments and contingencies
Stockholders' equity
Common stock, $.20 par value; authorized 20,000 shares;
issued 11,666 in 1998 and 8,736 in 1997 2,333 1,747
Capital in excess of par value of common stock 49,896 16,197
Cumulative translation adjustment (946) (777)
Retained earnings 35,734 24,742
-------- --------
Total stockholders' equity 87,017 41,909
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $145,088 $135,194
======== ========
The accompanying notes are an integral part of these statements.
16
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 27, 1998
1998 1997 1996
-------- -------- --------
Net sales $164,710 $163,234 $157,435
Cost of sales 118,957 118,435 115,320
-------- -------- --------
Gross profit 45,753 44,799 42,115
-------- -------- --------
Operating expenses
Selling 10,939 9,226 9,027
General and administrative 13,843 12,833 13,916
Amortization of goodwill and intangible assets 512 221 221
-------- -------- --------
Total operating expenses 25,294 22,280 23,164
-------- -------- --------
Income from operations 20,459 22,519 18,951
-------- -------- --------
Other expenses
Interest expense (2,148) (3,684) (4,440)
Other (50) (329) (545)
-------- -------- --------
Total other expenses (2,198) (4,013) (4,985)
-------- -------- --------
Income before income taxes 18,261 18,506 13,966
Provision for income taxes 6,939 7,455 5,866
-------- -------- --------
Net income $ 11,322 $ 11,051 $ 8,100
======== ======== ========
Basic earnings per share $ 1.05 $ 1.30 $ 1.03
======== ======== ========
Diluted earnings per share $ 0.98 $ 1.03 $ 0.80
======== ======== ========
The accompanying notes are an integral part of these statements.
17
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 27, 1998
Common Stock
------------------------------
Capital in
excess of Cumulative
par value of Translation Retained
Shares Amount common stock Adjustment earnings Total
------ ------ ------------ ----------- -------- -------
Balance at October 1, 1995 7,789 $1,558 $14,644 $(683) $ 5,591 $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
Cumulative translation
adjustment - - - (77) - (77)
------ ------ ------- ----- ------- -------
Balance at September 29, 1996 7,908 1,582 14,895 (760) 13,691 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
Cumulative translation
adjustment - - - (17) - (17)
------ ------ ------- ----- ------- -------
Balance at September 28, 1997 8,736 1,747 16,197 (777) 24,742 41,909
Net Income - - - - 11,322 11,322
Exercise of employee stock
Options 191 38 519 - - 557
Treasury stock repurchased
and canceled (114) (22) (488) - (330) (840)
Conversion of debt (Note 7) 2,853 570 33,668 - 34,238
Cumulative translation
adjustment - - - (169) - (169)
------ ------ ------- ----- ------- -------
Balance at September 27, 1998 11,666 $2,333 $49,896 $(946) $35,734 $87,017
====== ====== ======= ===== ======= =======
The accompanying notes are an integral part of these statements.
18
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 27, 1998
1998 1997 1996
-------- -------- --------
Cash flows from operating activities
Net income $ 11,322 $ 11,051 $ 8,100
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,281 4,257 3,861
Allowance for doubtful accounts (182) 506 141
Loss on disposition and retirement of assets 93 9 254
Deferred income taxes (212) (712) (1,440)
Change in assets and liabilities, net of
acquisitions and disposition:
Accounts receivable 72 (215) (4,690)
Inventories (3,656) (1,719) (3,998)
Other current assets 2,662 (3,098) 3,173
Other assets 1,301 786 (1,131)
Accounts payable (3,210) 2,853 1,239
Accrued liabilities (915) 820 1,864
Income taxes payable 13 1,049 678
-------- -------- -------
Net cash provided by operating activities 12,569 15,587 8,051
-------- -------- -------
Cash flows from investing activities
Capital expenditures (5,905) (6,052) (5,933)
Proceeds from sale of assets and disposition 5,029 - 380
Payments for acquisitions, net of cash acquired (13,740) (5,201) -
Investment in an unconsolidated affiliate (1,000) - -
-------- -------- -------
Net cash used in investing activities (15,616) (11,253) (5,553)
-------- -------- -------
Cash flows from financing activities
Increase (decrease) in notes payable to banks and others (66) 81 (9)
Proceeds from long-term debt 10,000 - 17
Payments on long-term debt (3,848) (2,571) (2,598)
Increase (decrease) in other long-term liabilities 38 (38) 88
Exercise of employee stock options, net of treasury
stock repurchased 557 297 175
-------- -------- -------
Net cash provided by (used in) financing activities 6,681 (2,231) (2,327)
-------- -------- -------
Effect of exchange rate changes on cash (169) (17) (77)
-------- -------- -------
Net increase in cash and cash equivalents 3,465 2,086 94
Cash and cash equivalents at beginning of year 6,145 4,059 3,965
-------- -------- -------
Cash and cash equivalents at end of year $ 9,610 $ 6,145 $ 4,059
======== ======== =======
The accompanying notes are an integral part of these statements.
19
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. Each of the three fiscal years in the period ended
September 27, 1998 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.
Inventories
- -----------
Inventories are stated at the lower of cost or market. Cost is determined by
the first-in, first-out method except for cost of 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 of the assets. Leasehold
improvements are amortized over the shorter of the lease terms or the estimated
useful lives. 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.
Intangible Assets
- -----------------
Intangible assets, arising principally from differences between the cost of
acquired companies and the underlying values at dates of acquisition (goodwill),
are amortized on a straight-line basis over periods not exceeding ten years. It
is the Company's policy to periodically evaluate the carrying value of its
operating assets, including goodwill, and to recognize impairments when the
estimated future undiscounted net operating cash flows from the use of assets
are less than their carrying values.
Investments
- -----------
The Company's investments in certain unconsolidated affiliates are stated at the
lower of cost or estimated net realizable value.
Income Taxes
- ------------
Income taxes are provided based on the liability method of accounting pursuant
to Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting
for Income Taxes". Under this method deferred
20
tax assets and liabilities are recognized for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, SFAS 109
generally requires consideration of all expected future events, including
enactment of changes in tax laws or rates. A valuation allowance is provided for
deferred tax assets when it is more likely than not that such assets will not be
realized through future operations.
Accounting for Stock-Based Compensation
- ---------------------------------------
The Company accounts for its stock based 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.
Earnings Per Share
- ------------------
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share". This Statement establishes standards for computing and
requires the presentation of basic and diluted earnings per share (EPS). The
company adopted this statement in the first quarter of fiscal year 1998 and has
restated the EPS for the prior year periods presented, as required.
Basic earnings per share have been computed based upon the weighted average
number of common shares outstanding during the respective periods. Diluted
earnings per share have been computed, when the result is dilutive, using the
treasury stock method for stock options outstanding during the respective
periods and based upon the assumption that the convertible subordinated
debentures had been converted into common stock as of the beginning of the
respective periods, with a corresponding increase in net income to reflect a
reduction in related interest expense, net of applicable taxes.
Earnings per share for the three fiscal years ended September 27, 1998,
September 28, 1997 and September 29, 1996 were calculated as follows:
Fiscal Year Ended
---------------------------
1998 1997 1996
------- ------- -------
(amounts in 000's,
except per share data)
BASIC
Net income $11,322 $11,051 $ 8,100
======= ======= =======
Weighted-average common shares outstanding 10,735 8,493 7,828
======= ======= =======
Basic earnings per share $ 1.05 $ 1.30 $ 1.03
======= ======= =======
DILUTED
Net income $11,322 $11,051 $ 8,100
Interest savings from assumed conversions of
Convertible debt, net of income taxes 383 1,244 1,297
------- ------- -------
Net income assuming conversions $11,705 $12,295 $ 9,397
======= ======= =======
Weighted-average common shares outstanding for basic 10,735 8,493 7,828
Dilutive effect of stock options 235 387 427
Dilutive effect of convertible debt 986 3,021 3,517
------- ------- -------
21
Weighted-average common shares outstanding on a
Diluted basis 11,956 11,901 11,772
------- ------- -------
Diluted earnings per share $ 0.98 $ 1.03 $ 0.80
======= ======= =======
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.
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 rate offered to the Company
for obligations of the same remaining maturities.
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 23%, 22% and 30% of net sales for fiscal years 1998, 1997 and
1996, 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.
Reclassifications
- -----------------
Certain reclassifications have been made to the fiscal year 1997 and 1996
balances to conform with the fiscal year 1998 presentation.
22
2. INVENTORIES
Inventories used in the computation of cost of goods sold were:
September 27, September 28, September 29,
1998 1997 1996
------------- ------------- -------------
(amounts in 000's)
Raw materials $14,759 $15,954 $14,310
Work in process 18,282 23,774 19,493
Finished goods 21,392 13,520 13,476
------- ------- -------
$54,433 $53,248 $47,279
======= ======= =======
Inventories in the amount of $8,312,000 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 $615,000 lower
at September 27, 1998 and $27,000 and $50,000 higher at September 28, 1997 and
September 29, 1996, respectively. The LIFO valuation method had the effect of
decreasing gross profit by $642,000 in fiscal year 1998 and increasing gross
profit by $23,000, and $50,000 in fiscal years 1997 and 1996, respectively.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
September 27, September 28,
Asset Life 1998 1997
------------- ------------- -------------
Buildings 20-40 years $ 17,896 $ 17,400
Property and equipment 3-10 years 48,160 38,758
Furniture and fixtures 5-10 years 1,044 965
Leasehold improvements Life of lease 2,713 1,868
-------- --------
69,813 58,991
Accumulated depreciation (42,113) (35,614)
Land 5,004 5,004
Construction in progress 2,850 6,490
-------- --------
$ 35,554 $ 34,871
======== ========
Depreciation expense was $4,765,000, $4,036,000 and $3,640,000 in fiscal years
1998, 1997 and 1996, respectively.
At September 27, 1998, 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
land and 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.
23
4. OTHER ASSETS
Other assets consisted of the following:
September 27, September 28,
1998 1997
------------- -------------
(amounts in 000's)
Investments in unconsolidated affiliates $ 1,878 $ 962
Deferred financing expenses, net 375 1,106
Cash surrender value of life insurance 443 418
Goodwill and other intangible assets, net 9,729 183
Notes receivable 2,320 282
Others 284 363
------- ------
$15,029 $3,314
======= ======
Accumulated amortization for deferred financing expenses, goodwill and other
intangible assets amounted to $2,752,000 and $2,733,000 as of September 27, 1998
and September 28, 1997, respectively. Amortization expense for fiscal years
1998, 1997 and 1996 was $516,000, $221,000 and $221,000, respectively.
5. ACCRUED LIABILITIES
Accrued liabilities consisted of:
September 27, September 28,
1998 1997
------------- -------------
(amounts in 000's)
Accrued payroll, profit sharing, benefits and
related taxes $ 8,018 $ 9,016
Accrued interest 2,314 2,641
Other accrued expenses 4,069 4,285
------- -------
$14,401 $15,942
======= =======
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 27, 1998
---------------------------
1998 1997 1996
------- ------- -------
(amounts in 000's)
Domestic $14,010 $15,929 $11,255
Foreign 4,251 2,577 2,711
------- ------- -------
Total $18,261 $18,506 $13,966
======= ======= =======
24
The provision for income taxes consisted of the following components:
For each of the three
fiscal years in the period
ended September 27, 1998
--------------------------
1998 1997 1996
------ ------ -------
(amounts in 000's)
Current
Federal $4,320 $6,525 $ 5,414
State 918 1,332 1,314
Foreign 490 310 578
Deferred 1,211 (712) (1,440)
------ ------ -------
$6,939 $7,455 $ 5,866
====== ====== =======
Deferred tax assets (liabilities) comprise the following:
September 27, September 28,
1998 1997
------------- -------------
(amounts in 000's)
Accounts receivable $ 1,384 $ 1,142
Inventories 418 342
Other assets 1,434 1,347
Fixed asset bases 1,007 477
Accrued employee benefit expenses 2,417 2,581
Accrued other expenses 2,140 2,230
Loss and credit carryforwards - 350
------- -------
Gross deferred tax assets 8,800 8,469
------- -------
Deferred tax asset valuation allowance - (350)
------- -------
Inventory bases (753) (763)
Depreciation (1,998) (1,740)
------- -------
Gross deferred tax liabilities (2,751) (2,503)
------- -------
$ 6,049 $ 5,616
======= =======
The decrease in the valuation allowance during fiscal 1998 primarily relates to
the disposition of subsidiaries with purchased net operating loss carryforwards.
The following is a reconciliation of income tax computed at the federal
statutory rate to the Company's actual tax expense:
For each of the three
fiscal years in the period
ended September 27, 1998
--------------------------
1998 1997 1996
------ ------ ------
(amounts in 000's)
Tax computed at statutory rate $6,392 $6,477 $4,748
State taxes, net of federal benefit 916 850 787
Foreign income taxed at different rates (997) 339 314
Goodwill 115 - -
Non-deductible interest 310 - -
Other differences, net 203 (211) 17
------ ------ ------
$6,939 $7,455 $5,866
====== ====== ======
25
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 1998, the undistributed earnings aggregated
approximately $19,362,000.
7. DEBT
Long-term debt consisted of:
September 27, September 28,
1998 1997
------------- -------------
(amounts in 000's)
Industrial Development Bond-bearing interest at 7.875%, due
May 2000; secured by first deed of trust $ 2,305 $ 2,520
Industrial Development Bond-bearing interest at 6.75%, due
February 2005; secured by first deed of trust 4,300 5,350
Convertible Subordinated Debentures-bearing interest at
5.875%, due 2012 - 33,261
Convertible Subordinated Notes-bearing interest at 10%, due
1999 - 750
Note payable-bearing interest at 5.93%, payable monthly
through July 2002 2,070 2,700
Notes payable (PPC Acquisition)-bearing interest at 7%,
payable monthly through September 2009 2,092 2,370
Notes payable to a bank-bearing interest at the bank's prime
rate (8.5% at September 27, 1998), payable in monthly
installments through July 2003 9,667 -
Notes payable-bearing interest at ranges of 5 - 9.75%, due
between October 1998 and September 2009 2,572 4,244
------- -------
23,006 51,195
Less current portion (4,339) (3,574)
------- -------
$18,667 $47,621
======= =======
26
Long-term debt maturities, including the current portion, during the next five
years are as follows (amounts in 000's):
1999 $ 4,339
2000 5,404
2001 3,204
2002 3,050
2003 1,848
Thereafter 5,161
-------
$23,006
=======
A $2,305,000 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 $230,000 in 1999 and
$2,075,000 in 2000.
A $4,300,000 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. A principal payment of $1,050,000 was
made in February 1998. The terms of the bond require principal payments of
$100,000 annually from 1999 to 2004 and $3,700,000 in 2005. A $4,466,000 letter
of credit is carried by a bank to guarantee the repayment of this bond. There
are no compensating balance requirements. 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 27, 1998.
In February 1987, the Company sold $40,250,000 of 5.875% convertible
subordinated debentures due 2012. The debentures were convertible into common
stock at $13.55 per share. At March 1, 1997 they were redeemable at 100% of par
plus accrued interest. Deferred debt issuance costs of $1,128,000 were included
in other assets and were amortized over the life of the debentures on a
straight-line basis. In fiscal years 1987, 1988, 1989 and 1991, the Company
repurchased at market prices a total of $6,969,000 in principal amount of these
debentures. In February 1998, $33,236,000 in principal amount was converted, at
the discretion of the holders, into 2,452,829 shares of common stock and the
remaining $25,000 was redeemed in cash, at par. Accrued interest of $884,000
and unamortized debt issuance costs of $632,000 associated with these debentures
were recorded to additional paid-in capital upon conversion of the debentures to
common stock.
In June 1992, the Company issued $2,000,000 of 10% Convertible Subordinated
Notes, due in 1999, to an officer and two existing shareholders to finance a
portion of an acquisition completed in fiscal year 1992. $750,000, $1,150,000
and $100,000 of these notes were converted, at $1.875 per share, into 400,000,
613,331 and 53,333 shares of common stock in fiscal years 1998, 1997 and 1996,
respectively.
In June 1997, the Company entered into a $2,700,000 equipment loan agreement,
providing for monthly principal payments through July 2002 of $45,000 plus
interest at 5.93% per annum. $2,070,000 of this loan remained outstanding at
September 27, 1998.
In September 1997, the Company issued and assumed notes payable of $2,370,000
related to the PPC acquisition. These notes are payable to the former owners,
bear an interest rate of 7%, and are due in monthly installments over various
periods through September 2009. $2,092,000 of these notes remained outstanding
at September 27, 1998
In June 1998, the Company finalized an amendment to its existing bank credit
facility which added a $10,000,000 term loan ($9,667,000 was outstanding at
September 27, 1998), used by Microsemi to finance
27
a portion of the BKC acquisition. The terms of the term loan require monthly
principal payments of $167,000 plus interest at the bank's prime rate from
August 1998 through July 2003 and is secured by substantially all of the assets
of the Company. The Company also has an option to borrow from this term loan at
1.5% per annum plus the LIBOR rate. The terms of the loan also contain
provisions regarding net worth and working capital. The Company was in
compliance with the aforementioned covenants at September 27, 1998.
The Company maintains a revolving credit facility with domestic banks which
continues according to its terms through September 1999. Under the credit
facility the Company can borrow up to $15,000,000. The credit line bears
interest at the bank's prime rate and is secured by substantially all of the
assets of the Company. The Company also has an option to borrow from this
credit line at 1.5% per annum plus the LIBOR rate. In addition, the credit
agreement contains provisions regarding net worth and working capital. The
Company was in compliance with the aforementioned covenants at September 27,
1998. As of September 27, 1998, $5,950,000 was borrowed under this credit
facility.
Notes payable to banks and others at September 27, 1998 included a note payable
to the former owner of the Bombay, India facility for $40,000, ($47,000 at
September 28, 1997) and $182,000 ($209,000 at September 28, 1997) 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. The Company reserved 750,000
shares 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.
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, the Company only granted options 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.
28
Activity and price information regarding the plans are as follows:
Stock Options
------------------
Average
Shares Price
-------- -------
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
========
Granted 189,500 $15.84
Exercised (191,669) 4.31
Expired or canceled (64,705) $10.05
--------
Outstanding September 27, 1998 637,390 $10.44
========
Stock options exercisable were 263,590, 308,164, and 421,590 at September, 27,
1998, September 28, 1997 and September 29, 1996, respectively, at weighted
average exercise prices of $7.24, $4.34 and $2.56, respectively. Remaining
shares available for grant at September 27, 1998, September 28, 1997 and
September 29, 1996 under the plans were 308,000, 262,000 and 244,000,
respectively. All options were granted at the fair market value of the
Company's shares of common stock on the date of grant.
The following table summarizes information about stock options outstanding and
exercisable at September 27, 1998, as required by SFAS 123:
Options Outstanding Options Exercisable
--------------------- -------------------
Weighted
Weighted Average Average
Range of Exercise Remaining Exercise
Exercise Prices Shares Price Life Shares Price
- ----------------- -------- -------- --------- -------- --------
$ 1.00 - $ 3.88 49,525 $ 2.64 3.3 years 49,525 $ 2.64
$ 4.44 - $ 5.00 125,587 $ 4.77 6.0 years 100,862 $ 4.81
$ 9.81 - $13.88 286,278 $10.86 7.7 years 98,703 $10.57
$15.875 - $17.25 176,000 $16.01 9.1 years 14,500 $17.14
------- -------
637,390 263,590
======= =======
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.
29
September 27, September 28,
1998 1997
------------- -------------
(amounts in 000's)
Net income
As reported 11,322 11,051
Pro forma 10,404 10,577
Basic earnings per share
As reported $ 1.05 $ 1.30
Pro forma $ .97 $ 1.25
Diluted earnings per share
As reported $ .98 $ 1.03
Pro forma $ .90 $ .98
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:
1998 1997
---------- ----------
Risk free interest rates 5.55% 5.98%
Expected dividend yield none none
Expected lives 5 years 5 years
Expected volatility 76.4% 66.6%
The weighted average grant date fair values of options granted during fiscal
years 1998 and 1997 were $15.84 and $11.45, 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 $2,509,000, $3,070,000 and
$2,557,000 in fiscal years 1998, 1997 and 1996, respectively.
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 $1,005,000, $899,000 and $821,000 to this plan
during fiscal years 1998, 1997 and 1996, 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 27, 1998 and September 28, 1997 was $1,400,000 and
$1,471,000, respectively, related to the Company's estimated liability under the
plan.
30
9. COMMITMENTS AND CONTINGENCIES
The Company occupies premises under operating lease agreements expiring through
2009. Aggregate future minimum rental payments under these leases are (amounts
in 000's):
1999 $ 872
2000 843
2001 679
2002 660
2003 620
Thereafter 2,258
------
$5,932
======
Rental expense charged to income was $411,000 in fiscal year 1998, $661,000 in
fiscal year 1997, and $1,058,000 in fiscal year 1996. The aforementioned
amounts are net of sublease income amounting to $557,000, $272,000 and $146,000
in fiscal years 1998, 1997 and 1996, respectively.
In Broomfield, Colorado, the owner of a 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. In
November 1998, the Company signed an agreement with three former owners of this
facility whereby the former owners will 1) reimburse the Company for $530,000 of
past costs, 2) assume responsibility for 90% of all future clean-up costs, and
3) indemnify and protect the Company against any and all third-party claims
relating to the contamination of the facility. 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. In the opinion of
management, 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.
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, the final
outcome of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
10. ACQUISITION AND DISPOSITION
On May 15, 1998, the Company acquired BKC Semiconductors, Incorporated (BKC),
located in Lawrence, Massachusetts, for approximately $13,740,000 in cash plus
existing indebtedness of BKC of approximately $3,359,000. Microsemi financed
this acquisition with cash on hand and advances under its existing credit
facilities, as amended. BKC was a publicly held company, which manufactured
discrete semiconductors with sales of approximately $11,000,000 for the fiscal
year ended September 28, 1997. The acquisition was accounted for under the
purchase method. The allocation of the purchase price to the assets and
liabilities of BKC was based upon the Company's estimates of the relative values
of the assets acquired and liabilities assumed. The Company recorded $9,839,000
of goodwill related to this acquisition. The Company's consolidated results of
operations for the fiscal year ended September 27, 1998 included the operations
of BKC since the date of acquisition.
On December 31, 1997, the Company sold General Microcircuits, Inc., a wholly
owned subsidiary in Mooresville, North Carolina, for $5,000,000 in cash and a
$2,000,000 note receivable. Microsemi did not realize any material gain or loss
from this transaction.
31
11. NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", and SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related Information".
These standards, which are effective for the Company's fiscal year 1999, expand
or modify disclosures and will have no impact on the Company's consolidated
financial position, results of operations, or cash flows.
12. GEOGRAPHIC AREAS
The following table presents sales, income from operations and identifiable
assets and liabilities by geographic areas for fiscal years 1998, 1997 and 1996:
SALES TO
UNAFFILIATED INCOME FROM
GEOGRAPHIC AREAS CUSTOMERS OPERATIONS ASSETS LIABILITIES
- ---------------------- ------------ ----------- ---------- -----------
(amounts in 000's)
1998:
UNITED STATES $145,242 $17,210 $131,663 $55,248
EUROPE 15,350 1,621 5,982 1,628
ASIA 4,118 1,628 7,443 1,195
-------- ------- -------- -------
TOTAL $164,710 $20,459 $145,088 $58,071
======== ======= ======== =======
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
======== ======= ======== =======
32
13. 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 27, 1998
-------------------------
Supplementary information: 1998 1997 1996
------- ------- ------
(amounts in 000's)
Cash paid during the year for:
Interest $ 1,858 $ 3,446 $3,745
======= ======= ======
Income taxes $ 7,619 $ 6,707 $6,330
======= ======= ======
Non-cash financing and investing activities:
Conversion of subordinated debt into 2,852,829,
614,807 and 53,333 shares of common stock in
fiscal years 1998, 1997 and 1996, respectively
(Note 7) $33,986 $ 1,170 $ 100
======= ======= ======
Stock options:
Exercises $ 899 $ 487 $ -
Stock surrendered in lieu of cash (342) (190) -
------- ------- ------
Net cash received $ 557 $ 297 $ -
======= ======= ======
Businesses acquired in purchase transactions
(Note 10):
Fair values of assets acquired $ 7,260 $ 8,789 $ -
Goodwill 9,839 - -
Less debt issued and liabilities assumed (3,359) (3,588) -
------- ------- ------
Cash paid for acquisition $13,740 $ 5,201 $ -
======= ======= ======
Equipment purchased through issuance of long
term debt: $ - $ 3,821 $ -
======= ======= ======
14. RESEARCH AND DEVELOPMENT
Research and development expenses charged to cost of sales and expenses were
$1,532,000, $1,161,000 and $1,020,000, for the fiscal years 1998, 1997 and 1996,
respectively.
33
15. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
Selected quarterly financial data are as follows:
Quarters ended in fiscal year 1998
------------------------------------------------
(amounts in 000's, except earnings per share)
December 28, March 29, June 28, September 27,
1997 1998 1998 1998
------------ --------- -------- -------------
Net sales $44,052 $41,194 $39,291 $40,173
Gross profit $12,019 $11,681 $10,874 $11,179
Net income $ 3,092 $ 3,416 $ 2,347 $ 2,467
Basic earnings per share $ 0.35 $ 0.33 $ 0.20 $ 0.21
Diluted earnings per share $ 0.28 $ 0.29 $ 0.20 $ 0.21
Quarters ended in fiscal year 1997
------------------------------------------------
(amounts in 000's, except earnings per share)
December 29, March 30, June 29, September 28,
1996 1997 1997 1997
------------ --------- -------- -------------
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
Basic earnings per share $ 0.24 $ 0.28 $ 0.35 $ 0.43
Diluted earnings per share $ 0.19 $ 0.23 $ 0.28 $ 0.34
34
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
- -------- ---------- ---------- ---------- -------------- ----------
Balance at Charged to Charged Deductions- Balance
beginning costs and to other recoveries and at end of
Classification of period expenses accounts write-offs period
- -------------- ---------- ---------- ---------- -------------- -----------
September 27, 1998
- ------------------
Allowance for doubtful accounts and
reserve for returns $2,665 $ $ $208 $2,457
====== ==== ==== ==== ======
Reserve for investments in and
advances to unconsolidated
affiliates $1,297 $ $ $ $1,297
====== ==== ==== ==== ======
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
====== ==== ==== ==== ======
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
35
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 27, 1998. The information required by those items is set forth
in that certain proxy statement and such information is incorporated by
reference in this Form 10-K.
PART IV
-------
ITEM 14. 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
36
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
By /s/ DAVID R. SONKSEN
----------------------------------------
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 21, 1998
37
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, President December 23, 1998
- ----------------------- and Chief Executive Officer
Philip Frey, Jr.
/s/ DAVID R. SONKSEN Vice President-Finance, Treasurer December 23, 1998
- ----------------------- and Secretary (principal financial
David R. Sonksen and accounting officer)
/s/ JOSEPH M. SCHEER Director December 18, 1998
- -----------------------
Joseph M. Scheer
/s/ BRAD DAVIDSON Director December 18, 1998
- -----------------------
Brad Davidson
/s/ ROBERT B. PHINIZY Director December 22, 1998
- -----------------------
Robert B. Phinizy
/s/ MARTIN H. JURICK Director December 17, 1998
- -----------------------
Martin H. Jurick
38
Exhibits.
EXHIBIT INDEX
Sequential
Exhibit Page
Number Description Number
2.1 The Agreement and Plan of Merger among the Company,
Micro BKC Acquisition Corp. and BKC Semiconductors
Incorporated, dated January 21, 1998, was filed with
Form 8-K on June 1, 1998 under the same exhibit number
and is incorporated herein by this reference (33)
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
39
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)
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)
40
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)
41
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. Jiri Sandera (31)
10.82 Change of Control Agreement with Mr. Philip Frey, Jr. (32)
10.83 Change of Control Agreement with Mr. David R. Sonksen. (32)
10.84 Supplemental Executive Retirement Plan (32)
23.1 Consent of Independent Accountants for form S-3 (34).
23.2 Consent of Independent Accountants for forms S-8 (34).
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.
42
(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.
43
(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.
(32) Incorporated by reference to the indicated Exhibit to the Registrant's
Current Report on Form 10-Q filed with the Commission for the fiscal
quarter ended December 28, 1997.
(33) Incorporated by reference to the indicated Exhibit to the Registrant's
Current Report on Form 10-Q filed with the Commission for the fiscal
quarter ended June 28, 1998.
(34) Incorporated by reference to the indicated Exhibits to the Registrant's
Current Report on Form 10-K filed with the Commission for the fiscal year
ended September 27, 1998.
44