Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
All statements, trend analysis and other information contained in the following
discussion relative to markets for our products and trends in revenue, gross
margins and anticipated expense levels, as well as other statements including
words such as "expects," "anticipates," "intends," "plans," "believes," and
"estimates," and variants of such words and similar expressions, identify
forward-looking statements. Our business is subject to numerous risks and
uncertainties, including probable variability in our quarterly operating
results, the rate of growth and development of wireless markets, risks
associated with our operation of a wafer fabrication facility and start-up of a
second wafer fabrication facility, our ability to manage rapid growth and to
attract and retain skilled personnel, variability in production yields, raw
material availability, manufacturing capacity constraints, dependence on a
limited number of customers and dependence on third parties. These and other
risks and uncertainties, which are described in more detail in the section
entitled "Business-Additional Factors That May Affect Future Results" in our
most recent Annual Report on Form 10K filed with the Securities and Exchange
Commission, could cause the actual results and developments to be materially
different from those expressed or implied in the forward-looking statements.
OVERVIEW
We design, develop, manufacture and market proprietary radio frequency
integrated circuits, or RFICs, for wireless communications products and
applications. As such, we operate as a single business segment. Our products are
included primarily in cellular and PCS (personal communications service) phones,
base stations, wireless local area networks and cable television modems. We
derive revenue from the sale of standard and custom-designed products and
services. We offer a broad array of products including amplifiers, mixers,
modulators/demodulators and single chip transmitters, receivers and transceivers
that represent a substantial majority of the RFICs required in wireless sub-
scriber equipment. We design products using multiple semiconductor process
technologies: gallium arsenide (GaAs) heterojunction bipolar transistor (HBT),
silicon bipolar transistor, silicon CMOS, silicon BiCMOS, silicon germanium
BiCMOS and GaAs metal semiconductor field effect transistor (MESFET). Generally
speaking, GaAs-based products offer better electrical performance while
silicon-based products are less expensive. Original equipment manufacturers
(OEMs) try to maximize tradeoffs between performance and cost. Sales of GaAs HBT
products represented 92%, 89% and 89% of our total revenue in fiscal years 2001,
2000 and 1999, respectively. We expect to continue to rely heavily on sales of
GaAs HBT products.
In September 1998, we began commercial shipments from our first GaAs HBT wafer
fabrication facility, which has enabled us to manufacture products with lower
per unit costs than products manufactured from purchased wafers. We completed
construction of a second wafer fabrication facility in December 2000. However,
due to slowing order activity, this facility was not put into production in
fiscal 2001. We expect to begin production in this facility in the second half
of fiscal 2002. Internally manufactured products accounted for 82%, 57% and 35%
of our total revenue for fiscal years 2001, 2000 and 1999, respectively.
RESULTS OF OPERATIONS
The following table shows our consolidated statement of operations data
expressed as a percentage of total revenue for the periods indicated:
For the Fiscal Year Ended March 31,
2001 2000 1999
- -------------------------------------------------------------
Total revenue 100.0% 100.0% 100.0%
Costs and expenses:
Cost of goods sold 54.2 52.9 65.0
Research and development 18.0 11.5 9.3
Marketing and selling 8.5 7.0 7.0
General and administrative 4.0 3.3 3.1
Other operating expenses 1.4 -- --
- ---------------------------------------------------------------
Total costs and expenses 86.1 74.7 84.4
- ---------------------------------------------------------------
Income from operations 13.9 25.3 15.6
Interest expense (2.8) (0.5) (0.8)
Interest income 4.5 1.9 1.3
Other expense, net -- (0.1) (0.1)
- ---------------------------------------------------------------
Income before income taxes 15.6 26.6 16.0
Income tax expense (5.2) (9.3) (3.2)
- ---------------------------------------------------------------
Net income 10.4 17.3 12.8
===============================================================
REVENUE
FISCAL 2001
Revenue in fiscal 2001 was $335.4 million, an increase of 16% over revenue of
$289.0 million in fiscal 2000 due primarily to the continued growth of our
GaAs HBT products. GaAs HBT sales were $309.9 million, an increase of 20% over
prior year's sales of $257.8 million due to increased demand from the handset
industry. This increased demand led to an expansion of our customer base as
well as growth in sales to several prominent existing customers in the handset
industry. Sales to Nokia Mobile Phones Ltd., our largest customer, represented
53% of total revenue in fiscal 2001, a decrease from 59% in fiscal 2000. While
the absolute dollar amount of sales to Nokia increased in fiscal 2001 from
fiscal 2000, as a percent of total revenue, Nokia sales decreased due to the
expanded customer base. No other customer generated sales greater than 10% of
total revenue in fiscal 2001.
Although we increased the number of units sold in fiscal 2001 by nearly 30%, our
overall average selling price declined approximately 10% from fiscal 2000. We
continue to experience downward pressure on average selling prices of our
products.
International shipments in fiscal 2001 were $174.4 million and accounted for 52%
of total revenue, as compared to $149.6 million, or 52% of total revenue, in
fiscal 2000. We believe international sales will either hold at current levels
or grow as a percentage of overall revenue for the foreseeable future. Fiscal
2001 sales to customers located in South Korea were $44.2 million, down from
sales of $44.8 million in fiscal 2000. This sales decline was predominately the
result of the unstable handset market due to the loss of service provider
subsidies on handsets in South Korea.
We sell our products worldwide directly to customers as well as through a
network of 11 domestic and 7 foreign sales representative firms. One South
Korean sales representative firm, Jittek, accounted for 10% of total revenue in
fiscal 2001, a decrease from 18% of total revenue in fiscal 2000.
During fiscal 2001, products manufactured at our wafer fabrication facility
accounted for $276.5 million, or 82% of total revenue, an increase of 69% over
the prior year's revenue of $163.7 million from internally manufactured
products.
FISCAL 2000
Revenue of $289.0 million increased 89% in fiscal 2000 compared to fiscal 1999's
revenue of $152.9 million due primarily to strong growth in both the GaAs HBT
and silicon products. GaAs HBT sales increased 91% due to the growth in the
handset industry and silicon sales increased 81% as a result of expanded
development, manufacture and sale of custom RFICs using IBM's advanced Blue
Logic silicon process technology.
Sales to Nokia represented 59% of total revenue in fiscal 2000, down from 73% of
total revenue in fiscal 1999. No other customer accounted for sales greater than
10% of our fiscal 2000 total revenue.
International shipments accounted for $149.6 million, or 52% of total revenue,
in fiscal 2000, compared to $81.2 million, or 53% of total revenue, in fiscal
1999. Sales to customers located in South Korea totaled $44.8 million in fiscal
2000, or 16% of total revenue, compared to $34.7 million, or 23% of total
revenue, in fiscal 1999. The growth in sales to our South Korean OEM customers
resulted from increased demand for CDMA handsets that they supply to the South
American and Asian markets. One sales representative firm, Jittek, accounted for
18% of our total revenue in fiscal 2000, a slight increase from 15% of total
revenue in fiscal 1999.
Although South Korean sales grew significantly during fiscal 2000, they
decreased from prior periods during each of the last two quarters of the year
due to an unstable market. European and other Asian sales growth offset declines
in the South Korean market.
During fiscal 2000 products manufactured at our wafer fabrication facility
increased just over 200% over fiscal 1999, accounting for $163.7 million in
sales or 57% of total revenue.
GROSS PROFIT
FISCAL 2001
Gross profit margins in fiscal 2001 declined slightly to 46% from 47% in fiscal
2000. This decrease was the result of lower average selling prices on our mature
products and a change in the product mix to include the more complex and more
costly modules. The ramp of our module business generated higher yield losses,
which negatively affected gross profit margins in fiscal 2001.
We continue to encounter price pressure on our products and we expect additional
start-up costs associated with modules to negatively impact margins in the
near-term. However, we are implementing a series of cost reduction and yield
improvement initiatives designed to improve gross profit margins on modules and
anticipate improvements in fiscal 2002.
Capacity in our first wafer fabrication facility is expected to be sufficient to
meet demand until the second half of fiscal 2002. Until our second wafer
fabrication facility is qualified for production, we will expense start-up costs
associated with this facility as other operating expenses. However, once this
facility is qualified for production, gross profit margins may be negatively
affected by costs to ramp production at the new facility and by the effects of
low capacity utilization.
FISCAL 2000
In fiscal 2000, our gross profit margins increased significantly to 47% versus
35% in fiscal 1999. Although we experienced a trend of lower overall average
selling prices, this was more than offset by lower overhead costs per unit,
lower overall wafer costs due to a greater percentage of internal manufacturing
and improvements in sourcing costs and overall manufacturing efficiencies.
RESEARCH AND DEVELOPMENT
FISCAL 2001
Research and development expenses in fiscal 2001 were $60.3 million, an increase
of 81% over fiscal 2000 expenses of $33.3 million. This increase was primarily
attributable to increased headcount and related personnel expenses. In addition,
development wafers and mask sets and prototyping expenses increased as a result
of module development.
We currently operate five RFIC design centers staffed by permanent employees in
addition to our design engineering staff in Greensboro, North Carolina. Our
design centers are located in Scotts Valley, California; Cedar Rapids, Iowa;
Boston, Massachusetts; Chandler, Arizona; and Pandrup, Denmark. The Denmark
design center was opened in fiscal 2001. Research and development employees
totaled 327 at March 31, 2001 compared to 228 at March 31, 2000.
We plan to continue to make substantial investments in research and development
and we expect that such expenses will continue to increase in absolute dollar
amounts in future periods.
FISCAL 2000
Research and development expenses in fiscal 2000 increased $19.1 million over
fiscal 1999 to $33.3 million primarily due to increased personnel expenses
related to an increase in headcount and additional spending on mask sets and
outside services for both standard and custom-designed products.
MARKETING AND SELLING
FISCAL 2001
Marketing and selling expenses in fiscal 2001 were $28.5 million, a 42% increase
over expenses of $20.1 million in fiscal 2000. This increase was primarily the
result of increased headcount and related personnel expenses as we are
conducting a greater portion of sales and marketing efforts in-house.
Additionally, commissions increased as a result of higher sales, and
communications expense increased as a result of increased quantity and higher
quality advertising and a greater presence at trade shows.
We sell our products worldwide directly to customers as well as through a
network of domestic and foreign sales representative firms. During fiscal 2001,
we had sales offices in Greensboro, North Carolina, the United Kingdom, Sweden,
Finland and Taiwan and sales and support teams in San Diego, California and
Japan. We also have an unmanned sales office in Denmark available to our staff
while traveling to customer locations. We expect to continue shifting more of
our sales and marketing efforts in-house, and that our reliance on independent
sales representative firms will decline over time. During fiscal 2002, we plan
to open an office in South Korea. This will contribute to increased marketing
and selling expenses as we build our internal direct sales force.
At March 31, 2001, we had 149 marketing and selling employees compared to 110 at
March 31, 2000. We expect that marketing and selling expenses will continue to
increase in absolute dollar amounts in future periods.
FISCAL 2000
Marketing and selling expenses in fiscal 2000 increased $9.4 million to $20.1
million over fiscal 1999 expenses of $10.7 million, primarily due to increased
headcount and to increased expenses associated with advertising, travel and
entertainment expenses, and commissions related to increased sales.
GENERAL AND ADMINISTRATIVE
FISCAL 2001
General and administrative expenses in fiscal 2001 were $13.5 million, a 41%
increase compared to fiscal 2000 expenses of $9.6 million. This increase was
attributable to increased headcount, increased investor relations expenses due
to higher circulation of our annual report and proxy materials, and higher
professional fees associated with tax-related studies.
At March 31, 2001, we had 84 general and administrative employees compared to 65
at March 31, 2000.
FISCAL 2000
General and administrative expenses in fiscal 2000 doubled from fiscal 1999 to
$9.6 million due primarily to an increase in headcount and related personnel
expenses. In addition, we experienced increased expenses for legal and
accounting services as a result of our TRW license expansion, SAP consulting and
the creation of foreign subsidiaries.
OTHER OPERATING EXPENSES
FISCAL 2001
Other operating expenses of $4.6 million pertaining to the start-up costs of our
second wafer fabrication facility were recorded in fiscal 2001. The operating
costs of this facility will be included in cost of goods sold once the facility
is qualified for production and economic value can be obtained. We expect to
qualify this facility in the second quarter of fiscal 2002.
INTEREST INCOME
FISCAL 2001
Interest income was $15.1 million in fiscal 2001 compared to $5.4 million in
fiscal 2000. This increase was due to the higher cash, cash equivalents and
investment balances as a result of our $300.0 million convertible subordinated
debt offering.
FISCAL 2000
Interest income in fiscal 2000 was $5.4 million and higher than interest income
of $2.0 million in fiscal 1999 as a result of a full year's interest from
investments in government bonds. These bonds were purchased with the proceeds
from a public stock offering completed in January 1999.
INTEREST EXPENSE
FISCAL 2001
Interest expense in fiscal 2001 was $9.3 million. The increase over fiscal
2000's interest expense of $1.4 million was due to interest paid on the
convertible subordinated notes.
FISCAL 2000
Interest expense in fiscal 2000 was $1.4 million, a slight increase over
interest expense of $1.2 million in fiscal 1999. For both years, the majority of
this interest expense related to equipment under capital leases used at our
first wafer fabrication facility.
INCOME TAX EXPENSE
FISCAL 2001
The effective combined income tax rate for fiscal 2001 was 33% and resulted in
an income tax provision of $17.4 million. This rate is slightly lower than the
35% effective rate in fiscal 2000 due primarily to lower taxable income, higher
research and development credits and the utilization of a foreign sales
corporation.
FISCAL 2000
The effective combined income tax rate for fiscal 2000 was 35% and resulted in a
provision for income tax of $27.0 million compared to an effective tax rate of
20% and provision of $4.9 million in fiscal 1999. Fiscal 1999's tax rate
included a larger credit for a change in the reserve for deferred tax assets
than fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date through sales of equity and debt
securities, bank borrowings, capital equipment leases and revenue from product
sales. Through public and Rule 144A securities offerings, we have raised
approximately $462.0 million, net of offering expenses. As of March 31, 2001, we
had working capital of approximately $463.3 million, including $266.1 million in
cash and cash equivalents, compared to working capital at March 31, 2000 of
$142.3 million, including $29.0 million in cash and cash equivalents.
Operating activities in fiscal 2001 provided cash of $56.4 million, compared to
$19.9 million provided in fiscal 2000. This increase was primarily attributable
to the lower fiscal 2001 fourth quarter sales volume, which caused a decline in
accounts receivable and provided cash of $21.2 million compared to cash used of
$37.5 million in fiscal 2000. Partially offsetting the cash provided by accounts
receivable in fiscal 2001 was additional cash used for inventories of $21.6
million from fiscal 2000. The lower than anticipated sales volume and planned
inventory build to facilitate meeting delivery schedules caused the change in
inventory from the prior year.
Cash used in investing activities in fiscal 2001 was $123.7 million, compared to
$142.8 million used in fiscal 2000. A decline in capital expenditures of $17.8
million primarily accounted for the decrease. Capital expenditures in fiscal
2001 were primarily for our new test and wafer fabrication facilities. Fiscal
2000 capital purchases included the completion of our headquarters building in
Greensboro, North Carolina, the up-fitting of a packaging facility, investment
in test equipment, wafer fabrication expansion and the up-fitting of our
stand-alone molecular beam epitaxy (MBE) facility.
During the first quarter of fiscal 2002, we announced that we are entering a
strategic alliance with Agere Systems, Inc. in which we will deploy silicon
manufacturing equipment within Agere's manufacturing line in Orlando, Florida.
In return for our capital commitment of $58.0 million over the next two years,
we are guaranteed a source of supply and favorable pricing for silicon wafers.
Additionally, we intend to combine our expertise in the design and manufacturing
of highly integrated RF chips with Agere's expertise in silicon germanium
process technology and wireless solutions to offer comprehensive solutions for
multiple wireless technologies.
We also plan to start construction on a test and tape and reel facility in
Beijing, China by the fall of 2001. This facility will be located near a handset
assembly plant being constructed by Nokia and should allow us to accelerate
time-to-market of key components, reduce shipping costs and contribute to
improved inventory management. We expect to spend approximately $20.0 million to
have this facility operational by the fall of 2002.
In fiscal 2001, financing activities provided $304.5 million in cash, an
increase of $300.2 million over the $4.3 million of cash provided by financing
activities in fiscal 2000. The net proceeds from the convertible subordinated
debt offering of $291.3 million generated the majority of the increase over
prior year.
At March 31, 2001, we had total long-term capital commitments of $30.8 million,
with $13.7 million relating to the expansion of our MBE facility and $9.6
million relating to our second wafer fabrication facility.
We lease our corporate, wafer fabrication and other facilities through several
third party operating leases. At March 31, 2001, we had minimum future lease
payments of approximately $124.5 million related to facility operating leases
and approximately $11.8 million related to equipment operating leases.
We currently have six capital lease facilities with three equipment financing
companies under which we have financed the cost of capital equipment and
leasehold improvements associated with our first wafer fabrication facility. We
have financed an aggregate of $22.0 million of leased property under these
facilities. Lease terms range from 36 months to 60 months with effective
interest rates ranging from 8.6% to 10.7%. Total minimum future lease payments
under these capital leases as of March 31, 2001 were $8.9 million.
On August 11, 2000, we completed the private placement of $300.0 million
aggregate principal amount of 3.75% convertible subordinated notes due 2005,
which included the exercise by the initial purchasers of the notes of their
option to purchase an additional $50.0 million principal amount of the notes.
The net proceeds from this offering were $291.3 million and are intended for
general corporate purposes, including capital expenditures and working capital.
In addition, we may use a portion of the net proceeds to acquire or invest in
complementary businesses, products or technologies if the opportunity arises.
On January 3, 2001, TRW Inc., a beneficial owner of approximately 14% of our
common stock, exercised a warrant for the purchase of 500,000 shares of common
stock at an exercise price of $20.00 per share. The warrant was granted in
November 1999 in connection with the expansion of license arrangements for use
of TRW's GaAs HBT technology to manufacture products for commercial coaxial and
other non-fiber wire applications. TRW continues to hold a second warrant for
the purchase of up to 1,000,000 shares of common stock at $20.00 per share. This
warrant may be forfeited if we do not reach a defined annualized sales target of
products through the use of the expanded license rights.
On March 5, 2001, we completed the sale-leaseback of our corporate headquarters
building, generating $13.0 million in cash. The sale-leaseback is for a
fifteen-year term with two ten-year options to renew.
Our future capital requirements may differ materially from those currently
anticipated and will depend on many factors, including, but not limited to,
market acceptance of our products, volume pricing concessions, capital
improvements, technological advances and our relationships with suppliers and
customers. We believe our cash requirements will be adequately met from normal
operating results during fiscal 2002. If existing resources and cash from
operations are not sufficient to meet our future requirements, we may seek
additional debt or equity financing or additional credit facilities. We cannot
be sure that any additional equity or debt financing will not be dilutive to
holders of our common stock. Further, we cannot be sure that additional equity
or debt financing, if required, will be available on favorable terms.
COMMITMENTS
The funding for the first phase of our second wafer fabrication facility came
primarily from a $100.0 million synthetic lease arrangement that we entered into
on August 13, 1999, as modified effective December 31, 1999. A synthetic lease
is an asset-based financing structured to be treated as an operating lease for
accounting purposes, and a capital lease for tax purposes. Prior to December 31,
1999, the synthetic lease transaction was largely secured by cash collateral.
The modification effective December 31, 1999 resulted in the release of the cash
collateral and the synthetic lease is now secured by substantially all of RFMD's
personal property assets. The lease has a term expiring November 3, 2004. At the
end of the term, the lease can be extended upon the agreement of the parties or
we may buy out the lease. The interest rates or yield rates embedded in the
lease (and used to calculate lease payments) are either:
o The Eurodollar Rate plus margins varying from 150 basis points to 300 basis
points per annum (based on certain quarterly financial covenant testing and
depending on whether the underlying source of funding is in the form of a
promissory note or an equity certificate), or
o At our election and under certain other circumstances where funding based
on the Eurodollar Rate is not available, the ABR Rate plus margins
varying from zero basis points to 75 basis points per annum (based on
certain quarterly financial covenant testing and depending on whether the
underlying source of funding is in the form of a promissory note or an
equity certificate). The Eurodollar Rate is a rate of interest determined
under the lease documents by reference to one or more sources for the
London interbank offered rate, or LIBOR. The ABR Rate is a rate of interest
determined under the lease documents equal to the greater of (a) the prime
lending rate of the primary lender or its successor (as determined under
the lease documents) or (b) the federal funds effective rate (as determined
under the lease documents) plus 0.5%.
Under the terms of the synthetic lease, we are required to comply with certain
financial covenants, which require the maintenance of minimum levels of tangible
net worth, liquidity and debt service coverage and prohibit the payment of
dividends.
In fiscal 2001, we entered into an interest rate swap contract to fix the
variable cash flows related to the LIBOR based interest rate in this synthetic
lease.
This lease provided up to $100.0 million in financing for our second wafer
fabrication facility. We completed construction of this facility in December
2000. The $100.0 million of financing funded approximately $56.9 million for the
building and $42.9 million for equipment.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In June 2000, we entered into an interest rate swap agreement to hedge the
variable interest rate of our synthetic lease. This interest rate swap is a cash
flow hedge whereby fixed payments commenced April 2001, and is currently
considered an off-balance sheet financial instrument. Our interest income and
expense are sensitive to changes in the general level of interest rates. In this
regard, changes in interest rates can affect the interest earned on our cash
equivalents. Our capital lease obligations have fixed interest rates and the
fair value of these instruments is affected by changes in market interest rates.
To mitigate the impact of fluctuations in interest rates, we generally enter
into fixed rate investing and borrowing arrangements. As a result, we believe
that the market risk arising from holdings of our financial instruments is not
material.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
RF Micro Devices, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of RF Micro
Devices, Inc. and subsidiaries as of March 31, 2001 and 2000, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended March 31, 2001. 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 in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RF Micro Devices,
Inc. and subsidiaries at March 31, 2001 and 2000, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended March 31, 2001, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Raleigh, North Carolina April 16, 2001
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CONSOLIDATED BALANCE SHEETS
March 31, 2001 2000
(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 266,076 $ 28,956
Short-term investments (Note 3) 75,162 33,755
Accounts receivable, less allowance of $951 and $775 as of March 31, 2001
and 2000, respectively 39,988 61,163
Inventories (Note 4) 71,015 38,389
Recoverable income taxes 28,477 796
Current deferred tax asset (Note 7) 9,028 5,771
Prepaid expenses 1,638 472
Other current assets 930 547
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 492,314 169,849
PROPERTY AND EQUIPMENT:
Land 1,452 2,224
Buildings (Note 5) -- 11,396
Machinery and equipment 154,291 92,335
Leasehold improvements 52,887 41,283
Furniture and fixtures 7,121 4,728
Computer equipment and software 11,495 8,191
- -------------------------------------------------------------------------------------------------------------------------
227,246 160,157
Less accumulated depreciation (49,757) (21,702)
- -------------------------------------------------------------------------------------------------------------------------
177,489 138,455
Construction in progress 31,082 21,388
- -------------------------------------------------------------------------------------------------------------------------
Total property and equipment, net 208,571 159,843
Related party technology license, net of accumulated amortization of $1,300
and $338 as of March 31, 2001 and 2000, respectively (Note 13) 11,943 12,905
Long-term investments 5,508 --
Other non-current assets 2,595 2,015
- -------------------------------------------------------------------------------------------------------------------------
Total assets $ 720,931 $ 344,612
=========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 14,613 $ 15,319
Accrued liabilities 9,410 7,726
Current obligations under capital leases (Note 5) 4,976 4,495
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 28,999 27,540
Long-term debt, net of amortized discount $7,300 (Note 6) 292,700 --
Non-current deferred tax liability (Note 7) 19,471 5,716
Obligations under capital leases, less current portion (Note 5) 3,263 8,203
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 344,433 41,459
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 5,000 shares authorized; no shares issued and
outstanding -- --
Common stock, no par value; 500,000 shares authorized; 163,710 and 160,209
shares issued and outstanding as of March 31, 2001 and 2000, respectively 246,930 229,275
Additional paid-in capital 53,196 26,019
Deferred compensation (14,798) (8,560)
Accumulated other comprehensive loss, net of $134 income tax as of March 31, 2001 (223) --
Retained earnings 91,393 56,419
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 376,498 303,153
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 720,931 $ 344,612
=========================================================================================================================
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME
Year ended March 31, 2001 2000 1999
(In thousands, except per share data)
REVENUE:
Product sales $ 333,203 $ 288,085 $ 152,114
Engineering revenue 2,161 875 738
- -------------------------------------------------------------------------------------------------------------------------
Total revenue 335,364 288,960 152,852
COSTS AND EXPENSES:
Cost of goods sold 181,801 152,746 99,325
Research and development 60,340 33,338 14,239
Marketing and selling 28,450 20,109 10,716
General and administrative 13,495 9,573 4,787
Other operating expenses 4,607 -- --
- -------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 288,693 215,766 129,067
- -------------------------------------------------------------------------------------------------------------------------
Income from operations 46,671 73,194 23,785
Interest expense (9,346) (1,400) (1,244)
Interest income 15,065 5,448 2,020
Other income (expense), net 19 (174) (109)
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes 52,409 77,068 24,452
Income tax expense 17,435 26,974 4,891
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 34,974 $ 50,094 $ 19,561
=========================================================================================================================
NET INCOME PER SHARE:
Basic $ 0.22 $ 0.32 $ 0.14
==========================================================================================================================
Diluted $ 0.20 $ 0.29 $ 0.13
==========================================================================================================================
SHARES USED IN PER SHARE CALCULATION:
Basic 161,820 158,728 136,944
==========================================================================================================================
Diluted 173,216 171,668 147,472
==========================================================================================================================
See accompanying notes.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated (Accumulated
Additional Other Deficit)
Common Paid-in Deferred Comprehensive Retained
(In thousands) Stock Capital Compensation Loss Earnings Total
Balance, March 31, 1998 $ 80,224 $ -- $ (225) $ -- $(13,236) $ 66,763
Offering of common stock 133,381 -- -- -- -- 133,381
Exercise of warrant 10,000 -- -- -- -- 10,000
Issuance of common stock in connection
with employee stock purchase plan 456 -- -- -- -- 456
Exercise of stock options 685 -- -- -- -- 685
Amortization of deferred compensation -- -- 60 -- -- 60
Net income -- -- -- -- 19,561 19,561
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1999 224,746 -- (165) -- 6,325 230,906
Issuance of warrants for
related party technology license -- 10,041 -- -- -- 10,041
Issuance of restricted stock awards -- 8,775 (8,775) -- -- --
Exercise of stock options 3,221 -- -- -- -- 3,221
Issuance of common stock in connection
with employee stock purchase plan 1,308 -- -- -- -- 1,308
Tax benefit from the exercise of
stock options -- 7,203 -- -- -- 7,203
Amortization of deferred compensation -- -- 380 -- -- 380
Net income -- -- -- -- 50,094 50,094
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2000 229,275 26,019 (8,560) -- 56,419 303,153
Comprehensive income:
Net income -- -- -- -- 34,974 34,974
Unrealized loss on marketable securities -- -- -- (223) -- (223)
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 34,751
Exercise of warrants for related party
technology license 10,001 -- -- -- -- 10,001
Issuance of restricted stock awards -- 7,946 (7,946) -- -- --
Exercise of stock options 5,028 -- -- -- -- 5,028
Issuance of common stock in connection
with employee stock purchase plan 2,626 -- -- -- -- 2,626
Tax benefit from the exercise of
stock options -- 19,231 -- -- -- 19,231
Amortization of deferred compensation -- -- 1,708 -- -- 1,708
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2001 $ 246,930 $ 53,196 $ (14,798) $ (223) $ 91,393 $ 376,498
====================================================================================================================================
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31, 2001 2000 1999
(In thousands)
OPERATING ACTIVITIES:
Net income $ 34,974 $ 50,094 $ 19,561
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 29,289 15,082 4,875
Amortization 713 53 --
Loss on disposal of equipment 114 -- 109
Amortization of related party TRW technology license 962 214 124
Tax benefit from exercise of employee stock options 19,231 7,203 --
Amortization of deferred compensation 1,708 380 60
Changes in operating assets and liabilities:
Accounts receivable 21,175 (37,466) (16,566)
Inventories (32,626) (11,054) (2,466)
Current deferred tax asset (3,257) (4,873) (898)
Non-current deferred tax asset -- 1,088 (1,088)
Prepaid expenses and other current and non-current assets (1,698) (760) (194)
Accounts payable (706) (3,791) 8,837
Accrued liabilities 273 2,136 4,836
Income taxes payable/recoverable income taxes (27,681) (3,650) 2,854
Non-current deferred tax liability 13,889 5,251 465
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 56,360 19,907 20,509
INVESTING ACTIVITIES:
Purchase of short-term investments (108,764) (47,069) --
Proceeds from sale of short-term investments 66,875 13,314 --
Purchase of property and equipment (89,742) (107,495) (26,137)
Proceeds from sale of property and equipment 13,022 -- 341
Purchase of other investments (5,000) -- --
Purchase of technology license (135) (1,500) --
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (123,744) (142,750) (25,796)
FINANCING ACTIVITIES:
Proceeds from convertible subordinated debt offering, net of debt
issuance costs of $442 and discount of $8,250 291,308 -- --
Net proceeds from stock offering -- -- 133,381
Proceeds from exercise of stock options, warrants and employee stock 17,655 4,529 11,141
purchases
Repayment of capital lease obligations (4,459) (4,135) (4,190)
Decrease (increase) in cash restricted for capital additions -- 3,860 (3,860)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 304,504 4,254 136,472
Net increase (decrease) in cash and cash equivalents 237,120 (118,589) 131,185
Cash and cash equivalents at beginning of year 28,956 147,545 16,360
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 266,076 $ 28,956 $ 147,545
============================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 6,734 $ 1,400 $ 2,157
============================================================================================================================
Cash paid during the year for income taxes $ 16,371 $ 21,953 $ 3,502
============================================================================================================================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred for new equipment $ -- $ -- $ 5,449
Issuance of stock warrants for technology license $ -- $ 10,041 $ --
Issuance of restricted stock as deferred compensation $ 7,946 $ 8,775 $ --
- ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY INFORMATION
RF Micro Devices, Inc. (the Company) designs, develops, manufactures and markets
proprietary radio frequency integrated circuits (RFICs) for wireless
communications products and applications; as such the Company operates as a
single business segment. The Company's products are primarily included in
cellular and PCS phones, base stations, wireless local area networks and cable
television modems. The Company derives revenue from the sale of standard and
custom-designed products and services. The Company offers a broad array of
products including amplifiers, mixers, modulators/demodulators and single chip
transmitters, receivers and transceivers that represent a substantial majority
of the RFICs required in wireless subscriber equipment.
The Company addresses the various wireless markets by a product delivery
strategy called Optimum Technology Matching(R). This product delivery strategy
utilizes multiple distinct semiconductor process technologies: gallium arsenide
(GaAs) heterojunction bipolar transistor (HBT), silicon bipolar transistor,
silicon CMOS, silicon BiCMOS, silicon germanium BiCMOS and GaAs metal semi-
conductor field effect transistor (MESFET). In June 1996, the Company and TRW
Inc. (TRW) entered into a license arrangement, whereby the Company was granted a
world-wide, perpetual, royalty-free license for GaAs HBT commercial wireless
applications operating at frequencies less than 10 GHz. In November 1999, the
Company and TRW expanded the existing license agreement to include commercial
coaxial and non-fiber wire applications.
The Company has built a GaAs HBT wafer fabrication facility to address the
various markets for this technology. Commercial production from this facility
began in September 1998. The Company completed construction of a second wafer
fabrication facility in December 2000 which it financed by means of a synthetic
lease. However, due to slowing order activity, this facility was not placed into
production in fiscal 2001. The Company expects to begin production at the
facility in the second half of fiscal 2002.
In January 1999, the Company completed a public offering of common stock. This
offering consisted of 18.4 million shares offered by the Company and 2.3 million
shares offered by TRW. The offering price was $7.68 per share resulting in net
offering proceeds to the Company of approximately $133.4 million.
In August 2000, the Company completed the private placement of $300.0 million
aggregate principal amount of 3.75% convertible subordinated notes due 2005,
resulting in net proceeds to the Company of approximately $291.3 million. The
notes are convertible into approximately 6.7 million shares of common stock at a
conversion price of $45.085 per share.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
ACCOUNTING PERIODS
The Company uses a 52- or 53-week fiscal year ending on the Saturday closest to
March 31 of each year. The previous three fiscal years ended on March 31, 2001,
March 25, 2000 and March 27, 1999. Fiscal 2001 was a 53-week year and the two
previous fiscal years were 52-week years. For purposes of financial statement
presentation, each fiscal year is described as having ended on March 31.
STOCK SPLITS
The Company has effected the following two-for-one stock splits, each in the
form of a 100% share dividend: on March 31, 1999, payable to shareholders of
record on March 17, 1999; on August 18, 1999, payable to shareholders of record
on August 2, 1999; and on August 25, 2000, payable to shareholders of record
on August 8, 2000. All earnings per share and share count information have been
restated retroactively to reflect the impact of these stock splits.
RECLASSIFICATIONS
Certain amounts in the March 31, 2000 and 1999 consolidated financial statements
have been reclassified to conform to the March 31, 2001 presentation. These
reclassifications had no effect on net income or shareholders' equity as
previously reported.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and other accrued liabilities approximate
fair values as of March 31, 2001 and 2000. The Company's convertible
subordinated notes had a fair value of $191.3 million as of March 31, 2001 on
the Private Offerings, Resale and Trading through Automated Linkages (PORTAL)
Market compared to the carrying amount of $292.7 million.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. The Company makes
estimates for the allowance for doubtful accounts, inventory reserves, warranty
reserves, and other financial statement amounts. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposit accounts, money market funds
and temporary, highly liquid investments with original maturities of three
months or less when purchased.
INVESTMENTS
Short-term: Investments are accounted for in accordance with Statement of
Financial Accounting Standards No. 115 (SFAS 115) "Accounting for Certain
Investments In Debt and Equity Securities". The securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
to maturity; securities are classified as trading securities when the Company
buys and holds principally for the purpose of selling in the near term; and all
other securities are classified as available-for-sale. The Company currently
does not have trading securities.
Investments available-for-sale at March 31, 2001 consisted of a marketable
equity security, corporate debt securities and U.S. Agency Medium Term Notes.
The U.S. Agency Medium Term Notes and corporate debt securities have original
maturities of less than one year when purchased. The Company had no
available-for-sale investments at March 31, 2000. Available-for-sale securities
are carried at fair value, with the unrealized gains and losses, net of tax,
reported as a separate component of shareholders' equity in accordance with SFAS
115.
Investments held-to-maturity at March 31, 2001 and 2000 consisted of U.S. Agency
Medium Term Notes and have original maturities of less than one year when
purchased. Management determines the appropriate classification of securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accumulation of discounts to maturity, and such
amortization is included in interest income from investments in accordance with
SFAS 115.
Long-term: The Company has an investment of $5.0 million in the equity of a
privately held company. The investment represents less than 10% ownership, and
the Company does not have the ability to exercise significant influence in the
management of the investee company. This investment is carried at its original
cost and accounted for under the cost method of accounting for investments as
described in Accounting Principles Board Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock".
During fiscal 2001, the Company made a long-term investment of $960,000 in the
common stock of a publicly traded company. The fair value of this investment was
$508,000 as of March 31, 2001.
INVENTORIES
Inventories are stated at the lower of cost or market determined using the
average cost method. The Company's business is subject to the risk of
technological and design changes. The Company provides for potentially obsolete
or slow moving inventory based on management's analysis of inventory levels and
future sales forecasts at the end of each accounting period.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is provided using the straight-line method over the estimated useful
lives of the assets, ranging from 3 to 20 years.
INTANGIBLES
Intangibles, consisting of technology license costs, are incurred to acquire the
rights to use another company's patented technology in the Company's development
and production of products. The license costs are amortized on a straight-line
basis over the estimated useful life of the technology, ranging from 5 to 15
years. The technology license costs related to third parties are included in
other non-current assets on the accompanying balance sheets. Intangible assets
consist of the following (in thousands):
March 31, 2001 2000
- ----------------------------------------------------------------
Intangible Assets:
Related party technology license $ 13,243 $ 13,243
Other technology licenses 1,635 1,500
- ----------------------------------------------------------------
Accumulated amortization (1,454) (391)
- ----------------------------------------------------------------
$ 13,424 $ 14,352
================================================================
The Company assesses the recoverability of its intangibles and other assets by
determining its ability to generate future cash flows sufficient to recover the
unamortized balances over the remaining useful lives. Intangibles and other
assets determined to be unrecoverable based on future cash flows would be
written off in the period in which the determination was made.
REVENUE RECOGNITION
Revenue from product sales is recognized when products are shipped. The Company
also enters into engineering agreements with certain customers relating to the
development of customer specific applications. Revenue is recognized for
engineering contracts as it is earned.
The Company's products generally carry a one- or two-year warranty against
defects depending on the specific type of product. The Company provides for
estimated warranty costs in the period the related sales are made.
SHIPPING AND HANDLING COST
The Company recognizes amounts billed to a customer in a sale transaction
related to shipping and handling as revenue. The costs incurred by the Company
for shipping and handling are classified as cost of goods sold.
RESEARCH AND DEVELOPMENT
The Company charges all research and development costs to expense as incurred.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. The Company recognized
advertising expense of $1.0 million, $726,000 and $427,000 for the fiscal years
ended March 31, 2001, 2000 and 1999, respectively.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Under SFAS 109, the liability method is used in accounting for income
taxes and deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities.
STOCK-BASED COMPENSATION
The Company accounts for employee stock options and employee restricted stock in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25). Under APB 25, no compensation expense is
recognized for stock options or restricted stock issued to employees with
exercise prices or share prices at or above quoted market value. For stock
options or restricted shares granted at prices below quoted market value, the
Company records deferred compensation expense for the difference between the
price of the shares and the market value. Deferred compensation expense is
amortized ratably over the vesting period of the related options.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123) provides an alternative to APB 25 in accounting for
stock-based compensation issued to employees. SFAS 123 provides for a fair value
based method of accounting for employee stock options and similar equity
instruments. However, companies that continue to account for stock-based
compensation arrangements under APB 25 are required by SFAS 123 to disclose the
pro forma effect on net income (loss) and income (loss) per share as if the fair
value based method prescribed by SFAS 123 had been applied. The Company has
continued to account for stock-based compensation using the provisions of APB 25
and presents the pro forma disclosure requirements of SFAS 123 (Note 11).
SALES AND ACCOUNTS RECEIVABLE
The Company operates as a single business segment engaged in the design and sale
of integrated circuits. Revenue from significant customers, those representing
10% or more of total sales for the respective periods, are summarized as
follows:
Year ended March 31, 2001 2000 1999
- ----------------------------------------------------------------
Customer 1 53% 59% 73%
- -----------------------------------------------------------------
Additionally, 40% and 57% of the Company's accounts receivable were due from
this customer at March 31, 2001 and 2000, respectively. A second customer
represented 13% of the Company's accounts receivable at March 31, 2001.
The Company's principal financial instrument subject to potential concentration
of credit risk is accounts receivable, which are unsecured. The Company provides
an allowance for doubtful accounts equal to estimated losses expected to be
incurred in the collection of accounts receivable.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), which, as amended, is effective for fiscal
years beginning after June 15, 2000. SFAS 133 establishes a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. The Company will adopt SFAS 133 for fiscal 2002, which may
result in additional disclosures. The Company uses derivatives for hedging
purposes. During fiscal 2001, the Company entered into an interest rate swap
agreement to hedge the variable interest rate of its synthetic lease (Note 5).
This interest rate swap is a cash flow hedge and is currently considered an
off-balance sheet financial instrument. Adoption of SFAS 133 in fiscal 2002 is
not expected to have a significant impact on the Company's consolidated
financial position, results of operations or cash flows.
3. INVESTMENTS
The following is a summary of available-for-sale and held-to-maturity
securities at March 31, 2001 and March 31, 2000 (in thousands):
Available-for-Sale Securities
- --------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized Estimated
March 31, 2001: Cost Gains Losses Fair Value
U.S. Agency
Medium
Term Notes $ 43,752 $ 99 $ - $ 43,851
Corporate debt
securities 13,403 - (4) 13,399
Equity securities 960 - (452) 508
- --------------------------------------------------------------------------
$ 58,115 $ 99 $ (456) $ 57,758
==========================================================================
The Company had no available-for-sale securities at March 31, 2000.
Held-to-Maturity Securities
- -------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized Estimated
March 31, 2001: Cost Gains Losses Fair Value
- -------------------------------------------------------------------------
U.S. Agency
Medium
Term Notes $ 17,912 $ 82 $ - $ 17,994
- -------------------------------------------------------------------------
March 31, 2000:
- -------------------------------------------------------------------------
U.S. Agency
Medium
Term Notes $ 33,755 $ 3 $ (22) $ 33,736
- -------------------------------------------------------------------------
The estimated fair value of held-to-maturity and available-for-sale securities
was based on the prevailing market values on March 31, 2001 and March 31, 2000.
The debt securities held as of March 31, 2001 are due within one year. Expected
maturities may differ from contractual maturities because the issuers of the
securities may have the right to prepay obligations.
4. INVENTORIES
The components of inventories are as follows (in thousands):
March 31, 2001 2000
- -------------------------------------------------------------------
Raw materials $ 25,641 $ 7,851
Work in process 26,686 26,560
Finished goods 38,571 15,092
- --------------------------------------------------------------------
90,898 49,503
Inventory allowances (19,883) (11,114)
- --------------------------------------------------------------------
Total inventories $ 71,015 $ 38,389
====================================================================
5. LEASES
The Company leases certain equipment and facilities under capital and
non-cancelable operating leases. The table below summarizes capitalized leased
equipment balances included in property and equipment (in thousands):
March 31, 2001 2000
- -----------------------------------------------------------------
Machinery and equipment $ 21,935 $ 22,043
Accumulated amortization (8,747) (5,261)
- -----------------------------------------------------------------
$ 13,188 $ 16,782
=================================================================
The Company is a party to six capital lease facilities with three
equipment-financing companies under which it has financed the cost of capital
equipment and leasehold improvements associated with its wafer fabrication
facility. Lease terms range from 36 months to 60 months with effective interest
rates ranging from 8.6% to 10.7%. At March 31, 2001, the minimum future lease
payments under these capital leases (excluding interest) totaled $8.2 million.
The Company has financed an aggregate of $22.0 million of leased property under
these facilities. Capital lease amortization totaling approximately $3.5
million, $3.6 million, and $2.1 million is included in depreciation expense for
the fiscal years ended March 31, 2001, 2000 and 1999, respectively.
Additionally, approximately $912,000 of interest expense related to this
equipment under capital leases was capitalized in fiscal 1999 in connection with
the construction of the wafer fabrication facility. No interest expense was
capitalized in fiscal 2001 or 2000.
The Company leases the majority of its corporate, wafer fabrication, and other
facilities from several third party real estate developers. The terms of these
operating leases range from five to fifteen years and several have renewal
options up to two ten-year periods. The Company also leases various machinery
and equipment and office equipment under non-cancelable operating leases. The
terms of these leases range from one to five years. As of March 31, 2001, total
future minimum lease payments of approximately $124.5 million related to
facility operating leases and approximately $11.8 million related to equipment
operating leases.
In 1997, in connection with a financing commitment related to the construction
of the Company's first wafer fabrication facility, the Company issued a warrant
to purchase 331,000 shares of its common stock at an exercise price of $1.13 per
share to an equipment financing company. On February 4, 1999, Finova Technology
Finance, Inc., the warrant holder, exercised the warrant through a "cashless"
exercise, as permitted by the terms of the warrant agreement, by relinquishing
the right to purchase 41,000 shares in return for 289,000 shares.
Minimum future lease payments under non-cancelable capital and operating leases
as of March 31 are as follows (in thousands):
Capital Operating
- --------------------------------------------------------------------
2002 $ 5,536 $ 28,667
2003 3,266 26,481
2004 134 77,764
2005 - 14,621
2006 - 4,513
Thereafter - 37,978
- ---------------------------------------------------------------------
Total minimum payments $ 8,936 $190,024
=====================================================================
Less amounts representing interest (697)
- ---------------------------------------------------------------------
Present value of net minimum payments 8,239
Less current portion (4,976)
- ---------------------------------------------------------------------
Long-term portion $ 3,263
=====================================================================
Rent expense under operating leases, including facilities and equipment, was
approximately $11.2 million, $7.7 million and $4.7 million for the fiscal years
ended March 31, 2001, 2000 and 1999, respectively.
SYNTHETIC LEASE
On August 13, 1999, as modified effective December 31, 1999, the Company entered
into a $100.0 million synthetic lease with a financial institution. A synthetic
lease is an asset-based financing structured to be treated as an operating lease
for accounting purposes, but as a capital lease for tax purposes. At the end of
the third quarter of fiscal year 2000, cash collateral largely secured the
synthetic lease transaction. The modification effective December 31, 1999
resulted in the release of the cash collateral and the synthetic lease is now
secured by substantially all of the personal property assets of the Company. The
monthly lease payments commenced on November 13, 2000 and have a term expiring
November 3, 2004. At the end of the term, the lease can be extended upon the
agreement of the parties or the Company may buy out the lease. The interest
rates or yield rates embedded in the lease (and used to calculate lease
payments) are either:
o The Eurodollar Rate plus margins varying from 150 basis points to 300 basis
points per annum (based on certain quarterly financial covenant testing and
depending on whether the underlying source of funding is in the form of a
promissory note or an equity certificate), or
o At the Company's election and under certain other circumstances where
funding based on the Eurodollar Rate is not available, the ABR Rate plus
margins varying from zero basis points to 75 basis points per annum (based
on certain quarterly financial covenant testing and depending on whether
the underlying source of funding is in the form of a promissory note or an
equity certificate). The Eurodollar Rate is a rate of interest determined
under the lease documents by reference to one or more sources for the
London inter-bank offered rate, or LIBOR. The ABR Rate is a rate of
interest determined under the lease documents equal to the greater of (a)
the prime lending rate of the primary lender or its successor (as deter-
mined under the lease documents) or (b) the federal funds effective rate
(as determined under the lease documents) plus 0.5%.
In fiscal 2001, the Company entered into an interest rate swap contract to fix
the variable cash flows related to the LIBOR based interest rate in this
synthetic lease.
This lease provided up to $100.0 million in financing for the Company's second
wafer fabrication facility. This facility's construction was completed in
December 2000. The $100.0 million of financing funded approximately $56.9
million for the building and $42.9 million of equipment.
Under the terms of the synthetic lease, the Company is required to comply with
certain financial covenants, which require the maintenance of minimum levels of
tangible net worth, liquidity and debt service coverage and prohibit the payment
of dividends.
During the fiscal year ending March 31, 2001, the Company incurred certain
start-up costs associated with preparing the second wafer fabrication facility
for normal productive capacity. These costs have been expensed as incurred in
accordance with the American Institute of Certified Public Accountants'
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities," and
are classified as other operating expenses in the consolidated statements of
income.
SALE-LEASEBACK
In March 2001, the Company completed a sale-leaseback transaction with respect
to the Company's corporate headquarters. The transaction included the sale of
the land and building for total consideration of $13.4 million. The lease covers
an initial term of 15 years with options to extend the lease for two additional
periods of ten years each. Rent expense for the first five years will be
approximately $6.7 million and will escalate by 2% each year thereafter. The
Company will recognize rent expense on a straight-line basis in accordance with
Statement of Financial Accounting Standards No. 13, "Accounting for Leases"
(SFAS 13), starting with the beginning of the lease term. The transaction was
deemed a normal leaseback as defined in Statement of Financial Accounting
Standard No. 98, "Accounting for Sales of Real Estate." The Company recorded a
sale and operating lease, thus removing the property from the Company's
consolidated balance sheet and is deferring the profit of $1.4 million over the
15 year lease term in accordance with Statement of Financial Accounting Standard
No. 66, "Accounting for Sales of Real Estate," and SFAS 13.
6. LONG-TERM DEBT
On August 11, 2000, the Company completed the private placement of $300.0
million aggregate principal amount of 3.75% convertible subordinated notes due
2005, which included the exercise by the initial purchasers of the notes of
their option to purchase an additional $50.0 million principal amount of the
notes. The notes are convertible into the Company's common stock at a conversion
price of $45.085 per share as adjusted for the August 2000 two-for-one common
stock split described in Note 2. The net proceeds of the offering were
approximately $291.3 million after payment of the underwriting discount and
expenses of the offering, which will be amortized over the term of the notes
based on the effective interest method.
7. INCOME TAXES
Deferred income tax assets and liabilities are determined based upon differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
The components of the income tax provision are as follows (in thousands):
Year Ended March 31, 2001 2000 1999
- -------------------------------------------------------------------
Current:
Federal $ 6,055 $ 24,939 $ 5,825
State 748 3,501 587
Deferred expense (benefit) 10,632 (1,466) (1,521)
- -------------------------------------------------------------------
Total $ 17,435 $ 26,974 $ 4,891
===================================================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred income taxes are as follows (in thousands):
March 31, 2001 2000
- ----------------------------------------------------------------
Deferred tax liabilities:
Accumulated depreciation $ 19,343 $ 5,716
Other 128 -
- -----------------------------------------------------------------
Total deferred tax liabilities 19,471 5,716
Deferred tax assets:
Allowance for bad debts 355 304
Warranty reserve 239 160
Inventory reserve 6,596 4,363
Accrued vacation 990 -
Sale-leaseback 526 -
Other 322 944
- -----------------------------------------------------------------
Total deferred tax assets 9,028 5,771
- -----------------------------------------------------------------
Net deferred (liability) asset $(10,443) $ 55
=================================================================
A reconciliation of the provision for income taxes to income tax expense
computed by applying the statutory federal income tax rate to pre-tax income for
the fiscal years ended March 31, 2001, 2000 and 1999 is as follows (dollars in
thousands):
Year Ended March 31, 2001
- -----------------------------------------------------------------------
Amount Percentage
Income tax expense at statutory
federal rate $18,358 35.00%
Increase (decrease) resulting from:
State tax, net of federal benefit 920 1.75
Research and development credits (1,221) (2.33)
Foreign Sales Corporation benefit (632) (1.20)
Other 10 0.02
- -----------------------------------------------------------------------
$17,435 33.24%
=======================================================================
Year Ended March 31, 2000
- ---------------------------------------------------------------------
Amount Percentage
Income tax expense at statutory
federal rate $26,974 35.00%
Increase (decrease) resulting from:
State tax, net of federal benefit 2,245 2.91
Research and development credits (544) (0.71)
Change in reserve for deferred tax assets (1,753) (2.27)
Other 52 0.07
- ---------------------------------------------------------------------
$26,974 35.00%
=====================================================================
Year Ended March 31, 1999
- -----------------------------------------------------------------------
Amount Percentage
Income tax expense at statutory
federal rate $ 8,559 35.00%
Increase (decrease) resulting from:
State tax, net of federal benefit 872 3.50
Research and development credits (482) (1.50)
Change in reserve for deferred tax assets (4,058) (17.00)
- -----------------------------------------------------------------------
$ 4,891 20.00%
=======================================================================
8. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share (in thousands, except per share data):
Year Ended March 31, 2001 2000 1999
- ----------------------------------------------------------------
Numerator for basic and diluted net income per share:
Net income $ 34,974 $ 50,094 $ 19,561
Denominator:
Denominator for basic net
income per share -
weighted average shares 161,820 158,728 136,944
Effect of dilutive securities:
Employee stock options 11,396 12,940 10,528
- ----------------------------------------------------------------
Denominator for diluted net
income per share - adjusted
weighted average shares
and assumed conversions 173,216 171,668 147,472
Basic net income per share $ 0.22 $ 0.32 $ 0.14
Diluted net income per share $ 0.20 $ 0.29 $ 0.13
- ----------------------------------------------------------------
Options to purchase 2,032,000 shares, 206,000 shares and 302,000 shares of
common stock were outstanding during fiscal 2001, 2000 and 1999 respectively,
but were not included in the computation of diluted net income per share for the
fiscal years ended March 31, 2001, 2000 and 1999 respectively, because the
exercise price of the options was greater than the average market price of the
common shares and, therefore, the effect would be anti-dilutive. The computation
of diluted net income per share for the fiscal year ended March 31, 2001 did not
assume the conversion of the 3.75% convertible subordinated notes due 2005
because the inclusion would be anti-dilutive.
9. 401(K) PLAN
Each employee is eligible to participate in the Company's fully qualified 401(k)
plan after three months of service. An employee may invest a maximum of 15% of
pretax earnings in the plan. Employer contributions to the plan are made at the
discretion of the Company and its Board of Directors. An employee is fully
vested in the employer contribution portion of the plan after completion of five
continuous years of service. The Company contributed $922,000, $511,000 and
$265,000 to the plan during fiscal years 2001, 2000 and 1999, respectively.
10. EMPLOYEE STOCK PURCHASE PLAN
In April 1997, the Company adopted its Employee Stock Purchase Plan (ESPP),
which qualifies as an "employee stock purchase plan" under Section 423 of the
Internal Revenue Code. All regular full-time employees of the Company (including
officers) and all other employees who meet the eligibility requirements of the
plan may participate in the ESPP. The ESPP provides eligible employees an
opportunity to acquire the Company's common stock at 85% of the lower of the
closing price per share of the Company's common stock on the first or last day
of each six-month purchase period. An aggregate of 4.0 million shares of common
stock have been reserved for offering under the ESPP and are available for
purchase thereunder, subject to anti-dilution adjustments in the event of
certain changes in the capital structure of the Company. The Company makes no
cash contributions to the ESPP, but bears the expenses of its administration.
During fiscal years 2001, 2000 and 1999, respectively, 179,000 shares, 95,000
shares, and 261,000 shares were purchased under the ESPP.
11. STOCK-BASED AWARDS
1992 STOCK OPTION PLAN
The Company's 1992 Stock Option Plan (the 1992 Option Plan) was adopted by the
shareholders of the Company in February 1992. The 1992 Option Plan provided for
the granting of both incentive and nonqualified options to purchase common stock
to key employees, non-employee directors and advisors and consultants in the
service of the Company. The 1992 Option Plan was terminated following the
Company's initial public offering in June 1997, at which time options to
purchase 8.7 million shares had been granted.
1997 KEY EMPLOYEES' STOCK OPTION PLAN
In April 1997, the Company adopted the 1997 Key Employees' Stock Option Plan
(the 1997 Option Plan), which provides for the granting of options to purchase
common stock to key employees and independent contractors in the service of the
Company. The 1997 Option Plan permits the granting of both incentive options and
non-qualified options. The aggregate number of shares of common stock that may
be issued pursuant to options granted under the 1997 Option Plan may not exceed
10.4 million shares, subject to adjustment in the event of certain events
affecting the Company's capitalization.
DIRECTORS' OPTION PLAN
In April 1997, the Company adopted the Non-employee Directors' Stock Option
Plan. Under the terms of this plan, directors who are not employees of the
Company are entitled to receive options to acquire shares of common stock. An
aggregate of 1.6 million shares of common stock have been reserved for issuance
under this plan, subject to adjustment for certain events affecting the
Company's capitalization. During fiscal years 2001, 2000 and 1999, respectively,
the Company issued options to purchase 80,000, 120,000 and 160,000 shares,
respectively, to eligible participants under the plan. In addition, during
fiscal 1999, the Company granted options to purchase 120,000 shares to certain
directors outside of the Non-employee Directors' Stock Option Plan.
1999 STOCK INCENTIVE PLAN
The 1999 Stock Incentive Plan (the 1999 Stock Plan), which the Company's
shareholders approved at the 1999 annual meeting of shareholders, provides for
the issuance of a maximum of 16.0 million shares of common stock pursuant to
awards granted thereunder. Awards that may be granted under the 1999 Stock Plan
include incentive stock options and nonqualified stock options totaling 14.0
million shares. The remaining 2.0 million shares reserved under the plan are for
stock appreciation rights, restricted stock awards and restricted units. The
number of shares reserved for issuance under the 1999 Stock Plan and the terms
of awards may be adjusted upon certain events affecting the Company's
capitalization. No awards may be granted under the 1999 Stock Plan after June
30, 2009. The Company recorded deferred compensation of $7.9 million and $8.8
million in fiscal 2001 and 2000, respectively, associated with the awarding of
558,000 and 400,000 shares, respectively, of non-vested restricted stock to key
employees at no cost under the 1999 Stock Plan. This deferred compensation is
being amortized to expense over the vesting periods of such restricted stock
awards, up to four years. During fiscal 2001, 50,000 shares of these restricted
stock awards were exercised.
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock-based awards. The Company has recorded
deferred compensation expense of $300,000 for the difference between the grant
price and the deemed fair value of certain of the Company's common stock options
granted in 1997. Pro forma information regarding net income (loss) and net
income (loss) per share is required by SFAS 123, and has been determined as if
the Company accounted for its employee stock options using the fair value method
of SFAS 123. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following assumptions for
the fiscal years ended March 31, 2001, 2000 and 1999, respectively: risk-free
interest rate of 4.8%, 6.5% and 5.5%, no expected dividends, a volatility factor
of 1.255, 0.892 and 0.801 and a weighted average expected life of the options of
8.47 years. The weighted average fair value of options granted during fiscal
years 2001, 2000 and 1999 was $24.32, $19.46 and $2.62, respectively.
For purposes of pro forma disclosures, the estimated fair value of the awards is
amortized to expense over the awards' vesting periods. The Company's pro forma
information follows (in thousands, except per share data):
Year ended March 31, 2001 2000 1999
- -------------------------------------------------------------------------------
Net income, as reported $34,974 $50,094 $19,561
Pro forma net (loss) income $(1,719) $32,113 $18,191
Basic net income per share, as reported $ 0.22 $ 0.32 $ 0.14
Diluted net income per share, as reported $ 0.20 $ 0.29 $ 0.13
Pro forma basic net (loss) income per share $ (0.01) $ 0.20 $ 0.13
Pro forma diluted net (loss) income per share $ (0.01) $ 0.19 $ 0.12
- -------------------------------------------------------------------------------
A summary of activity of the Company's employee stock option plans follows (in
thousands, except per share data):
Number of Shares Option Prices
- -------------------------------------------------------------------------
Available Options
for Grant Outstanding Per Share Range
March 31, 1998 9,915 8,897 $ 0.02 - $ 2.89
Granted (6,389) 6,389 1.39 - 11.89
Exercised -- (1,558) 0.02 - 2.89
Canceled 146 (146) 0.02 - 11.22
- -------------------------------------------------------------------------
March 31, 1999 3,672 13,582 0.02 - 11.89
Reserved 14,000 -- -- --
Granted (5,306) 5,306 10.03 - 87.50
Exercised -- (2,606) 0.02 - 19.72
Canceled 119 (119) 0.03 - 44.78
- -------------------------------------------------------------------------
March 31, 2000 12,485 16,163 0.02 - 87.50
Granted (4,684) 4,684 11.13 - 80.13
Exercised -- (2,762) 0.02 - 24.84
Canceled 421 (421) 0.11 - 87.50
- -------------------------------------------------------------------------
March 31, 2001 8,222 17,664 $ 0.03 - $87.50
=========================================================================
Exercise prices for options outstanding as of March 31, 2001, ranged from $0.03
to $87.50. The weighted average remaining contractual life of outstanding
options is 7.9 years. The weighted average exercise price of outstanding options
at March 31, 2001 was $14.15. At March 31, 2001, 2000 and 1999, awards to
purchase 4.1 million, 2.7 million and 1.2 million shares of common stock were
exercisable, respectively.
The following table summarizes in more detail information regarding the
Company's stock options outstanding at March 31, 2001 (in thousands, except per
share and award life data):
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------------------
Weighted- Weighted-Average Weighted-
Range of Number Average Remaining Number Average
Exercise Prices Of Options Exercise Price Contractual Life Of Options Exercise Price
- --------------------------------------------------------------------------------------------------------------------
$ 0.03- 13.44 9,403 $ 3.37 7.0 years 3,314 $ 2.44
13.45- 26.88 5,857 17.72 9.0 581 21.25
26.89- 40.31 946 35.32 8.8 142 35.19
40.32- 53.75 999 48.18 8.9 46 48.84
53.76- 67.19 222 62.07 9.0 16 60.68
67.20- 80.63 165 78.05 9.0 33 78.05
80.64- 87.50 72 87.11 8.9 14 87.11
- ---------------------------------------------------------------------------------------------------------------------
17,664 $ 14.15 7.9 years 4,146 $ 7.82
=====================================================================================================================
12. COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At March 31, 2001, the Company had reserved a total of 32.3 million of its
authorized 500.0 million shares of common stock for future issuance as follows
(in thousands):
- -------------------------------------------------------------------
Outstanding stock options under employee
stock options plans 17,664
Possible future issuance under employee
stock option plans 8,222
Outstanding directors' options outside of
non-employee directors' option plan 107
Employee stock purchase plan 3,368
Restricted stock-based awards granted 908
Possible future issuance of restricted
stock-based awards 1,042
TRW warrant 1,000
- ------------------------------------------------------------------
Total shares reserved 32,311
==================================================================
13. RELATED PARTY TRANSACTIONS
In connection with a bridge financing in 1996, which was subsequently converted
to preferred stock, the Company issued to a shareholder warrants that entitled
the holder to purchase 536,000 shares of common stock at exercise prices ranging
from $0.3438 to $0.7563 per share. These warrants were exercised in March 1999.
In connection with a June 1996 technology licensing agreement with TRW, the
Company issued a warrant to TRW to purchase up to 8.0 million shares of the
Company's common stock at an exercise price of $1.25 per share. This warrant
first became exercisable on June 15, 1998, the date that the Company's first
wafer fabrication facility became operational, and was exercised on September
14, 1998. A value of $250,000 was recorded for this warrant.
In connection with the expansion of the license arrangements with TRW for use of
the GaAs HBT technology to manufacture products for commercial coaxial and other
non-fiber wire applications in November 1999, the Company granted TRW two
warrants for the purchase of shares of common stock. The first warrant was for
500,000 shares of common stock, became exercisable on December 31, 2000 and was
exercised on January 3, 2001. The second warrant is for 1.0 million shares of
common stock, became exercisable after December 31, 2000 and expires on December
31, 2001, but may not be exercised until the Company achieves certain annualized
sales milestones and will become null and void if the Company fails to achieve
these milestones. The exercise price established for these warrants is $20.00
per share. The value of these warrants was estimated using an option pricing
model to be $10.0 million, which represents the cost of the Company's right to
use TRW's technology for these new applications. Accordingly, the related
intangible asset was increased on the Company's consolidated balance sheet.
14. GEOGRAPHIC INFORMATION
The consolidated financial statements include sales to customers by geographic
region that are summarized as follows:
Year ended March 31, 2001 2000 1999
- -------------------------------------------------------------
Sales:
United States 48% 48% 47%
Asia 27 27 27
Europe 19 21 25
Central and South America 4 4 1*
Canada 2 1* 1
Other 1* 1* 1*
- ---------------------------------------------------------------
* less than 1%
The consolidated financial statements include the following long-lived assets
amounts related to operations of the Company by geographic region as of March
31, (in thousands):
2001 2000
- ---------------------------------------------------------------
Long-lived assets:
United States $207,741 $159,843
Europe 830 --
- ----------------------------------------------------------------
Total long-lived assets $208,571 $159,843
================================================================
Sales, for geographic disclosure, are based on the "bill to" address of the
customer. The "bill to" address is not always an accurate representation of the
final consumption of the Company's components by either the OEM or the OEM's
customer. Long-lived assets include property and equipment.
15. SUMMARY OF QUARTERLY EARNINGS (UNAUDITED):
Fiscal 2001 Quarters
(in thousands, except per share data)
First Second Third Fourth
- ------------------------------------------------------------------
Revenue $ 98,206 $102,220 $ 79,918 $ 55,020
Gross profit 50,564 51,874 37,541 13,584
Net income (loss) 16,242 17,733 7,843 (6,844)
Net income (loss)
per share:
Basic $ 0 .10 $ 0.11 $ 0.05 $ (0.04)
Diluted $ 0 .09 $ 0.10 $ 0.05 $ (0.04)
- -------------------------------------------------------------------
Fiscal 2000 Quarters
(in thousands, except per share data)
First Second Third Fourth
- ------------------------------------------------------------------
Revenue $ 62,048 $ 68,921 $ 73,161 $ 84,830
Gross profit 26,403 32,094 35,631 42,086
Net income 10,418 12,470 12,575 14,631
Net income per share:
Basic $ 0.07 $ 0.08 $ 0.08 $ 0.09
Diluted $ 0.06 $ 0.07 $ 0.07 $ 0.08
- ------------------------------------------------------------------