SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 29, 2001
Commission File Number: 0-22511
-----------------
RF MICRO DEVICES, INC.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1733461
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7628 Thorndike Road
Greensboro, North Carolina 27409-9421
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(Address of principal executive offices, including zip code)
(336) 664-1233
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(Registrant's telephone number, including area code)
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
----- -----
As of February 6, 2002, there were 167,360,681 shares of the registrant's common
stock outstanding.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PAGE
Condensed Consolidated Statements of Operations for the three
months ended December 31, 2001 and 2000.........................
Condensed Consolidated Statements of Operations for the nine
months ended December 31, 2001 and 2000.........................
Condensed Consolidated Balance Sheets as of December 31, 2001
and March 31, 2001..............................................
Condensed Consolidated Statements of Cash Flows for the nine
months ended December 31, 2001 and 2000.........................
Notes to Condensed Consolidated Financial Statements............
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.........................................
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...............................................
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.......................
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000
--------------- ---------------
Revenue:
Product sales $ 100,061 $ 79,799
Engineering revenue 490 119
--------------- ---------------
Total revenue 100,551 79,918
Operating costs and expenses:
Cost of goods sold 61,658 42,377
Research and development 19,055 16,011
Marketing and selling 7,458 6,544
General and administrative 3,888 3,241
Other operating expenses (Note 7) 2,550 1,252
--------------- ---------------
Total operating costs and expenses 94,609 69,425
--------------- ---------------
Income from operations 5,942 10,493
Other income (expense):
Interest income 2,585 5,159
Interest expense (4,458) (3,443)
Other, net 2 46
--------------- ---------------
Income before income taxes 4,071 12,255
--------------- ---------------
Income tax expense 570 4,412
--------------- ---------------
Net income $ 3,501 $ 7,843
=============== ===============
Net income per share (Note 2):
Basic $ 0.02 $ 0.05
Diluted $ 0.02 $ 0.05
Weighted average shares outstanding used in per share calculation:
Basic 166,439 162,153
Diluted 175,759 172,627
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</FN>
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000
--------------- ---------------
Revenue:
Product sales $ 267,611 $ 279,234
Engineering revenue 1,263 1,111
--------------- ---------------
Total revenue 268,874 280,345
Operating costs and expenses:
Cost of goods sold 189,461 140,365
Research and development 52,047 44,933
Marketing and selling 20,828 21,456
General and administrative 10,631 10,307
Other operating expenses (Note 7) 13,568 1,252
Impairment of long-lived assets (Note 6) 6,801 --
--------------- ---------------
Total operating costs and expenses 293,336 218,313
--------------- ---------------
(Loss) income from operations (24,462) 62,032
Other income (expense):
Interest income 10,041 9,811
Interest expense (12,670) (5,711)
Other, net (551) 29
--------------- ---------------
(Loss) income before income taxes (27,642) 66,161
--------------- ---------------
Income tax (benefit) expense (Note 8) (4,289) 24,342
--------------- ---------------
Net (loss) income ($ 23,353) $ 41,819
=============== ===============
Net (loss) income per share (Note 2):
Basic ($ 0.14) $ 0.26
Diluted ($ 0.14) $ 0.24
Weighted average shares outstanding used in per share calculation:
Basic 165,292 161,346
Diluted 165,292 173,567
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</FN>
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
DECEMBER 31, MARCH 31,
2001 2001
--------------- ---------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 117,944 $ 266,076
Short-term investments 228,200 75,162
Accounts receivable, net 45,126 38,610
Recoverable income taxes 15,172 28,477
Inventories (Note 3) 39,400 71,015
Other current assets 8,391 12,974
--------------- ---------------
Total current assets 454,233 492,314
Property and equipment, net of accumulated depreciation of $75,193 at
December 31, 2001 and $49,757 at March 31, 2001 222,335 208,571
Goodwill (Note 9) 31,444 --
Non-current deferred tax assets 21,356 --
Related party technology licenses, net of amortization of $2,022 at
December 31, 2001 and $1,300 at March 31, 2001 11,221 11,943
Other intangible assets (Note 9) 9,041 1,481
Other non-current assets 8,749 6,622
--------------- ---------------
Total assets $ 758,379 $ 720,931
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,355 $ 14,613
Accrued liabilities 17,969 9,410
Current obligations under capital leases 4,102 4,976
--------------- ---------------
Total current liabilities 40,426 28,999
Long-term debt, net of financing cost 293,855 292,700
Non-current deferred tax liabilities 23,482 19,471
Obligations under capital leases, less current maturities 565 3,263
Other long-term liabilities 11,298 --
--------------- ---------------
Total liabilities 369,626 344,433
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; 167,084 and
163,710 shares issued and outstanding at December 31, 2001 and March
31, 2001, respectively 277,211 246,930
Additional paid-in capital 68,270 53,196
Deferred compensation (20,192) (14,798)
Accumulated other comprehensive loss, net of tax (Note 4) (4,576) (223)
Retained earnings 68,040 91,393
--------------- ---------------
Total shareholders' equity 388,753 376,498
--------------- ---------------
Total liabilities and shareholders' equity $ 758,379 $ 720,931
=============== ===============
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</FN>
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000
--------------- ---------------
Cash flows from operating activities:
Net (loss) income ($ 23,353) $ 41,819
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation 25,902 20,679
Amortization 5,100 2,804
Loss on disposal of equipment and long-term investment 458 61
Impairment of long-lived assets 6,801 --
Tax benefit from exercise of employee stock options 7,441 --
Changes in operating assets and liabilities:
Accounts receivable, net (6,458) 9,339
Recoverable income taxes and deferred tax assets (1,148) (547)
Inventories 32,070 (22,648)
Other assets (3,385) (2,864)
Accounts payable and accrued liabilities 10,909 10,653
Other liabilities 8,875 8,518
--------------- ---------------
Net cash provided by operating activities 63,212 67,814
Cash flows from investing activities:
Purchase of property and equipment (43,281) (73,247)
Proceeds from maturities of held-to-maturity securities 17,950 33,805
Proceeds from maturities of available for sale securities 84,086 6,300
Purchase of held-to-maturity securities -- (32,502)
Purchase of available for sale securities (256,761) (42,767)
Purchase of businesses, net of cash acquired (17,838) --
Purchase of other investments -- (5,000)
Purchase of technology license (130) --
--------------- ---------------
Net cash used in investing activities (215,974) (113,411)
Cash flows from financing activities:
Proceeds from convertible debt offering, net of
financing cost -- 291,354
Proceeds from exercise of options and
employee stock purchases 8,344 5,267
Repayment of capital lease obligations (3,714) (3,346)
--------------- ---------------
Net cash provided by financing activities 4,630 293,275
--------------- ---------------
Net (decrease) increase in cash and cash equivalents (148,132) 247,678
Cash and cash equivalents at the beginning of the period 266,076 28,956
--------------- ---------------
Cash and cash equivalents at the end of the period $ 117,944 $ 276,634
=============== ===============
Noncash investing and financing activities:
Issuance of restricted stock as deferred compensation $ 7,046 $ 7,946
Available-for-sale investment equity change, net of tax $ 302 $ 1,188
Fair value of cash flow hedge, net of tax ($ 4,655) $ --
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements
</FN>
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United
States. The preparation of these financial statements requires management to
make estimates and assumptions, which could differ materially from actual
results. In addition, certain information or footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed, or
omitted, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the financial statements include all
adjustments (which are of a normal and recurring nature) necessary for the fair
presentation of the results of the interim periods presented. For comparative
purposes, certain fiscal 2001 amounts have been reclassified to conform to
fiscal 2002 presentation. These reclassifications had no effect on net income
(loss) or shareholders' equity as previously stated. The results of operations
for interim periods are not necessarily indicative of the results that may be
expected for a full year. These condensed consolidated financial statements
should be read in conjunction with the Company's audited consolidated financial
statements and notes thereto included in the Company's Form 10-K for the year
ended March 31, 2001.
The condensed 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.
The Company uses a 52- or 53-week fiscal year ending on the Saturday closest to
March 31 of each year. The first fiscal quarter of each year ends on the
Saturday closest to June 30, the second fiscal quarter of each year ends on the
Saturday closest to September 30 and the third fiscal quarter of each year ends
on the Saturday closet to December 31; however, in this report the Company's
fiscal year is described as ending on March 31 and the first, second, and third
quarters of each fiscal year are described as ending June 30, September 30 and
December 31, respectively.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. NET INCOME (LOSS) PER SHARE
The following table sets forth a reconciliation of the numerators and
denominators in the computation of basic and diluted income (loss) per share (in
thousands, except per share data):
Three Months Ended Nine Months Ended
------------------------------------- -------------------------------------
Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 2001 Dec. 31, 2000
----------------- ---------------- ----------------- ----------------
Numerator for basic and diluted
income (loss) per share:
Net income (loss) $3,501 $7,843 ($23,353) $41,819
================= ================ ================= ================
Denominator for basic income (loss) per
share - weighted average shares
166,439 162,153 165,292 161,346
Effect of dilutive securities:
Stock options and warrants 9,320 10,474 - 12,221
----------------- ---------------- ----------------- ----------------
Denominator for diluted income
(loss) per share - adjusted
weighted average shares
and assumed conversions
175,759 172,627 165,292 173,567
Basic income (loss) per share
$ 0.02 $ 0.05 ($ 0.14) $ 0.26
================= ================ ================= ================
Diluted income (loss) per share
$ 0.02 $ 0.05 ($ 0.14) $ 0.24
================= ================ ================= ================
In the computation of diluted loss per share for the nine months ended December
31, 2001, all outstanding stock options and warrants were excluded because the
effect of their inclusion would have been anti-dilutive. The computation of
diluted loss per share similarly did not assume the conversion of the Company's
3.75% convertible subordinated notes due 2005 because the inclusion would be
anti-dilutive. The notes are convertible at a price of $45.085 per share and the
closing price of the Company's stock on the date it committed to sell the notes
was $35.50.
In the computation of diluted income per share for the three months ended
December 31, 2001 and 2000 and the nine months ended December 31, 2000,
outstanding stock options to purchase approximately 3.0 million shares, 1.6
million shares, and 1.0 million shares, respectively, were excluded because the
exercise price of the options was greater than the average market price of the
common stock and the effect of their inclusion would have been anti-dilutive.
The computation of diluted income per share for these periods additionally did
not assume the conversion of the Company's 3.75% convertible subordinated notes
due 2005 because the inclusion would be anti-dilutive.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
3. INVENTORIES
Inventories are stated at the lower of cost or market determined using the
average cost method. The components of inventories are as follows (in
thousands):
December 31, March 31,
2001 2001
--------------- ---------------
Raw materials $ 22,075 $ 25,641
Work in process 20,999 26,686
Finished goods 25,053 38,571
--------------- ---------------
68,127 90,898
Inventory reserve (28,727) (19,883)
--------------- ---------------
Total inventory $ 39,400 $ 71,015
=============== ===============
During the quarter ended June 30, 2001, inventory reserves increased primarily
due to recent customer demand shift from microwave monolithic integrated
circuits (MMIC) to more complex, highly integrated multi-chip module power
amplifiers. The industry volatility and lower forecasts for handset sales during
the first part of fiscal 2002 increased the Company's overall inventory risk
associated with predictability of future sales and management's reliance on
sales forecasts. An inventory reserve adjustment of $15.3 million was recorded
as an addition to cost of goods sold based on management's best estimate of
inventory risk. The net loss for the nine-month period ended December 31, 2001
prior to this change in estimate would have been $10.4 million including a tax
benefit of $1.9 million. The net loss per basic and diluted share for the nine
months ended December 31, 2001 would have been ($0.06).
The Company has utilized a leading material requirement planning system,
implemented planning strategies for each product and maintains an inventory
management team. During the first three quarters of fiscal 2002, the Company's
gross inventories have decreased $22.8 million, which management believes
demonstrates the effectiveness of the Company's focus on supply chain management
through the implementation of new planning strategies and an inventory
management team. During fiscal year 2000 and the first two quarters of fiscal
2001 gross inventories grew consistent with sales. As sales began to decline in
the last two quarters of fiscal 2001, inventory levels began to grow
disproportionately with sales. The Company's response to industry trends and
corresponding implementation of new production planning strategies did not
impact gross inventory levels until the second quarter of fiscal 2002.
In the event the Company sells inventory that had been covered by a specific
inventory reserve, the sale is recorded at the actual selling price and the
related cost of goods sold at the full inventory cost. The Company evaluates
inventory levels quarterly against sales forecasts on a part-by-part basis and
evaluates its overall inventory risk. Reserves are adjusted to reflect inventory
values in excess of forecasted sales as well as overall inventory risk assessed
by management. Inventory deemed obsolete is required by Company policy to be
carried for a period not to exceed one year so that customers may be notified
and find a suitable replacement. Once the one-year period is complete, the
inventory will be disposed of or destroyed and the inventory value and related
reserve will be written off the Company's books.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. COMPREHENSIVE (LOSS) INCOME
Accumulated comprehensive (loss) income for the Company consisted entirely of
accumulated unrealized gains on marketable securities during fiscal 2001; fiscal
2002 also includes the fair value of a cash flow hedge related to the Company's
synthetic lease (Note 5). The amount is a separate component of shareholders'
equity. The components of comprehensive (loss) income, net of tax, are as
follows (in thousands):
Three Months Ended Nine Months Ended
---------------------- ----------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net income (loss) $ 3,501 $ 7,843 ($ 23,353) $ 41,819
Comprehensive (loss) income:
Unrealized (loss) gains on
marketable securities (336) (869) 90 1,188
Realized (loss) gain adjustment (6) -- 212 --
Changes in fair value of
cash flow hedge 1,032 -- (4,655) --
---------- ---------- ---------- ----------
Accumulated comprehensive
(loss)income $ 4,191 $ 6,974 ($ 27,706) $ 43,007
========== ========== ========== ==========
5. DERIVATIVE FINANCIAL INSTRUMENTS
On April 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities." The standard establishes a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities. Adoption of SFAS 133 did not have a significant impact on the
Company's reported consolidated financial position, results of operations or
cash flows.
Objectives and Strategies
Interest Rate Management - The Company uses an interest rate swap agreement to
effectively convert the $95.0 million notional amount of a variable rate
synthetic lease to a fixed rate basis, thus reducing the impact of interest rate
changes on future income commencing April 2001 through November 2004.
Financial Reporting Policy
The interest rate swap discussed above is a cash flow hedge and is recorded on
the consolidated balance sheet at its fair value of $7.3 million as of December
31, 2001, which is included in other long-term liabilities and comprehensive
loss, net of tax, with no impact on earnings.
The terms and provisions of the interest-rate swap and $95.0 million of the
hedged item (synthetic lease) exactly match, enabling the Company to use the
hypothetical method of accounting for derivatives as defined by SFAS 133. This
hedge is an amortizing swap that is perfectly effective in offsetting changes in
expected cash flows due to fluctuations in the variable interest rate over the
term of the lease since the notional amount reduction exactly matches the
principal reduction in the synthetic lease transaction. This agreement involves
the receipt of the variable rate amounts in exchange for a fixed rate interest
payment over the life of the agreement without exchange of the underlying
notional amounts. The differential in rates results in cash to be paid or
received and is recognized as an adjustment to interest expense or income for
the reporting period.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
6. IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with the Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-lived Assets and for
Long-Lived Assets to Be Disposed Of," the Company reviews long-lived assets for
impairment based on changes in circumstances that indicate their carrying
amounts may not be recoverable due to the extent and manner the assets are now
used by the Company. During the quarter ended June 30, 2001, the Company
recognized an impairment charge totaling $6.8 million related to assets to be
held and used, as well as to assets to be disposed of, which is presented on the
condensed consolidated statements of operations as "Impairment of long-lived
assets."
Assets to be held and used
During the quarter ended June 30, 2001, management made a decision to outsource
module production packaging and transition the Company's packaging line to a
dedicated research and development ("R&D") facility, which resulted in a $4.0
million asset impairment charge. As a result of the transition to an R&D
facility, the Company identified certain excess capacity and determined that the
estimated future cash flows for an R&D line did not support the carrying value
of the assets related to the full capacity initially invested by the Company.
The impaired assets are module assembly packaging equipment for surface mount
devices, die attach, wire-bond and molding processes. The fair market value of
these assets was estimated based on the historical selling prices for used
equipment of a similar type and the carrying values were adjusted accordingly.
Assets to be disposed of
During the quarter ended June 30, 2001, management identified a customer demand
shift from MMICs to more complex, highly integrated multi-chip module power
amplifiers, which created an impairment of the $3.1 million carrying value of
the Company's MMIC gravity feed test handlers. The impairment charge of the test
handlers totaled $2.8 million, with a $0.3 million residual value remaining.
Assets to be disposed of are measured at the lower of carrying amount or fair
value less cost to sell. Disposal of the impaired assets is expected to occur by
the end of fiscal 2002.
Impact of Recently Issued Accounting Standards
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 supersedes SFAS 121 and
establishes a single accounting model for long-lived assets to be disposed of by
sale as well as resolved implementation issues related to SFAS 121. The Company
will adopt SFAS 144 for fiscal 2003, which may result in additional disclosures.
Adoption of SFAS 144 in fiscal 2003 is not expected to have a significant impact
on the Company's consolidated financial position, results of operations or cash
flows.
7. OTHER OPERATING EXPENSES
Other operating expenses consist of start-up costs associated with preparing the
Company's second wafer fabrication facility located in Greensboro, NC and the
proposed facility in Beijing, China for normal production 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." The second wafer fabrication facility qualified
for production in the third quarter of fiscal 2002. Accordingly, the associated
expenses transitioned from other operating expense to cost of goods sold during
this quarter of fiscal 2002.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. INCOME TAX
The total income tax benefit for the nine months ended December 31, 2001 was
$4.3 million, which included current federal benefits, current state benefits,
and deferred expense of $5.5 million, $0.4 million, and $1.6 million,
respectively. The Company's effective tax rate was 15.5% for the nine months
ended December 31, 2001, compared to 36.8% for the same period of fiscal 2001.
This rate differs from the statutory rate of 35% primarily due to tax credits
and the change in the valuation allowance for deferred tax assets.
9. BUSINESS COMBINATIONS
Acquisition of RF Nitro Communications, Inc.
On October 23, 2001, the Company merged with RF Nitro Communications, Inc. ("RF
Nitro"), a privately held company with advanced materials and products in
broadband wireless and wireline (fiber-optic) markets. As a result of the
acquisition, the Company gained access to advanced compound semiconductor
processes, such as Gallium Nitride, as well as additional resources to conduct
advanced research on this and other technologies. In addition, RF Nitro sold
Indium Gallium Phosphide ("InGaP") transistors and amplifiers, which are
expected to accelerate the Company's initiatives to introduce InGaP for certain
wireless applications. The acquisition was accounted for in accordance with the
Statement of Financial Accounting Standard No. 141 "Business Combinations" (SFAS
141). The results of operations of RFN have been included in the consolidated
financial results of the Company since the date of acquisition. There are no
significant differences between the accounting policies of the Company and RF
Nitro.
The aggregate purchase price of the RF Nitro acquisition was $25.1 million,
consisting of $3.0 million in cash, 1.2 million shares of common stock and
replacement stock options valued at $22.1 million. The value of the 1.2 million
common shares issued was determined based on the average market price of the
Company's common shares over the last five trading days prior to the
announcement of the execution of the acquisition agreement. The total purchase
price of $25.1 million was allocated to the assets acquired and liabilities
assumed based on their fair values as determined by an independent appraisal, as
follows (in thousands):
Total purchase price $25,114
Current assets $ 712
Property, plant and equipment 3,017
Other assets 450
Identifiable intangible assets 6,240
-------
Total assets acquired $10,419
-------
Current liabilities $ 1,392
Long-term debt 142
-------
Total liabilities assumed $ 1,534
-------
Resulting goodwill $16,229
-------
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
9. BUSINESS COMBINATIONS (continued)
Of the $6.2 million of acquired intangible assets, $4.7 million represents the
value of an acquired technology license; $1.5 million represents the value of a
covenant not to compete, and $0.03 million represents the value of employee
contracts. The technology license meets the criteria for having an indefinite
life and is not being amortized in accordance with the Statement of Financial
Accounting Standard No. 142 "Goodwill and Other Intangible Assets" (SFAS 142).
As required by SFAS 142, The Company will assess the carrying value of its
non-amortized intangible assets for potential impairment on an ongoing basis.
The tests for potential impairment of intangible assets with indefinite useful
lives is based on a comparison of the fair value of these assets, excluding a
recoverability test, and the carrying value of such assets. Consistent with the
requirements of SFAS 121, an impairment loss will be recognized if the carrying
amount exceeds the fair value of these intangible assets. The remaining
specifically identifiable intangible assets acquired are being amortized over
their estimated useful lives of two years.
The $16.2 million allocated to goodwill represents the excess of the purchase
price over the fair value of assets acquired and liabilities assumed. In
accordance with SFAS 142, the goodwill is not being amortized and will be
evaluated for impairment on an annual basis. Of the total amount of goodwill,
none is expected to be deductible for federal income tax purposes.
Acquisition of IBM's GPS Development Operation
On December 14, 2001, the Company acquired the global positioning system ("GPS")
development operation of International Business Machine Corporation ("IBM") for
$15 million in cash. The acquisition provides the Company with advanced GPS
technology and access to IBM's chipscale packaging technology. The GPS
development operation was the first to introduce GPS solutions using Silicon
Germanium (SiGe), which reduces size, power consumption and noise figure, and
enables higher levels of integration. As a part of the transaction, IBM has
agreed to transfer to the Company intellectual property associated with these
products. The GPS development operation is composed primarily of engineers and
technical marketing specialists with extensive development and application
experience and broad customer knowledge. The Company plans to utilize the GPS
technology and engineering resources acquired to provide GPS solutions to
handset manufacturers, as wireless service providers comply with regulatory
mandates and seek new databased services. The acquisition of the GPS development
operation is considered the acquisition of a business in accordance with the
Statement of Financial Accounting Standard No. 141 "Business Combinations" (SFAS
141) The results of GPS have been included in the consolidated financial results
of the Company since the date of acquisition. There are no significant
differences between the accounting policies of the Company and GPS.
The aggregate purchase price of the GPS acquisition consisted of $15.0 million
in cash. The total purchase price was allocated to the assets acquired and
liabilities assumed based on the fair values as determined by an independent
appraisal, as follows (in thousands):
Total purchase price $ 15,000
Property, plant and equipment $ 285
Identifiable intangible assets 1,100
--------
Total assets acquired $ 1,385
--------
Long-term liabilities $ 1,600
--------
Total liabilities assumed $ 1,600
--------
Resulting goodwill $ 15,215
--------
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
9. BUSINESS COMBINATIONS (continued)
In addition, contingent purchase consideration of up to $22.5 million may be
payable if certain cumulative GPS product revenue is accrued during the calendar
year ending December 31, 2002. Any payments of contingent purchase consideration
will increase the goodwill attributed to GPS. We are unable to assess the
probability of any contingent purchase consideration that may be due and has
therefore excluded it from the allocation in accordance with SFAS 141.
The $1.1 million of identifiable intangible asset represents developed product
technology. This technology is being amortized over its useful life of five
years.
The $15.2 million of goodwill represents the excess of the purchase price over
fair value of assets acquired and liabilities assumed. In accordance with SFAS
142, the goodwill is not being amortized and will be evaluated for impairment on
an annual basis. Of this total amount, 100% is expected to be deductible for
federal income tax purposes.
Pro Forma Consolidated Financial Data
The following unaudited pro forma consolidated financial information reflects
the results of operations for the periods ended December 31, 2001 and December
31, 2000 as if the acquisitions of RF Nitro and the GPS operations had occurred
on March 31, 2001 and 2000, respectively (in thousands).
Three Months Ended Nine Months Ended
---------------------- ----------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenue $ 100,674 $ 80,180 $ 270,213 $ 280,647
Net income (loss) 1,659 6,894 ($ 28,724) $ 39,435
Net income (loss) per share:
Basic $ 0.01 $ 0.04 ($ 0.17) $ 0.24
Diluted $ 0.01 $ 0.04 ($ 0.17) $ 0.23
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of what operating results would have been had the
acquisitions actually taken place on March 31, 2001 and 2000. In addition, these
results are not intended to be a projection of future results and do not reflect
any synergies that might be achieved from the combined operations.
10. COMMITMENTS
Strategic Alliance with Agere
The Company entered into a strategic alliance with Agere Systems Inc. in May
2001, pursuant to which it agreed to invest approximately $58.0 million over two
years to upgrade manufacturing clean room space and purchase semiconductor
manufacturing equipment to be deployed within Agere's Orlando, Florida
manufacturing facility. The alliance was designed to provide the Company a
guaranteed source of supply and favorable pricing of silicon wafers. On January
23, 2002, Agere announced that it was seeking a buyer for its Orlando wafer
fabrication operation. The Company and Agere are engaged in discussions
regarding the terms of their alliance and the effect of this potential sale.
Management currently cannot predict the outcome of these discussions or what
form the alliance will take in the future, but currently does not believe that
these developments will have a material adverse effect on the Company's
business, financial condition or results of operations.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
10. COMMITMENTS (continued)
China Test and Tape and Reel Facility
On November 8, 2001 the Company broke ground on a test and tape and reel
facility in Beijing, China. The Company expects to spend approximately $20.0
million to have this facility operational by the fall of 2002.
Synthetic Lease
In August 1999, as modified effective December 1999 and August 2001, 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. 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 the Company's personal property assets. The
modification in August 2001 resulted in expansion of financial covenants, which
require the maintenance of minimum levels of tangible net worth, liquidity and
debt service coverage and prohibit the payment of dividends. 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 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" (described below) plus margins varying from 150 basis
points to 325 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"
(described below) plus margins varying from 25 basis points to 200 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 determined under the lease documents) or (b) the federal funds
effective rate (as determined under the lease documents) plus 0.5%.
The Company also has provided for a contingent residual value guarantee in
relation to the synthetic lease. This guarantee provides that in the event the
assets are sold to a third party at the end of the lease term, the Company
unconditionally promises to pay to the lessor the lesser of (1) the deficiency
balance, which is equal to the excess, if any, of the cost of the assets over
the aggregate sale price paid by the third party, or (2) the maximum residual
guarantee amount, which is equal to 85% of the "Property Cost" (aggregate
outstanding loans and holder advances) for all of the assets subject to the
synthetic lease. Amortization equal to 1.7111% per month of the equipment
portion of the synthetic lease reduces the asset cost and thus the Company's
contingent residual value guarantee.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that
relate to our plans, objectives, estimates and goals. Words such as "expects,"
"anticipates," "intends," "plans," "believes," and "estimates," and variations
of such words and similar expressions, identify such forward-looking statements.
The Company's business is subject to numerous risks and uncertainties, including
variability in quarterly operating results, the rate of growth and development
of wireless markets, risks associated with the operation of our molecular beam
epitaxy and wafer fabrication facilities, 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, dependence on our GaAs HBT products and dependence
on third parties. These and other risks and uncertainties, which are described
in more detail in our most recent Annual Report on Form 10-K filed with the
Securities and Exchange Commission, could cause the actual results and
developments to be materially different from those expressed or implied by any
of these forward-looking statements.
RESULTS OF OPERATIONS
The following table sets forth our consolidated statement of operations data
expressed as a percentage of total revenue for the periods indicated:
Three Months Ended Nine Months Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2001 2000 2001 2000
--------- --------- --------- --------
Revenue 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses
Cost of goods sold 61.3 53.0 70.5 50.1
Research and development 19.0 20.0 19.4 16.0
Marketing and selling 7.4 8.2 7.7 7.7
General and administration 3.9 4.1 4.0 3.7
Other operating expenses 2.5 1.6 5.0 0.4
Impairment of long-lived assets -- -- 2.5 --
--------- --------- --------- ---------
Total operating costs and expense 94.1 86.9 109.1 77.9
Income (loss) from operations 5.9 13.1 (9.1) 22.1
Interest income 2.6 6.5 3.7 3.5
Interest expense (4.4) (4.3) (4.7) (2.0)
Other, net -- -- (0.2) --
--------- --------- --------- ---------
Income (loss) before income taxes 4.1 15.3 (10.3) 23.6
Income tax (expense) benefit (0.6) (5.5) 1.6 (8.7)
--------- --------- --------- ---------
Net income (loss) 3.5% 9.8% (8.7)% 14.9%
========= ========= ========= =========
REVENUE
Revenue for the quarter ended December 31, 2001 increased 25.8% to $100.6
million, compared to $79.9 million for the quarter ended December 31, 2000. For
the nine months ended December 31, 2001, revenue decreased 4.1% to $268.9
million from $280.3 million for the same period ended December 31, 2000. The
third quarter increase was attributable to revenue growth from our highly
integrated multi-chip module power amplifiers partially offset by a decrease in
microwave monolithic integrated circuit (MMIC) products. The decrease in the
nine-month year-over-year revenue was due primarily to excess inventories among
manufacturers resulting from an overly optimistic forecast for the growth of the
handset market and continued downward pressure on average selling prices,
especially in our mature products.
International shipments accounted for $72.8 million, or 72.5% of revenue, in the
third quarter of fiscal 2002, compared to $38.2 million, or 47.8% of revenue, in
the third quarter of fiscal 2001. For the nine months ended December 31, 2001,
international shipments were $183.7 million, or 68.3% of revenue, up from $148.1
million, or 52.8% of revenue, for the nine months ended December 31, 2000. Sales
to customers located in South Korea totaled $27.5 million, or 27.3% of revenue,
for the third quarter of fiscal 2002, compared to $14.5 million, or 18.2% of
revenue, for the third quarter of fiscal 2001. Year-to-date shipments to South
Korea totaled $60.3 million, or 22.4% of revenue, in fiscal 2002 and $38.2
million, or 13.6% of revenue, in fiscal 2001. Shipments to this market may
continue to fluctuate from the prior year, as the South Korean market remains
unstable. Variations in revenue by geographic region year-over-year are also due
inpart to our largest customer shifting production to its Korean facility from
facilities located in U.S. locations.
GROSS PROFIT
Gross profit for the three months ended December 31, 2001 increased 3.6% to
$38.9 million, or 38.7% of revenue, compared to $37.5 million, or 47.0% of
revenue, in the comparable period of the prior year. For the nine months ended
December 31, 2001, gross profit decreased 43.3% to $79.4 million, or 29.5% of
revenue, compared to $140.0 million, or 49.9% of revenue, for the nine months
ended December 31, 2000. The gross profit decrease as a percentage of revenue in
the third quarter is attributed to the transition of the new wafer fabrication
facility from other operating expense to cost of goods sold; continued declines
in average selling prices on products; and initial higher cost of goods sold
associated with our module products. The decrease in gross profit for the nine
months ended December 31, 2001 was the result of increases in inventory
reserves, continued declines in average selling prices on products, initial
higher cost of goods sold associated with our module products and greater than
normal yield losses associated with the ramp up of new module products. Our
increased inventory reserves are attributable primarily due to recent customer
demand shift from microwave monolithic integrated circuits (MMIC) to more
complex, highly integrated multi-chip module power amplifiers. The industry
volatility and lower forecasts for handset sales during the first part of fiscal
2002 increased our overall inventory risk associated with predictability of
future sales and management's reliance on sales forecasts. In order to focus on
inventory reserve issues, we have utilized a leading material requirement
planning system, implemented planning strategies for each product and maintain
an inventory management team. During the first three quarters of fiscal 2002,
our gross inventories have decreased $22.8 million, which management believes
demonstrates the effectiveness of our focus on supply chain management through
the implementation of new planning strategies and an inventory management team.
During fiscal year 2000 and the first two quarters of fiscal 2001 gross
inventories grew consistent with sales. As sales began to decline in the last
two quarters of fiscal 2001, inventory levels began to grow disproportionately
with sales. Our response to industry trends and corresponding implementation of
new production planning strategies did not impact gross inventory levels until
the second quarter of fiscal 2002, resulting in the reserve adjustment in the
first quarter.
We have historically experienced significant fluctuations in gross profit
margins, which have caused fluctuations in our quarterly operating results, and
we cannot be certain operating results will not be similarly affected in the
future. We expect continued downward pressure on margins due to the factors
described above, as well as costs associated with our new wafer fabrication
facility. The new wafer fabrication facility qualified for production in the
third quarter of fiscal 2002. Accordingly, the associated expenses transitioned
from other operating expense to cost of goods sold during the third quarter of
fiscal 2002.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended December 31, 2001
increased 19.0% to $19.1 million, or 19.0% of revenue, compared to $16.0
million, or 20.0% of revenue, for the three months ended December 31, 2000. For
the nine months ended December 31, 2001, research and development expenses were
$52.0 million, or 19.4% of revenue, compared to $44.9 million, or 16.0% of
revenue, in the comparable period of the prior year. The increases were
primarily attributable to increased headcount and related expenses including
salaries, benefits and equipment; increased development wafers and mask sets;
and increased prototyping expenses. The module production packaging line that
was transitioned into a research and development ("R&D") facility and the
acquisitions of RF Nitro and IBM's GPS operations contributed to the increased
headcount and associated expenses. We plan to continue to make substantial
investments in research and development.
MARKETING AND SELLING
Marketing and selling expenses for the third quarter of fiscal 2002 were $7.5
million, compared to $6.5 million for the third quarter of fiscal 2001, an
increase of 14.0%. For the nine-month periods ended December 31, 2001 and 2000,
marketing and selling expenses were $20.8 million and $21.5 million in fiscal
2002 and fiscal 2001, respectively. The third quarter increase was primarily
attributable to higher salary and benefit cost. The year-to-date decrease in
fiscal 2002 was primarily attributable to reduced sales commissions associated
with the decline in revenue and shifts in revenue from third party
commission-based accounts to in-house accounts. Marketing and selling expenses,
as a percentage of revenue, were 7.4% and 8.2% for the three months ended
December 31, 2001 and 2000, respectively, and 7.7% and 7.7%, respectively, for
the nine months then ended. We plan to continue to make investments in marketing
and selling and expect that such expenses will increase in future periods.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the quarter ended December 31, 2001
increased 20.0% to $3.9 million, or 3.9% of revenue, compared to $3.2 million,
or 4.1% of revenue, for the quarter ended December 31, 2000. For the nine-month
period ended December 31, 2001, general and administrative expenses were $10.6
million, or 4.0% of revenue, compared to $10.3 million, or 3.7% of revenue, for
the comparable period ended December 31, 2000. The increase for the third
quarter was primarily attributable to greater salary and benefit cost associated
with increased headcounts. Legal and auditing fees associated with the
acquisition of RF Nitro and IBM's GPS development operations also contributed to
the increase. The nine-month period increase is consistent with the quarter
increase, and included additional charges related consulting for tax strategy
planning and donations to the American Red Cross related to the tragic events of
September 11, 2001.
IMPAIRMENT OF LONG-LIVED ASSETS
We evaluate our long-lived assets for impairment whenever indicators of
impairment exist. During the nine months ended December 31, 2001, we recognized
an impairment charge totaling $6.8 million related to impairment of certain
property and equipment. With respect to assets to be held and used, management
made a decision to outsource module production packaging and transition our
packaging line to a dedicated R&D facility, which resulted in a $4.0 million
asset impairment charge during the nine months ended December 31, 2001. As a
result of the transition to an R&D facility, management identified certain
excess capacity and determined that the estimated future cash flows for an R&D
line did not support the carrying value of the assets related to the full
capacity initially invested. The fair market value of these assets was estimated
based on the historical selling prices for used equipment of a similar type and
the carrying values were adjusted accordingly. With respect to assets to be
disposed of, management identified a customer demand shift from MMICs to more
complex, highly integrated multi-chip module power amplifiers, which created an
impairment of the $3.1 million carrying value of our MMIC gravity feed test
handlers. The impairment charge of the test handlers totaled $2.8 million, with
a $0.3 million residual value remaining. Assets to be disposed of are measured
at the lower of carrying amount or fair value less cost to sell. Disposal of the
impaired assets is expected to occur by the end of fiscal 2002.
INTEREST INCOME
For the quarter ended December 31, 2001, interest income was $2.6 million,
compared to $5.2 million in the same quarter during the prior year. Interest
income for the nine-month periods ended December 31, 2001 and 2000 was $10.0
million and $9.8 million, respectively. Interest income for the nine-month
period increased due to a higher average cash balance in fiscal 2002 as a result
of the August 2000 convertible debt offering. The decrease in interest income in
the quarter ended December 31, 2001 was due to lower prevailing interest rates,
driven by the Federal Reserve cuts to the federal funds rate. We expect interest
income to continue to decline over the remainder of fiscal year 2002 compared to
2001 due to the lower interest rate environment.
INTEREST EXPENSE
Interest expense for the quarter ended December 31, 2001 was $4.5 million
compared to $3.4 million in the same quarter during the prior year. For the
nine-month periods ended December 31, 2001 and 2000, interest expense was $12.7
million and $5.7 million, respectively. These increases in interest expense are
attributable to the August 2000 convertible subordinated notes and the interest
rate swap that modifies the interest characteristics of our synthetic lease from
a variable to a fixed rate basis.
INCOME TAX
The effective tax rate for the nine months ended December 31, 2001 was 15.5%,
compared to 36.8% for the nine months ended December 31, 2000. This rate differs
from the statutory rate of 35% primarily due to tax credits and the change in
the valuation allowance for deferred tax assets.
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 offerings and Rule 144A offerings, we have raised
approximately $462.0 million, net of offering expenses. As of December 31, 2001,
working capital was $413.8 million, including $117.9 million in cash and cash
equivalents, compared to working capital at March 31, 2001 of $463.3 million.
Operating activities for the first nine months of fiscal 2002 generated $63.2
million in cash compared to $67.8 million in the first nine months of fiscal
2001. This year-over-year decrease was primarily attributable to a decrease in
net income of $65.2 million partially offset by a year-over-year change in
inventory of $54.7 million, which includes an $8.8 million inventory reserve
adjustment for fiscal 2002. The $22.8 million cash provided from changes in
gross inventories was due to an increased focus on supply chain management
through implementation of new planning strategies and an inventory management
team which has decreased the need to build inventory to meet delivery schedules.
Adjustments to reconcile net (loss) income for non-cash operating items
increased cash provided from operating activities by $22.2 million
year-over-year due to increases in depreciation, amortization, impairment of
long-lived assets and tax benefits from exercise of employee stock options. This
was partially offset by cash used in accounts receivable of $6.5 million in
fiscal 2002 compared to cash provided of $9.3 million in fiscal 2001. This
variation was primarily due to sales fluctuations.
Cash used in investing activities for the nine months ended December 31, 2001
was $216.0 million, compared to $113.4 million in the prior year. Uses of cash
in fiscal 2002 included purchases of securities available for sale of $256.8
million, purchases of capital equipment and leasehold improvements of $43.3
million and purchase of businesses totaling $17.8 million. Proceeds from
maturities of securities provided cash of $102.0 million, partially offsetting
the cash used. The year-over-year increase is primarily attributable to the
purchase of securities and the acquisitions of RF Nitro and IBM's GPS
development operation. The RF Nitro acquisition is intended to provide access to
advanced compound semiconductor processes as well as additional resources to
conduct advanced research and the acquisition IBM's GPS development operation is
intended to provide advanced GPS technology and access to IBM's chipscale
packaging technology.
Cash provided by financing activities for the nine months ended December 31,
2001 was $4.6 million, compared to cash provided of $293.3 million for the nine
months ended December 31, 2000. The net proceeds from the convertible debt
offering in fiscal 2001 represent the increased amount in prior year.
At December 31, 2001, we had long-term capital commitments of approximately
$15.6 million, consisting of approximately $1.6 million for the deployment of
manufacturing equipment pursuant to a strategic alliance with Agere Systems Inc.
("Agere"), approximately $3.2 million for the expansion of our molecular beam
epitaxy (MBE) facility, approximately $5.7 million for equipment for the second
wafer fabrication facility, approximately $2.6 million for construction and
equipment for a facility in Beijing, China, approximately $0.7 million for
facility improvements in our first wafer fabrication facility, and the remainder
for general corporate requirements. We entered into a strategic alliance with
Agere in May 2001, pursuant to which we agreed to invest approximately $58.0
million over two years to upgrade manufacturing clean room space and purchase
semiconductor manufacturing equipment to be deployed within Agere's Orlando,
Florida manufacturing facility. This alliance was designed to provide us a
guaranteed source of supply and favorable pricing of silicon wafers. On January
23, 2002, Agere announced that it was seeking a buyer for its Orlando wafer
fabrication operation. We are engaged in discussions with Agere regarding the
terms of our alliance and the effect of this potential sale. Our management
currently cannot predict the outcome of these discussions or what form the
alliance will take in the future, but currently does not believe that these
developments will have a material adverse effect on our business, financial
condition or results of operations. We broke ground November 8, 2001 on a test
and tape and reel facility in Beijing, China, and expect to spend approximately
$20.0 million to have this facility operational by the fall of 2002. We expect
to fund our commitments through a combination of cash on hand, capital leases
and other forms of financing.
The funding for the first phase of our second wafer fabrication facility came
primarily from a synthetic lease arrangement that we entered into in August
1999, as modified effective December 1999 and August 2001. 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 modification in August 2001 resulted in expansion
of financial covenants, which require the maintenance of minimum levels of
tangible net worth, liquidity and debt service coverage and prohibit the payment
of dividends. 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" (described below) plus margins varying from 150 basis
points to 325 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" (described below)
plus margins varying from 25 basis points to 200 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%.
We also have provided for a contingent residual value guarantee in relation to
the synthetic lease. This guarantee provides that in the event the assets are
sold to a third party at the end of the lease term, we unconditionally promise
to pay to the lessor the lesser of (1) the deficiency balance, which is equal to
the excess, if any, of the cost of the assets over the aggregate sale price paid
by the third party, or (2) the maximum residual guarantee amount, which is equal
to 85% of the "Property Cost" (aggregate outstanding loans and holder advances)
for all of the assets subject to the synthetic lease. Amortization equal to
1.7111% per month of the equipment portion of the synthetic lease reduces the
asset cost and thus our contingent residual value guarantee.
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 to new and existing facilities, technological advances and our
relationships with suppliers and customers. We believe our cash requirements
will be adequately met from the combination of the debt offering and 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 financing will not be dilutive to holders of our
common stock. Also, we cannot be sure that additional equity or debt financing,
if required, will be available on favorable terms.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been named a defendant in a patent infringement lawsuit,
captioned Lemelson Medical, Education & Research Foundation, LP v. Broadcom
Corporation; RF Micro Devices, Inc.; SanDisk Corporation; TransSwitch
Corporation; WJ Communications, Inc., filed August 3, 2001 in the U.S. District
Court for the District of Arizona by Lemelson Medical, Education and Research
Foundation, LP. The suit alleges that the Company has infringed 12 "machine
vision" patents, seven "bar code" patents and three semiconductor patents owned
by the plaintiff and seeks injunctive relief, damages for the alleged
infringements and payment of the plaintiff's attorneys' fees. Management is
currently conducting an initial assessment of these claims.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities
On October 23, 2001, we issued an aggregate of 1,159,171 of our common
shares pursuant to our acquisition of RF Nitro Communications, Inc., a Delaware
corporation ("RF Nitro"). All of the common shares issued in this transaction
were issued in a non-public offering pursuant to an exemption from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), under Section 4(2) of the Securities Act. This sale was made
without general solicitation or advertising. We have filed a Registration
Statement on Form S-3 covering the resale of such securities. All net proceeds
from the sale of such securities will go to the selling shareholders who offer
and sell their shares. We have not received and will not receive any proceeds
from the sales of these common shares other than the assets and liabilities of
RF Nitro.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
During the quarter ended December 31, 2001, the Company filed no reports on Form
8-K.
SIGNATURES
Pursuant to the requirements 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.
RF Micro Devices, Inc.
Dated: February 12, 2002
/s/ William A. Priddy, Jr.
--------------------------
WILLIAM A. PRIDDY, JR.
Vice President, Finance and Administration
and Chief Financial Officer
Dated: February 12, 2002
/s/ Barry D. Church
--------------------------
BARRY D. CHURCH
Corporate Controller
(Principal Accounting Officer)