UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 28, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-22511
-----------------
RF MICRO DEVICES, INC.
(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
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(336) 664-1233
(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 5, 2003, there were 183,036,702 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, 2002 AND 2001.....................................
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS
ENDED DECEMBER 31, 2002 AND 2001.....................................
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002
AND MARCH 31, 2002...................................................
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS
ENDED DECEMBER 31, 2002 AND 2001.....................................
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.................
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..............................................
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............
ITEM 4. CONTROLS AND PROCEDURES................................................
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.........................
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................
PART I - FINANCIAL INFORMATION
ITEM 1.
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,
2002 2001
----------------------- ----------------------
Revenue:
Product sales $ 145,290 $ 100,061
Engineering revenue 523 490
----------------------- ----------------------
Total revenue 145,813 100,551
Operating costs and expenses:
Cost of goods sold 91,387 61,658
Research and development 24,408 19,055
Marketing and selling 9,076 7,458
General and administrative 4,658 3,888
Other operating expenses (NOTE 7) 10,500 2,550
----------------------- ----------------------
Total operating costs and expenses 140,029 94,609
----------------------- ----------------------
Income from operations 5,784 5,942
Other (expense) income:
Interest income 1,167 2,585
Interest expense (11,992) (4,458)
Other (expense) income, net (84) 2
----------------------- ----------------------
(Loss) income before income taxes (5,125) 4,071
----------------------- ----------------------
Income tax expense (NOTE 9) 58 570
----------------------- ----------------------
Net (loss) income ($ 5,183) $ 3,501
======================= ======================
Net (loss) income per share (NOTE 3):
Basic ($ 0.03) $ 0.02
Diluted ($ 0.03) $ 0.02
Weighted average shares outstanding used in per share calculation:
Basic 170,642 166,439
Diluted 170,642 175,759
See accompanying Notes to Condensed Consolidated Financial Statements.
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,
2002 2001
------------ --------------
Revenue:
Product sales $ 368,669 $ 267,611
Engineering revenue 821 1,263
------------ --------------
Total revenue 369,490 268,874
Operating costs and expenses:
Cost of goods sold 227,629 189,461
Research and development 70,029 52,047
Marketing and selling 26,222 20,828
General and administrative 13,635 10,631
Other operating expenses (NOTE 7) 11,853 13,568
Impairment of long-lived assets (NOTE 8) - 6,801
------------- --------------
Total operating costs and expenses 349,368 293,336
------------ --------------
Income (loss) from operations 20,122 (24,462)
Other income (expense):
Interest income 4,659 10,041
Interest expense (20,944) (12,670)
Other, net (57) (551)
------------- --------------
Income (loss) before income taxes 3,780 (27,642)
------------- --------------
Income tax expense (benefit) (NOTE 9) 129 (4,289)
------------- --------------
Net income (loss) $ 3,651 ($23,353)
============= ==============
Net income (loss) per share (NOTE 3):
Basic $ 0.02 ($ 0.14)
Diluted $ 0.02 ($ 0.14)
Weighted average shares outstanding used in per share calculation:
Basic 169,048 165,292
Diluted 174,752 165,292
See accompanying Notes to Condensed Consolidated Financial Statements.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
DECEMBER 31, MARCH 31,
2002 2002
---------------------- ----------------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 161,375 $ 157,648
Short-term investments 101,740 186,526
Accounts receivable, net 62,307 56,373
Inventories (NOTE 4) 63,012 38,734
Recoverable income tax 6,329 10,786
Other current assets 5,938 5,903
---------------------- ----------------------
Total current assets 400,701 455,970
Property and equipment, net of accumulated depreciation of $114,157 at
December 31, 2002 and $84,209 at March 31, 2002 313,513 221,679
Goodwill (NOTE 5) 109,504 34,525
Long-term investments (NOTE 10) 60,747 2,797
Intangible assets, net of amortization of $4,264 at
December 31, 2002 and $2,906 at March 31, 2002 (NOTE 5) 58,296 11,754
Other non-current assets 2,325 2,275
---------------------- ----------------------
Total assets $ 945,086 $ 729,000
====================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 29,131 $ 16,909
Accrued liabilities 22,900 14,690
Short-term payable, net 29,421 -
Current obligations under capital leases 1,426 3,319
---------------------- ----------------------
Total current liabilities 82,878 34,918
Long-term debt, net 295,454 294,248
Other long-term liability 1,785 9,980
Obligations under capital leases, less current maturities 792 169
---------------------- ----------------------
Total liabilities 380,909 339,315
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; 182,657 and
167,768 shares issued and outstanding at December 31, 2002 and
March 31, 2002, respectively 437,508 279,924
Additional paid-in capital 74,339 64,665
Deferred compensation (21,831) (19,652)
Accumulated other comprehensive loss, net of tax (NOTE 6) (299) (6,061)
Retained earnings 74,460 70,809
---------------------- ----------------------
Total shareholders' equity 564,177 389,685
---------------------- ----------------------
Total liabilities and shareholders' equity $ 945,086 $ 729,000
====================== ======================
See accompanying Notes to Condensed Consolidated Financial Statements.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2002 2001
-------------------- -----------------
Cash flows from operating activities:
Net income (loss) $ 3,651 ($ 23,353)
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Depreciation 30,673 25,902
Amortization 7,683 5,100
Loss on disposal of equipment and long-term investment 1,166 458
Acquired in-process research and development 10,500 -
Impairment on long-lived assets - 6,801
Tax benefit from exercise of employee stock options - 7,441
Currency Translation (81) -
Changes in operating assets and liabilities:
Accounts receivable, net (5,787) (6,458)
Inventories (24,047) 32,070
Recoverable income taxes and deferred tax assets 4,545 (1,148)
Other assets 297 (3,385)
Accounts payable and accrued liabilities 16,378 10,909
Other liabilities (2,192) 8,875
-------------------- -----------------
Net cash provided by operating activities 42,786 63,212
Cash flows from investing activities:
Purchase of capital equipment/leasehold improvements (121,129) (43,281)
Proceeds from maturities of securities held-to-maturity - 17,950
Proceeds from maturities of securities available for sale 277,059 84,086
Purchase of securities available for sale (192,723) (256,761)
Purchase of other investments, net (30,000) -
Purchase of businesses, net of cash (paid)received 27,737 (17,838)
Purchase of technology license - (130)
-------------------- -----------------
Net cash used in investing activities (39,056) (215,974)
Cash flows from financing activities:
Proceeds from exercise of options and employee stock purchases 2,938 8,344
Repayment of capital lease obligations (2,971) (3,714)
-------------------- -----------------
Net cash (used in) provided by financing activities (33) 4,630
-------------------- -----------------
Net increase (decrease) in cash and cash equivalents 3,697 (148,132)
Effect of exchange rate changes on cash 30 -
Cash and cash equivalents at the beginning of the period 157,648 266,076
-------------------- -----------------
Cash and cash equivalents at the end of the period $ 161,375 $ 117,944
==================== =================
Non-cash investing and financing activities:
Stock issued in connection with business combinations, net of cash received $ 133,019 $ 22,114
Jazz investment payable $ 30,000 $ -
Change in fair value of cash flow hedge, net of tax ($ 1,752) ($ 4,655)
Issuance of restricted stock as deferred compensation $ 5,604 $ 7,046
Available-for-sale investment equity change, net of tax ($ 316) $ 90
Currency translation change, net of tax $ 75 $ -
See accompanying Notes to Condensed Consolidated Financial Statements.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of RF Micro
Devices, Inc. and Subsidiaries (the Company) 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 2002
amounts have been reclassified to conform to fiscal 2003 presentation. These
reclassifications had no effect on net (loss) income 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 Annual Report on Form 10-K for the year ended March
31, 2002.
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 closest 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 (CONTINUED)
(Unaudited)
2. BUSINESS COMBINATION
ACQUISITION OF RESONEXT COMMUNICATIONS, INC.
On December 19, 2002, the Company completed the acquisition of Resonext
Communications, Inc., a privately held company providing, highly integrated
silicon complementary metal-oxide-semiconductor (CMOS) wireless local area
network (WLAN) solutions for 802.11a and multi-band (802.11a/b/g) platforms. The
acquisition of Resonext expands the Company's total addressable market and is
expected to complement the Company's growing presence in 802.11b products.
Resonext provides highly integrated two-chip CMOS solutions for 5GHz and dual
band WLAN platforms.
Pursuant to an Agreement and Plan of Merger and Reorganization, dated as of
October 15, 2002 and amended as of November 21, 2002, between the Company and
Resonext (the "Agreement"), the Company agreed to issue $133.0 million in common
stock, subject to a collar on RF Micro's stock prices between $6.00 and $9.50
per share, for all the outstanding shares of capital stock of Resonext,
including shares issuable upon exercise of outstanding warrants and employee
stock options. Based on the Agreement, the Company's stock was valued at $9.50
per share for the purpose of calculating the number of shares to be issued in
this transaction, as determined by a trailing 20-trading day average price and a
collar on the Company's stock price of between $6.00 and $9.50 per share. The
Company issued 13,339,885 shares of common stock for all of the outstanding
shares of capital stock of Resonext. The Company reserved an additional 660,115
shares for issuance upon exercise of outstanding Resonext warrants and employee
stock options. Of the 13.3 million shares issued at the closing, 1.4 million
shares were placed in escrow to secure certain indemnification obligations of
the former Resonext stockholders for a period of one year.
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 Resonext 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 Resonext.
The aggregate purchase price value of the Resonext acquisition determined in
accordance with SFAS 141 was $160.8 million, including a total of 14.0 million
shares of common stock and replacement stock options and warrants valued at
$158.8 million and $2.0 million of incurred transaction related fees. The value
of the 13.3 million common shares issued at closing was determined based on a
measurement date of November 29, 2002 in accordance with Emerging Issues Task
Force Issue No. 99-12 "Determination of the Measurement Date for the Market
Price of Acquirer Securities Issued in a Purchase Business Combination" (EITF
99-12). The value of the Company's common shares for the purpose of determining
its purchase price was $11.67 and was calculated based on the average of the
closing prices of the Company's common stock in the period from the three
trading days prior to, including and subsequent to the measurement date. The
remaining 0.7 million options and warrants were valued based on the fair value
estimated at the measurement date using a Black-Scholes option pricing model.
The values assigned to these common shares, options and warrants were adjusted
for the outstanding unvested options and shares related to future service, which
was recorded as deferred compensation in accordance with FASB Interpretation No.
44, "Accounting for Certain Transactions Involving Stock Compensation" (FIN 44).
The purchase price adjustment was based on the intrinsic value of the unvested
options and shares which was determined by the difference between the value of
the Company's common stock on the date of consummation and the exercise price of
such options and warrants.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
2. BUSINESS COMBINATIONS (CONTINUED)
The total purchase price components are as follows (in thousands):
Common stock issued $ 155,676
Value of options and warrants 6,697
Unvested equity compensation (3,657)
--------------
Total stock, options and warrants $ 158,716
Transaction costs projected 2,040
--------------
Total purchase price $ 160,756
==============
The total purchase price of $160.8 million was allocated to the assets acquired
and liabilities assumed based on their fair values as determined by a
preliminary independent appraisal as of December 19,2002, as follows (in
thousands):
Total purchase price $ 160,756
================
Current assets, including cash of $27.7 million $ 28,420
Property, plant and equipment 2,398
Other assets 157
Identifiable intangible assets:
Core technology 45,100
In-process research & development 10,500
Developed technology 2,500
Customer contracts 300
----------------
Total assets acquired $ 89,375
================
Current liabilities $ 1,897
Long-term debt 1,701
----------------
Total liabilities assumed $ 3,598
================
Resulting goodwill $ 74,979
================
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
2. BUSINESS COMBINATIONS (CONTINUED)
Of the $58.4 million of acquired identifiable intangible assets, $45.1 million
represents the value of acquired core technology; $2.5 million represents the
value of acquired developed technology; $10.5 million represents the value of
in-process research and development cost that has no alternative future use; and
$0.3 million represents the value of customer contracts. The core and developed
technology assets acquired are being amortized over their estimated useful lives
of four and ten years, respectively. The acquired in-process research and
development with no alternative future use was charged to expense at the
acquisition date (NOTE 7) in accordance with SFAS 142. The remaining customer
contract value will be amortized over the estimated useful life of one year.
The $75.0 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.
PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial information reflects
the results of operations for the periods ended December 31, 2002 and December
31, 2001 as if the acquisition of Resonext's operations had occurred on March
31, 2002 and 2001, respectively (in thousands).
Three Months Ended Nine Months Ended
------------------------------------ ------------------------------------
Dec. 31, 2002 Dec. 31, 2001 Dec. 31, 2002 Dec. 31, 2001
----------------- ----------------- ------------------ -----------------
Revenue $ 145,813 $ 100,551 $ 369,490 $ 268,874
Net loss ($ 11,786) ($ 2,140) ($ 16,324) ($ 40,911)
Net loss per share:
Basic ($ 0.06) ($ 0.01) ($ 0.09) ($ 0.23)
Diluted ($ 0.06) ($ 0.01) ($ 0.09) ($ 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
acquisition actually taken place on March 31, 2002 and 2001. 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.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. NET (LOSS) INCOME PER SHARE
The following table sets forth a reconciliation of the numerators and
denominators in the computation of basic and diluted net (loss) income per share
(in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------- -------------------------------------
2002 2001 2002 2001
----------------- ---------------- --------------- -----------------
Numerator for basic and diluted net
(loss) income per share:
Net (loss) income ($ 5,183) $ 3,501 $ 3,651 ($ 23,353)
================= ================ =============== =================
Denominator for basic net (loss) income
per share - weighted average shares 170,642 166,439 169,048 165,292
Effect of dilutive securities:
Stock options and warrants - 9,320 5,704 -
----------------- ---------------- --------------- -----------------
Denominator for diluted net (loss) income
per share - adjusted weighted average
shares and assumed conversions 170,642 175,759 174,752 165,292
Basic net (loss) income per share ($ 0.03) $ 0.02 $ 0.02 ($ 0.14)
================= ================ =============== =================
Diluted net (loss) income per
share ($ 0.03) $ 0.02 $ 0.02 ($ 0.14)
================= ================ =============== =================
In the computation of diluted net income per share for the three months ended
December 31, 2001 and the nine months ended December 31, 2002, outstanding stock
options to purchase approximately 3.0 million shares and 12.1 million shares,
respectively, were excluded because the exercise price of the options was
greater than the average market price of the underlying common stock and the
effect of their inclusion would have been anti-dilutive. In the computation of
diluted net loss per share for the three months ended December 31, 2002 and 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 net income (loss) per share for three
months and nine months ended December 31, 2002 and 2001 similarly did not assume
the conversion of the Company's 3.75% convertible subordinated notes due 2005
because the inclusion would have been anti-dilutive. The notes are convertible
at a price of $45.09 per share, and the closing price of the Company's common
stock on the date it committed to sell the notes was $35.50.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
4. 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,
2002 2002
---------------- ------------------
Raw materials $ 14,639 $ 16,263
Work in process 37,513 26,136
Finished goods 33,328 21,528
---------------- ------------------
85,480 63,927
Inventory reserve (22,468) (25,193)
---------------- ------------------
Total inventories $ 63,012 $ 38,734
================ ==================
5. INTANGIBLES AND GOODWILL
In July 2001, the Financial Accounting Standard Board (FASB) issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). SFAS 142 supersedes Accounting Principles Board (APB) Opinion No.
17, "Intangible Assets" and is intended to result in the provision of more
meaningful information about intangible assets. In addition, SFAS 142 eliminates
amortization of goodwill and instead requires that it be tested for impairment
at least annually and whenever events indicate that impairment may have
occurred. Beginning in fiscal 2003, the Company will perform an annual
impairment review during the fourth quarter of each year or more frequently if
the Company believes indicators of impairment exist.
The Company adopted SFAS 142 in fiscal 2002 for all goodwill and intangible
assets acquired during and after fiscal 2002. This includes the acquisitions of
RF Nitro Communications, Inc., the global positioning system (GPS) development
operation of International Business Machines Corp. (IBM), and the Company's
acquisition of Resonext. The Company adopted SFAS 142 for existing intangible
assets in the first quarter of fiscal 2003. The adoption of SFAS 142 did not
have a significant impact on the Company's consolidated financial position and
results of operations or cash flows.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
5. INTANGIBLES AND GOODWILL (CONTINUED)
Intangibles consist primarily of technology licenses and assets resulting from
business acquisitions. License costs are amortized on a straight-line basis over
the lesser of the estimated useful life of the technology or the term of the
license agreement, ranging from five to 20 years. Acquired product technology
and other intangible asset costs are also amortized on a straight-line basis
over the estimated useful life, ranging from one to 10 years (NOTE 2). The
following summarizes certain information regarding gross carrying amounts and
amortization of costs of intangibles (in thousands):
December 31, 2002 March 31, 2002
------------------------------------- -------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
---------------- ----------------- ----------------- ----------------
Intangible Assets:
Technology licenses $ 11,980 $ 3,074 $ 11,980 $ 2,503
Acquired product technology and
other 50,580 1,190 2,680 403
---------------- ----------------- ----------------- ----------------
Total $ 62,560 $ 4,264 $ 14,660 $ 2,906
================ ================= ================= ================
6. OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) for the Company consists of
accumulated unrealized gains on marketable securities, foreign currency
translation adjustments and the change in fair value of a cash flow hedge
related to the Company's synthetic lease. This amount is included as a separate
component of shareholders' equity. The components of comprehensive income
(loss), net of tax, are as follows for the periods presented (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------- -------------------------------------
2002 2001 2002 2001
------------- -------------- --------------- ------------------
Net (loss) income ($ 5,183) $ 3,501 $ 3,651 ($ 23,353)
Comprehensive income (loss):
Change in fair value of cash flow hedge 521 1,032 (1,752) (4,655)
Reclassification of realized loss on cash
flow hedge 7,755 -- 7,755 --
Unrealized gains on
marketable securities 10 (336) (316) 90
Realized gain adjustment (6) 212
Foreign currency 37 -- 75 --
------------- -------------- --------------- ------------------
Comprehensive income (loss) $ 3,140 $ 4,191 $ 9,413 ($ 27,706)
============= ============== =============== ==================
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
7. OTHER OPERATING EXPENSES
Other operating expenses for fiscal 2003 include approximately five months of
costs associated with our test, tape and reel facility in Beijing, China and an
acquired in-process research and development charge of $10.5 million related to
the Resonext acquisition in the third quarter of fiscal 2003.
The in-process research and development was charged to expense in accordance
with SFAS 141 which specifies that the amount assigned to acquired intangible
assets to be used in a particular research and development project that have no
alternative future use shall be charged to expense at the acquisition date.
The China facility's start-up 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 operating
costs of the Beijing facility transitioned to cost of goods sold in September
once the facility was qualified for production and economic value was obtained.
The prior year results included start-up costs associated with our second wafer
fabrication facility in Greensboro, North Carolina, which qualified for
production in the third quarter of fiscal 2002. Accordingly, associated expenses
transitioned from other operating expenses to cost of goods sold during that
quarter.
8. IMPAIRMENT OF LONG-LIVED ASSETS
On April 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS 144). SFAS 144 supersedes Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of" (SFAS 121), and establishes a single
accounting model for long-lived assets to be disposed of by sale, and resolves
implementation issues related to SFAS 121. Adoption of SFAS 144 did not have a
significant impact on the Company's consolidated financial position, results of
operations or cash flows. 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
consolidated statements of operations as "Impairment of long-lived assets."
During the quarter ended June 30, 2001, management identified a customer demand
shift from microwave monolithic integrated circuits (MMICs) to more complex,
highly integrated multi-chip module power amplifiers, which created an
impairment of the $3.1 million carrying value for certain of the Company's MMIC
gravity-fed test handling equipment. The impairment charge for the applicable
equipment totaled $2.8 million, with a $0.3 million residual value remaining.
During the first quarter of fiscal 2003, the Company determined that the plan of
sale criteria in SFAS 144 had not been met for these assets. As a result, the
assets were measured at the lower of the carrying amount (less accumulated
depreciation and impairment loss) or fair value of $0.1 million and the assets
were reclassified from "Assets to be Disposed of by Sale" to "Assets to be Held
and Used".
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
8. IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED)
The Company's management additionally made a decision during the quarter ended
June 30, 2001 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. The asset impairment charge for the transition
to an R&D facility was classified as "Assets to be Held and Used."
9. INCOME TAXES
Income tax expense for the third quarter of fiscal 2003 was $0.06 million and
$0.13 million for the nine months ended December 31, 2002, representing foreign
income taxes on international operations. The Company's effective tax benefit
for the third quarter of fiscal 2003 was 0.0%, compared to a 14.0% effective tax
rate for the third quarter of fiscal 2002. The Company's effective tax rate was
3.4% for the nine months ended December 31, 2002 compared to a 15.5% effective
tax benefit for the same period ended December 31, 2001. The Company's overall
tax rate for the fiscal years ending 2003 and 2002 differed from the statutory
rate due to adjustments to the valuation allowance primarily related to the
non-recognition of the US tax benefits on the domestic net operating losses and
tax credits, rate differences on foreign transactions, and other differences
between book and tax treatment of certain expenditures.
At December 31, 2002, the Company had outstanding net operating loss
carryforwards (NOLs) for domestic tax purposes of approximately $61.9 million.
The federal NOLs will expire in years 2022 and 2023, and state losses will
expire in years 2009-2022, if unused. Included in the amounts above are certain
NOL and other tax attribute assets acquired in conjunction with the close of the
Resonext acquisition. The utilization of acquired assets may be subject to
certain annual limitations as required under Internal Revenue Code Section 382.
In accordance with the Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," a valuation allowance of $29.6 million related to
domestic operating losses has been established since it is more likely than not
that some portion of the deferred tax assets will not be realized. This review,
along with the timing of the reversal of the Company's temporary differences and
the expiration dates of the NOLs, were considered in reaching this conclusion.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
10. COMMITMENTS
JAZZ SEMICONDUCTOR STRATEGIC RELATIONSHIP
On October 15, 2002, the Company entered into a strategic relationship with Jazz
Semiconductor, Inc. (Jazz), a privately-held, radio frequency (RF) and
mixed-signal silicon wafer foundry, for silicon manufacturing and development.
Under the arrangement, the Company obtained a committed, lower cost source of
supply for wafers fabricated utilizing Jazz's silicon manufacturing processes.
In addition, the Company will collaborate with Jazz on joint process development
and the optimization of these processes for fabrication of next-generation
silicon radio frequency integrated circuits (RFICs). As part of its strategic
relationship with Jazz, the Company agreed to invest approximately $60.0 million
in Jazz, $30.0 million of which was invested in October 2002 and $30.0 million
of which is payable in the third quarter of fiscal 2004. The investment
represents a minority interest in Jazz operations, and the Company has one seat
on the board of directors out of nine; however, the Company will not have the
ability to exercise significant influence in the management of Jazz operations.
This investment will be carried at its original cost and accounted for using the
cost method of accounting for investments in accordance with Accounting
Principles Board Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock."
STRATEGIC ALLIANCE WITH AGERE
The Company entered into a strategic alliance with Agere Systems Inc. (Agere) in
May 2001, pursuant to which the Company 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, of which $16.0 million had been invested as of
December 31, 2002. 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 is engaged in discussions with Agere regarding the terms
of its alliance with Agere and the effect of this potential sale. The Company
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.
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. On November 19, 2002, the Company retired the remaining amount of the
synthetic lease, and purchased the underlying assets for $84.5 million, with
available cash on hand. As a result, the Company's interest rate swap cash flow
hedge, which was recorded on the Company's balance sheet at its fair value of
$8.3 million at September 30, 2002, was no longer eligible for hedge accounting
and was removed from the Company's balance sheet as of December 31, 2002. The
amount retired for the interest rate swap was $7.8 million and was settled on
November 21, 2002. The retirement of the interest rate swap was recognized as a
loss for financial reporting purposes on the Company's consolidated statements
of operations for the third quarter ended December 31, 2002 and was included as
an expense in other income (expense).
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
11. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" (SFAS 145). The Company adopted
SFAS 145 for financial statements issued on or after May 15, 2002. Adoption of
SFAS 145 did not have a significant impact on the Company's consolidated
financial position, results of operations or cash flows.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS
146). SFAS 146 is effective for exit or disposal activities that are initiated
after December 31, 2002, and the Company will adopt SFAS 146 prospectively. The
Company does not anticipate that adoption of SFAS 146 will have a significant
impact on the Company's consolidated financial position, results of operations
or cash flows.
In October 2002, the FASB issued Statement of Financial Accounting Standards No.
147, " Acquisitions of Certain Financial Institutions- An Amendment of FASB
Statements No. 72 and 144 and FASB Interpretation No. 9" (SFAS 147). SFAS 147 is
an industry specific standard and is not applicable to the Company; therefore,
it will not have an impact on the Company's consolidated financial position,
results of operations or cash flows.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure"
(SFAS 148). SFAS 148 amends Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), to provide alternative
methods of transition to SFAS 123's fair value method of accounting for
stock-based employee compensation. SFAS 148 also amends the disclosure
provisions in SFAS 123 and APB Opinion No. 28, "Interim Financial Reporting", to
require disclosure in the summary of significant accounting policies of the
effects of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and interim
financial statements. The Company will adopt the interim financial reporting for
interim periods beginning after December 15, 2002. The Company does not believe
that adoption of SFAS 148 will have a significant impact on the Company's
consolidated financial position, results of operations or cash flows.
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 "expect,"
"anticipate," "intend," "plan," "believe," and "estimate," 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
the following:
o Variability in quarterly operating results;
o The rate of growth and development of wireless markets;
o The risks associated with the operation of our molecular beam epitaxy,
the operation of our test, tape and reel facilities, both foreign and
domestic, and the operation of our wafer fabrication facilities;
o Our ability to manage rapid growth and to attract and retain skilled
personnel;
o Variability in production yields, raw material availability, and
manufacturing capacity constraints;
o Dependence on a limited number of customers;
o Dependence on our gallium arsenide (GaAs) heterojunction bipolar
transistor (HBT) products;
o Ability to reduce costs by converting our second four-inch GaAs HBT
wafer fabrication facility into a six-inch facility, improving yields
and increasing capacity utilization;
o Dependence on third parties;
o The risks arising from currency fluctuations, tariffs, trade barriers,
taxes and export license requirements associated with our foreign
operations; and
o The risks associated with integration of acquired companies, including
the risk that we may not realize expected synergies from our business
combinations.
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 unaudited consolidated statement of
operations data expressed as a percentage of total revenue for the periods
indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------------- -----------------------------------
2002 2001 2002 2001
-------------- --------------- -------------- ----------------
Revenue 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses
Cost of goods sold 62.7 61.3 61.6 70.5
Research and development 16.8 19.0 19.0 19.4
Marketing and selling 6.2 7.4 7.1 7.7
General and administrative 3.2 3.9 3.7 4.0
Other operating expenses 7.2 2.5 3.2 5.0
Impairment of long-lived assets - - - 2.5
-------------- --------------- -------------- ----------------
Total operating costs and expenses 96.1 94.1 94.6 109.1
Income (loss) from operations 3.9 5.9 5.4 (9.1)
Interest income 0.8 2.6 1.3 3.7
Interest expense (8.2) (4.4) (5.7) (4.7)
Other, net (0.1) - - (0.2)
-------------- --------------- -------------- ----------------
Income (loss) before income taxes (3.6) 4.1 1.0 (10.3)
Income tax (benefit) expense - (0.6) - 1.6
-------------- --------------- -------------- ----------------
Net income (loss) (3.6)% 3.5% 1.0% (8.7)%
============== =============== ============== ================
REVENUE
Revenue for the third quarter of fiscal 2003 increased 45.0% to $145.8 million,
compared to $100.6 million for the same quarter in fiscal 2002. For the nine
months ended December 31, 2002, revenue increased 37.4% to $369.5 million,
compared to $268.9 million for the same period in fiscal 2002. The increases in
year over year were due primarily to strong growth in power amplifier and small
signal sales in response to demand from the handset manufacturers and product
revenue diversification in wireless local area network (WLAN). WLAN revenue in
the third quarter of fiscal 2003 increased to $9.7 million compared to $0.3
million in the same quarter of fiscal 2002. WLAN revenue increased to $23.6
million in the nine months ended December 31, 2002 compared to $1.0 million for
the nine months ended December 31, 2001. We continue to pursue and diversfy
revenue gains in high growth non-handset businesses such as WLAN. On December
19, 2002, we completed the acquisition of Resonext Communications, Inc.
(Resonext), a privately held company providing highly integrated silicon
complementary metal-oxide-semiconductor (CMOS) wireless local area network
(WLAN) solutions for 802.11a and multi-band (802.11a/b/g) platforms. The
acquisition of Resonext expands our total addressable market and is expected to
complement our growing presence in 802.11b products.
Revenues increased year over year despite continued pressure on average selling
prices for modules and microwave monolithic integrated circuits (MMICs).
International shipments were $121.7 million and accounted for 83.5% of revenue
in the third quarter of fiscal 2003, compared to $72.8 million, or 72.4% of
revenue, in the third quarter of fiscal 2002. For the nine months ended December
31, 2002 international shipments were $290.6 million, or 78.6% of revenue, up
from $183.7 million, or 68.3% of revenue, for the nine months ended December 31,
2001. Sales to customers located in Asia totaled $87.4 million, or 59.9% of
revenue, for the third quarter of fiscal 2003, compared to $52.2 million, or
51.9% of revenue, for the third quarter of fiscal 2002. Year-to-date shipments
to Asia totaled $195.4 million, or 52.9% of revenue, in fiscal 2003 and $139.1
million, or 51.7% of revenue, in fiscal 2002. The establishment of our sales and
customer support centers in Taipei, Taiwan and Seoul, South Korea has
contributed to our absolute sales dollar increase in the Asian markets.
GROSS PROFIT
Gross profit for the three months ended December 31, 2002 increased to $54.4
million, or 37.3% of revenue, compared to $38.9 million, or 38.7% of revenue, in
the third quarter of the prior year. For the nine months ended December 31,
2002, gross profit increased to $141.9 million, or 38.4% of revenue, compared to
$79.4 million, or 29.5% of revenue, for the same period ended December 31, 2001.
For the three months ended December 31, 2001, gross profit absolute dollar
increases was primarily attributable to sales growth. The nine months ended
December 31, 2002 increases in gross profit were primarily attributable to
increased unit volume and capacity utilization, favorable production yields and
the absence of an adjustment to inventory reserves of $15.3 million recorded in
the first quarter of fiscal 2002 due to an anticipated reduction in sales of
MMICs, which declined in fiscal 2003. Fiscal 2003 gross profit percentages were
adversely impacted by the shift in product mix to modules, which have a lower
overall average gross profit, than MMICs. Module sales for the three months
ended December 31, 2002 represented 62% of our revenue compared to 43% for the
three month ended December 31, 2001. For the nine months ended December 31,
2002, module revenue represented 55% of revenue compared to 40% for the same
period ended December 31, 2001.
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. Our test, tape and reel facility in Beijing, China transitioned from
other operating expenses to cost of goods sold during September 2002 once the
facility was qualified for production and economic value was obtained. We expect
continued downward pressure on margins due to a decline in average selling
prices and the shift in product mix to modules from MMICs. Management believes
this decline can be mitigated by continued cost reduction efforts including
converting our second four-inch GaAs HBT wafer fabrication facility into a
six-inch facility, higher levels of product integration, yield improvement plans
and increased capacity utilization.
RESEARCH AND DEVELOPMENT
Research and development expenses in the third quarter of fiscal 2003 were $24.4
million, or 16.8% of revenue, compared to $19.1 million, or 19.0% of revenue,
for the three months ended December 31, 2001. For the nine months ended December
31, 2002, research and development expenses were $70.0 million, or 19.0% of
revenue, compared to $52.0 million, or 19.4% of revenue, for the same period in
fiscal 2002. The increases year over year were primarily attributable to
increased headcount and related personnel expenses including salaries, benefits,
and equipment. Spending on development wafers, mask sets and prototyping also
increased as a result of continued module development and associated work on
cost reductions and yield improvement techniques. During the end of the third
quarter of fiscal 2002, we acquired RF Nitro Communications, Inc. (RF Nitro), a
privately-held company focused on the commercialization of gallium nitride
(GaN). We also acquired the global positioning system (GPS) development
operation of International Business Machines Corp. (IBM), which provided us with
advanced GPS technology and access to IBM's chipscale packaging technology. The
RF Nitro and GPS acquisitions contributed to the increased headcount and related
personnel expense year over year and resulted in additional amortization expense
from the acquired intangible assets. On December 19, 2002, we acquired Resonext,
which is expected to increase expenses in future periods. The acquisition of
Resonext expands our total addressable market and is expected to complement our
growing presence in 802.11b products. We plan to continue to make investments in
research and development and expect that such expenses will continue to increase
in absolute dollars in future periods.
MARKETING AND SELLING
Marketing and selling expenses for the third quarter of fiscal 2003 were $9.1
million, compared to $7.5 million for the third quarter of fiscal 2002. For the
nine months ended December 31, 2002, marketing and selling expenses increased to
$26.2 million, compared to $20.8 million for the nine months ended December 31,
2001. The absolute dollar increases year over year in fiscal 2003 compared to
fiscal 2002 were primarily attributable to increased headcount, related
personnel expenses including salaries, benefits, and equipment, and increased
sales commissions associated with the increase in revenue. The RF Nitro and GPS
acquisitions contributed slightly to the increased headcount, related personnel
expenses and additional amortization expense from the acquired intangible
assets. Marketing and selling expenses as a percentage of revenue were 6.2% and
7.4% for the three months ended December 31, 2002 and 2001, respectively, and
7.1% and 7.7% for the nine months ended December 31, 2002 and 2001,
respectively. The decrease as a percentage of revenues year over year in fiscal
2003 compared to fiscal 2002 is attributable to shifts in revenue from third
party commission-based accounts to in-house accounts. The Resonext acquisition
is expected to increase expenses in future periods. We plan to continue to make
investments in marketing and selling and expect that such expenses will continue
to increase in absolute dollars in future periods.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the quarter ended December 31, 2002 were
$4.7 million, or 3.2% of revenue, compared to $3.9 million, or 3.9% of revenue,
for the quarter ended December 31, 2001. For the nine months ended December 31,
2002, general and administrative expenses were $13.6 million, or 3.7% of
revenue, compared to $10.6 million, or 4.0% of revenue, in the same period of
fiscal 2002. The year over year increases in absolute dollars were primarily due
to increased headcount and related personnel expenses including salaries,
benefits, and equipment. Other increases in fiscal 2003 included recruiting
expenses related to the appointment of two new board members, bank charges for
letters of credit expenses related to the expansion in Asian markets, and
insurance premiums. We expect increases in absolute dollars in future periods.
OTHER OPERATING EXPENSE
Other operating expenses for the third quarter of fiscal 2003 were $10.5
million, compared to $2.6 million in the prior year. For the nine months ended
December 31, 2002, other operating expenses were $11.9 million, compared to
$13.6 million for the same period in fiscal 2002. The third quarter increase in
absolute dollar and as a percentage of revenue resulted from a charge for
acquired in-process research and development which the valuation firm evaluated
no alternative future use for. The year over year decreases in fiscal 2003 from
fiscal 2002 were primarily attributable to start-up costs associated with our
second wafer fabrication facility in Greensboro, North Carolina, which were
incurred in the first and second quarters of fiscal 2002. The second wafer
fabrication facility qualified for production in the third quarter of fiscal
2002. Accordingly, associated expenses transitioned from other operating
expenses to cost of goods sold during that quarter. Fiscal 2003 included
start-up costs associated with our test, tape and reel facility in Beijing,
China through August 2002. The operating costs of the Beijing facility
transitioned to cost of goods sold during the last month of the second quarter
once the facility was qualified for production and economic value was obtained.
These initial other operating 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."
INTEREST INCOME
For the quarter ended December 31, 2002, interest income was $1.2 million,
compared to $2.6 million for the same quarter for the prior year. Interest
income for the nine months ended December 31, 2002 and 2001 was $4.7 million and
$10.0 million, respectively. Interest income decreased due to lower prevailing
interest rates driven by the Federal Reserve cuts to the federal funds rate and
lower cash and investment balances.
INTEREST EXPENSE
Interest expense was $12.0 million for the three months ended December 31, 2002,
compared to $4.5 million for the third quarter of the prior year. Interest
expense for the nine months ended December 31, 2002 and 2001 was $20.9 million
and $12.7 million, respectively. The third quarter increase in fiscal 2003
resulted from the retirement of an interest rate swap for $7.8 million. In
fiscal 2001, we entered into an interest rate swap cash flow hedge to reduce the
impact of interest rate changes under our synthetic lease on our results of
operations. We paid off the synthetic lease and acquired the assets in the third
quarter of fiscal 2003 and as a result, our interest rate swap cash flow hedge
was no longer eligible for hedge accounting and we elected to pay the swap off.
The year over year increase in interest expense was primarily due to the
interest rate swap that modified the interest characteristics of our synthetic
lease from a variable to a fixed rate. Interest expense is expected to decrease
in future periods as a result of the retirement of the interest rate swap
agreement.
INCOME TAX
Income tax expense for the third quarter of fiscal 2003 was $0.06 million and
$0.13 million for the nine months ended December 31, 2002, representing foreign
income taxes on international operations. Our effective tax benefit for the
third quarter of fiscal 2003 was 0%, compared to a 14.0% effective tax rate for
the third quarter of fiscal 2002. Our effective tax rate was 3.4% for the nine
months ended December 31, 2002 compared to a 15.5% effective tax benefit for the
same period in fiscal 2002. The overall tax rate for the three months and nine
months ended December 31, 2002 differed from the statutory rate due to
adjustments to the valuation allowance primarily related to the non-recognition
of the US tax benefits on the domestic net operating losses and tax credits,
rate differences on foreign transactions, and other differences between book and
tax treatment of certain expenditures. Our fiscal 2002 overall tax rate differed
from the statutory rate due to the non-recognition of the US tax benefits on the
domestic net operating losses, differences between book and tax treatment of
certain expenditures, and rate differences on foreign transactions.
At December 31, 2002, we had outstanding net operating loss carryforwards (NOLs)
for domestic tax purposes of approximately $61.9 million. The federal NOLs will
expire in years 2022 and 2023, and state losses will expire in years 2009-2022,
if unused. Included in the amounts above are certain NOL and other tax attribute
assets acquired in conjunction with the close of the Resonext acquisition. The
utilization of acquired assets may be subject to certain annual limitations as
required under Internal Revenue Code Section 382. In accordance with the
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," a valuation allowance of $29.6 million related to domestic operating
losses has been established since it is more likely than not that some portion
of the deferred tax assets will not be realized. This review, along with the
timing of the reversal of our temporary differences and the expiration dates of
the NOLs, were considered in reaching this conclusion.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date through sales of equity and debt
securities, bank borrowings, capital equipment leases and cash from operations.
Through public and Rule 144A securities offerings, we have raised approximately
$462.0 million, net of offering expenses. As of December 31, 2002, our working
capital was $317.0 million, including $161.4 million in cash and cash
equivalents, compared to working capital at March 31, 2002 of $421.1 million.
Operating activities for the first nine months of fiscal 2003 generated $42.8
million in cash, compared to $63.2 million in the first nine months of fiscal
2002. This year over year decrease was primarily attributable to cash used of
$24.0 million due to a planned inventory build-up of certain products to
facilitate meeting forecasted demand and delivery schedules, and in-transit
inventory required to stock the production line at our test, tape and reel
facility in Beijing, China. In comparison, cash provided by changes in
inventories in the first nine months of fiscal 2002 was $32.0 million, which
included a $15.3 million inventory reserve adjustment. The year over year
decrease in cash provided by changes in inventories was partially offset by an
increase in net income of $27.0 million. Adjustments to reconcile net income
(loss) for non-cash operating items increased cash provided from operating
activities by $4.2 million year over year due primarily to the acquired
in-process research and development cost with no alternative future benefit
related to the Resonext acquisition.
Net cash used in investing activities for the nine months ended December 31,
2002 was $39.0 million, compared to $216.0 million in the prior year. The year
over year decrease in cash used was primarily attributable to higher proceeds
from maturities of securities available-for-sale of $277.1 million compared to
$84.0 million in fiscal 2002. The decrease in cash used was positively impacted
by cash of $27.7 million provided by the purchase of Resonext in fiscal 2003,
which offset cash used of $17.8 million in fiscal 2002 for the RF Nitro and GPS
acquisitions. We purchased capital equipment in fiscal 2003 of $121.1 million,
which included the buyout of the synthetic lease assets for $84.5 million. This
is compared to $43.3 million in capital equipment and leasehold improvement
expenditures in fiscal 2002.
Net cash used by financing activities for the nine months ended December 31,
2002 was $0.03 million, compared to cash provided of $4.6 million for the nine
months ended December 31, 2001. This decrease is attributable to a reduction in
net proceeds from the exercise of options and employee stock purchases from $8.3
million in fiscal 2002 to $2.9 million in fiscal 2003.
COMMITMENTS
STRATEGIC RELATIONSHIP WITH JAZZ SEMICONDUCTOR. We entered into a strategic
relationship with Jazz Semiconductor (Jazz) in October 2002, pursuant to which
we agreed to invest approximately $60.0 million in Jazz. We transferred $30.0
million in cash in the third quarter of fiscal 2003 and expect to pay the
remaining $30.0 million in the third quarter of fiscal 2004. We currently have
sufficient liquidity to pay the remaining $30.0 million.
STRATEGIC ALLIANCE WITH AGERE SYSTEMS, INC. We entered into a strategic alliance
with Agere Systems Inc. (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, of which $16.0 million
had been invested as of December 31, 2002. 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. We cannot
predict the outcome of these discussions or what form the alliance will take in
the future, but our management currently does not believe that these
developments will have a material adverse effect on our business, financial
condition or results of operations.
SYNTHETIC LEASE In August 1999, as modified effective December 1999 and August
2001, we 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. On November 19, 2002, the Company retired the remaining amount
of the synthetic lease, and purchased the underlying assets for $84.5 million,
with available cash on hand.
In fiscal 2001, we entered into an interest rate swap cash flow hedge to reduce
the impact of interest rate changes under the lease on our results of
operations. The derivative financial instrument was recorded on our balance
sheet at its fair value of $8.3 million based on the valuation of an outside
firm as of September 30, 2002, and was included in other long-term liabilities
and accumulated other comprehensive loss. After the retirement of the synthetic
lease, the swap was no longer eligible for hedge accounting and was removed from
our balance sheet as of December 31, 2002. The retired amount of the interest
rate swap was $7.8 million and was settled on November 21, 2002.
CONVERTIBLE DEBT During fiscal 2001, we completed the private placement of
$300.0 million aggregate principal amount of 3.75% convertible subordinated
notes due 2005. 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. In fiscal 2003, we expect to pay interest of $11.3 million,
of which we have already paid $5.6 million.
CAPITAL COMMITMENTS At December 31, 2002, we had long-term capital commitments
of approximately $6.4 million, consisting of approximately $2.2 million for
equipment in our second wafer fabrication facility, $1.7 million for our
molecular beam epitaxy (MBE) facility, $1.2 million for equipment in our test,
tape and reel facility in Greensboro, North Carolina, and the remainder for
general corporate requirements.
FUTURE SOURCES OF FUNDING
We expect to fund our commitments through a combination of cash on hand, capital
leases and other forms of financing. 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 and demand for 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 in the second quarter of fiscal 2001 and cash from operations
during fiscal 2003. However, if existing resources and cash from operations are
not sufficient to meet our future requirements, or if we perceive favorable
opportunities, we may seek additional debt or equity financing or additional
credit facilities. We filed a $500.0 million shelf registration statement with
the Securities and Exchange Commission providing for the offering from time to
time of debt securities, common stock, preferred stock, depositary shares,
warrants and subscription rights. We do not have any current plans to issue any
securities under this registration statement. We cannot be sure that any
additional 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.
RELATED PARTY TRANSACTIONS
During the nine months ended December 31, 2002, we used an airplane owned by
Adelaide Limited, LLC (Adelaide). William J. Pratt, a member of the Board of
Directors and Chief Technical Officer, is the manager and sole member of
Adelaide. We paid $0.1 million in connection with our use of the airplane.
Management believes that the terms of these transactions were as favorable as
could have been obtained from a non-affiliated entity. Management intends to
continue to utilize this airplane.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk has not changed significantly for the risks disclosed
in Item 7A of the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 2002.
ITEM 4. CONTROL AND PROCEDURES
Within 90 days prior to the date of this report, the Company's Chief Executive
Officer and the Chief Financial Officer evaluated the effectiveness of the
Company's disclosure controls and procedures in accordance with Rule 13a-14
under the Exchange Act. Based on their evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that the Company's disclosure controls
and procedures enable the Company to record, process, summarize and report in a
timely manner the information that the Company is required to disclose in its
Exchange Act reports.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation referred to above.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities
On December 19, 2002, we issued an aggregate of 13,339,885 shares of common
shares in exchange for all of the outstanding shares of capital stock of
Resonext Communications Inc.. In addition, we reserved 600,115 shares for
issuance upon exercise of outstanding warrants and options of Resonext. All of
the common shares issued in this transaction were exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to Section 3(a)(10) of the Securities Act and based on a fairness
hearing conducted in accordance with the California General Corporation Law and
the issuance of a permit by the State of California on December 17, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
2.1 Agreement and Plan of Merger and Reorganization
between RF Micro Devices, Inc. and Resonext
Communications, Inc., dated as of October 15, 2002
(the "Agreement"), and Amendment No. 1 to the
Agreement dated as of November 21, 2002. (1)
10.1 Amended and Restated Change in Control Agreement
dated January 10, 2003, between RF Micro Devices,
Inc., and Robert A. Bruggeworth. *
99.1 Certification of Periodic Report by Robert A.
Bruggeworth, as Chief Executive Officer, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Periodic Report by William A.
Priddy, Jr., as Chief Financial Officer, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(1) Incorporated by reference to Exhibit 2.1 to our Current Report on
Form 8-K filed January 3, 2003.
* Executive compensation plan or agreement.
(b) Reports on Form 8-K
During the quarter ended December 31, 2002, the Company filed the following
reports on Form 8-K:
On November 26, 2002, a Form 8-K was filed to disclose pursuant to Item 5 that
Robert A. Bruggeworth will succeed David A. Norbury as Chief Executive Officer
in January 2003 and that we paid off the remaining amount of the synthetic
lease, $84.5 million, with available cash on hand.
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 11, 2003
/S/ WILLIAM A. PRIDDY, JR.
--------------------------
WILLIAM A. PRIDDY, JR.
Vice President, Finance and Administration
and Chief Financial Officer
Dated: February 11, 2003
/S/ BARRY D. CHURCH
--------------------------
BARRY D. CHURCH
Vice President and Corporate Controller
(Principal Accounting Officer)
CERTIFICATIONS
I, Robert A. Bruggeworth, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RF Micro Devices, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: February 11, 2003
/S/ ROBERT A. BRUGGEWORTH
------------------------------
ROBERT A. BRUGGEWORTH
President and Chief Executive Officer
CERTIFICATIONS
I, William A. Priddy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RF Micro Devices, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: February 11, 2003
/S/ WILLIAM A. PRIDDY, JR.
------------------------------
WILLIAM A. PRIDDY, JR.
Vice President, Finance and Administration
and Chief Financial Officer