Selected Financial Data
The following selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Consolidated Financial Statements and Notes thereto included
in this Annual Report. The consolidated statement of operations data for the
years ended March 31, 2003, 2002 and 2001, and the consolidated balance sheet
data as of March 31, 2003 and March 31, 2002, are derived from, and are
qualified by reference to, the Consolidated Financial Statements and Notes
thereto included in this Annual Report. The statement of operations data for the
years ended March 31, 2000 and 1999, and the balance sheet data as of March 31,
2001, March 31, 2000 and March 31, 1999, are derived from our historical
financial statements, which are not included in this Annual Report.
YEAR ENDED MARCH 31,
2003 2002 2001 2000 1999
-----------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue:
Product sales $ 506,805 $ 367,387 $ 333,203 $ 288,085 $ 152,114
Engineering revenue 1,014 1,921 2,161 875 738
-----------------------------------------------------------------------------
Total revenue 507,819 369,308 335,364 288,960 152,852
Costs and expenses:
Cost of goods sold 325,168 248,965 181,801 152,746 99,325
Research and development 101,736 74,445 60,340 33,338 14,239
Marketing and selling 36,833 28,993 28,450 20,109 10,716
General and administrative 18,364 14,224 13,495 9,573 4,787
Other operating expenses 13,961 14,085 4,607 -- --
Impairment of long-lived assets -- 6,801 -- -- --
-----------------------------------------------------------------------------
Total costs and expenses 496,062 (1) 387,513 288,693 215,766 129,067
-----------------------------------------------------------------------------
Income (loss) from operations 11,757 (18,205) 46,671 73,194 23,785
Interest expense (24,433) (17,195) (9,346) (1,400) (1,244)
Other income, net 3,591 7,987 15,084 5,274 1,911
-----------------------------------------------------------------------------
(Loss) income before income taxes (9,085) (27,413) 52,409 77,068 24,452
Income tax (expense) benefit (250) 6,829 (17,435) (26,974) (4,891)
-----------------------------------------------------------------------------
Net (loss) income $ (9,335) $ (20,584) $ 34,974 $ 50,094 $ 19,561
=============================================================================
Net (loss) income per share:
Basic $ (0.05) $ (0.12) $ 0.22 $ 0.32 $ 0.14
=============================================================================
Diluted $ (0.05) $ (0.12) $ 0.20 $ 0.29 $ 0.13
=============================================================================
Shares used in per share calculation:
Basic 172,706 165,827 161,820 158,728 136,944
=============================================================================
Diluted 172,706 165,827 173,213 171,668 147,472
=============================================================================
CONSOLIDATED BALANCE SHEET DATA: AS OF MARCH 31,
2003 2002 2001 2000 1999
-----------------------------------------------------------------------------
Cash and cash equivalents $ 164,422 $ 157,648 $ 266,076 $ 28,956 $ 147,545
Short-term investments 92,187 186,526 75,162 33,755 --
Working capital 315,081 421,052 463,315 142,309 167,918
Total assets 932,825 (1) 729,000 720,931 344,612 275,758
Long-term debt and capital lease
obligations, less current portion 296,476 294,417 295,963 8,203 12,587
Shareholders' equity 557,400 (1) 389,685 376,498 303,153 230,906
(1) Fiscal 2003 includes the effects of the merger with Resonext Communication, Inc. See Note 7 of Consolidated
Financial Statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ALL STATEMENTS, TREND ANALYSIS AND OTHER INFORMATION CONTAINED IN THE FOLLOWING
DISCUSSION RELATIVE TO MARKETS FOR OUR PRODUCTS AND TRENDS IN REVENUE, GROSS
MARGINS AND ANTICIPATED EXPENSE LEVELS, AS WELL AS OTHER STATEMENTS INCLUDING
WORDS SUCH AS "EXPECT," "ANTICIPATE," "INTEND," "PLAN," "BELIEVE" AND
"ESTIMATE," AND VARIANTS OF SUCH WORDS AND SIMILAR EXPRESSIONS, IDENTIFY
FORWARD-LOOKING STATEMENTS.
OUR BUSINESS IS SUBJECT TO NUMEROUS RISKS AND UNCERTAINTIES, INCLUDING THE
FOLLOWING:
o VARIABILITY IN OPERATING RESULTS;
o THE RATE OF GROWTH AND DEVELOPMENT OF WIRELESS MARKETS;
o THE RISKS ASSOCIATED WITH THE OPERATION OF OUR MOLECULAR BEAM EPITAXY
FACILITY, THE OPERATION OF OUR TEST AND 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 COSTS AND AVAILABILITY;
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 AND IMPROVE MARGINS BY CONVERTING OUR SECOND
FOUR-INCH GAAS HBT WAFER FABRICATION FACILITY INTO A SIX-INCH
FACILITY, IMPROVING YIELDS, IMPLEMENTING INNOVATIVE TECHNOLOGIES AND
INCREASING CAPACITY UTILIZATION;
o DEPENDENCE ON THIRD PARTIES;
o OUR ABILITY TO BRING NEW PRODUCTS TO MARKET IN RESPONSE TO MARKET
SHIFTS AND USE TECHNOLOGICAL INNOVATION TO LEAD THE INDUSTRY IN
TIME-TO-MARKET FOR OUR PRODUCTS;
o CURRENCY FLUCTUATIONS, TARIFFS, TRADE BARRIERS, TAXES AND EXPORT
LICENSE REQUIREMENTS ASSOCIATED WITH OUR FOREIGN OPERATIONS; AND
o OUR ABILITY TO INTEGRATE ACQUIRED COMPANIES, INCLUDING THE RISK THAT
WE MAY NOT REALIZE EXPECTED SYNERGIES FROM OUR BUSINESS COMBINATIONS.
THESE RISKS AND OTHER UNCERTAINTIES, WHICH ARE DESCRIBED IN MORE DETAIL IN THE
SECTION ENTITLED "BUSINESS--ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS"
IN OUR MOST RECENT ANNUAL REPORT ON FORM 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 IN THE FORWARD-LOOKING
STATEMENTS.
OVERVIEW
We design, develop, manufacture and market proprietary radio frequency
integrated circuits (RFICs) for wireless communications products and
applications. As such, we operate as a single business segment. We are a leading
supplier of power amplifiers, one of the most critical radio frequency (RF)
components in cellular phones. We are also the leading GaAs HBT manufacturer,
which offers distinct advantages over other technologies for the manufacture of
current and next generation power amplifiers. Our products are included
primarily in cellular phones, base stations, wireless local area networks, cable
television modems, and global positioning systems (GPS). We derive revenue from
the sale of standard and custom-designed products. We offer a broad array of
products including amplifiers, mixers, modulators/demodulators and single chip
transmitters, receivers and transceivers that represent a substantial majority
of the RFICs required in wireless subscriber equipment. We design products for
manufacture using multiple semiconductor process technologies: aluminum gallium
arsenide (AlGaAs) (also referred to as gallium arsenide (GaAs)) heterojunction
bipolar transistor (HBT), silicon bipolar transistor, silicon complementary
metal-oxide-semiconductor (CMOS), silicon BiCMOS (integration of bi-polar
transistors and CMOS), silicon germanium (SiGe) BiCMOS, GaAs metal-semiconductor
field-effect transistor (MESFET), and indium gallium phosphide (InGaP) HBT. We
are also actively developing and evaluating gallium nitride (GaN) and GaAs
pseudomorphic high electron mobility transistor (pHEMT) processes. Handset
manufacturers try to maximize tradeoffs between performance and cost. Our
approach to using multiple semiconductor process technologies allows us to offer
customers products that fulfill their performance, cost and time-to-market
requirements. We call this approach to business Optimum Technology Matching(R).
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management believes the following critical accounting polices, among others,
affect its more significant judgments and estimates used in the preparation of
our consolidated financial statements.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. We make estimates
for the allowance for doubtful accounts, inventory reserves, warranty reserves,
income tax valuation, investment impairments, impairments of goodwill,
long-lived assets and other financial statement amounts on a regular basis and
make adjustments based on historical experiences and existing and expected
future conditions. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from product sales is recognized when the title, and risk and rewards of
product ownership, is transferred. We also enter into engineering agreements
with certain customers relating to the development of customer-specific
applications. Revenue is recognized for engineering contracts as it is earned.
Our products generally carry 12 to 27 month warranties against defects depending
on the specific type of product. We provide for estimated warranty costs in the
period the related sales are made based on historical experience as well as
assessment of overall risk.
IMPAIRMENT OF LONG-LIVED ASSETS, INVESTMENTS, INTANGIBLE ASSETS AND GOODWILL
We review the carrying values of all long-lived assets, including goodwill and
identifiable intangibles, whenever events or changes in circumstances indicate
that such carrying values may not be recoverable, as required by Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142) and Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). As required by
SFAS 142, we review goodwill and intangible assets with indefinite lives for
impairment at least annually. Unforeseen events and changes in circumstances and
market conditions and material differences in the value of intangible assets due
to changes in estimates of future cash flows could negatively affect the fair
value of our assets and result in an impairment charge. In connection with the
November 1999 expansion of the related party technology license agreement with
Northrop Grumman Space Technology sector (NGST), formerly known as TRW Space &
Electronics, Inc. (TRW), two warrants to purchase our common stock were granted
to TRW. The value of the warrants increased the gross carrying amount of the
technology license. One of the warrants was exercisable only if we achieved
certain milestones. The required milestones were not met, and therefore the
related party technology license carrying amount was reduced by the valuation of
the forfeited warrant as of March 31, 2002. As required by SFAS 144, we reviewed
long-lived assets based on changes in circumstances that indicate their carrying
amounts may not be recoverable due to the extent and manner we use the assets.
During fiscal 2002, we 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."
We review our investments for impairment and make appropriate reductions in the
carrying value when an other-than-temporary decline is evident in accordance
with Accounting Principles Board Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock" and Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments In Debt and
Equity Securities" (SFAS 115). During fiscal 2003 and fiscal 2002, we recorded a
$1.3 million and a $3.6 million charge, respectively, for the impairment of a
$5.0 million investment in the equity of a privately held company. The
impairment charge represented management's best estimate of an
other-than-temporary decline in value.
In making impairment determinations for long-lived assets, investments, and
intangible assets, we utilize certain assumptions, including, but not limited
to: 1) estimations and quoted market prices of the fair market value of the
assets, 2) estimations of future cash flows expected to be generated by these
assets, which are based on additional assumptions such as asset utilization,
length of service the asset will be used in the Company's operations and
estimated salvage values and 3) independent valuation analysis of newly acquired
intangible assets. In order to evaluate goodwill, we use certain assumptions in
analyzing existing goodwill, including, but not limited to, two generally
accepted valuation methodologies: the income approach - discounted cash flows,
and the market approach -enterprise value and guideline company analysis. Newly
acquired goodwill determinations are based on independent appraisals.
INVENTORIES
Inventories are stated at the lower of cost or market determined using the
average cost method. Our business is subject to the risk of technological and
design changes. We evaluate inventory levels quarterly against sales forecasts
on a part-by-part basis and evaluate our overall inventory risk. Reserves are
adjusted to reflect inventory values in excess of forecasted sales as well as
overall inventory risk assessed by management. In the event we sell 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. Inventory deemed obsolete is required by our 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
obsolete inventory will be disposed of and the inventory value and related
reserve will be written off.
During fiscal 2003, our inventory reserves decreased $7.2 million. This decrease
primarily resulted from disposal of obsolete inventory resulting in a
corresponding write-off of such assets and their related reserve. Gross
inventories increased $11.9 million or 19% in fiscal 2003 compared to fiscal
2002. The increase is attributable to our revenue growth and the higher cost of
more complex, highly integrated multi-chip module power amplifiers. Revenue in
fiscal 2003 increased 38% and unit sales volume increased 56%. We believe our
continued focus on supply chain management through the implementation of new
planning strategies, efforts of an inventory management team and utilization of
a leading material planning system as discussed below has enabled us to
demonstrate the effective management of inventory through reduced inventory
reserve risk.
During fiscal 2002, our inventory reserves increased as customers shifted demand
from microwave monolithic integrated circuits (MMICs) to more complex, highly
integrated multi-chip module power amplifiers. 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. These factors resulted in a $15.3
million reserve adjustment in the first quarter of fiscal 2002. Of this reserve,
90% was attributable to standard products. In order to improve on inventory
level issues, we have utilized a leading material requirement planning system
that we purchased in 1999 and fully implemented in February 2001, implemented
planning strategies for each product and maintained an inventory management
team. During fiscal 2000 and the first two quarters of fiscal 2001 gross
inventories grew consistently 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. During fiscal 2002, our gross inventories
decreased $27.0 million, which we believe demonstrates the effectiveness of our
focus on supply chain management through the implementation of new planning
strategies and an inventory management team.
STOCK-BASED COMPENSATION
We account for employee stock options and employee restricted stock in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25). Under APB 25, no compensation expense is
recognized for stock options or restricted stock issued to employees with
exercise prices or share prices at or above quoted market value. For stock
options or restricted shares granted at exercise prices below quoted market
value, we record deferred compensation expense for the difference between the
price of the shares and the market value. Deferred compensation expense is
amortized ratably over the vesting period of the related options or shares of
restricted stock.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123) provides an alternative to APB 25 in accounting for
stock-based compensation issued to employees. SFAS 123 provides for a fair value
based method of accounting for employee stock options and similar equity
instruments. However, companies that continue to account for stock-based
compensation arrangements under APB 25 are required by SFAS 123 to disclose the
pro forma effect on net (loss) income and net (loss) income per share as if the
fair value based method prescribed by SFAS 123 had been applied. We continue to
account for stock-based compensation using the provisions of APB 25 and present
the pro forma information required by SFAS 123 as amended by Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" (SFAS 148).
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 145, "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
(SFAS 145). We adopted SFAS 145 for financial statements issued on or after May
15, 2002. Adoption of SFAS 145 did not have a significant impact on our
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 we will adopt SFAS 146 prospectively. The adoption
of SFAS 146 did not have a significant impact on our 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 us; therefore, SFAS 147
did not have an impact on our 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. We will adopt the interim financial reporting requirements
of SFAS 148 for interim periods beginning after March 31, 2003 and we have
adopted the annual financial reporting requirements in fiscal 2003. The adoption
of SFAS 148 did not have a significant impact on our consolidated financial
position, results of operations or cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). FIN 44 is the interpretation of Accounting
Research Bulletin No. 51 "Consolidated Financial Statements," which addresses
consolidation by business enterprises of variable interest entities. FIN 46 is
effective immediately for all variable interest entities created after January
31, 2003 and effective for fiscal years beginning after June 15, 2003 for
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. We will adopt FIN 46 in fiscal 2004. The
adoption of FIN 46 is not expected to have a significant impact on our
consolidated financial position, results of operations or cash flows.
RESULTS OF OPERATIONS
The following table shows our consolidated statement of operations data
expressed as a percentage of total revenue for the periods indicated:
FOR THE FISCAL YEARS ENDED MARCH 31,
2003 2002 2001
---- ---- ----
Total revenue 100.0% 100.0% 100.0%
Operating costs and expenses:
Cost of goods sold 64.0 67.4 54.2
Research and development 20.0 20.2 18.0
Marketing and selling 7.3 7.9 8.5
General and administrative 3.6 3.8 4.0
Other operating expenses 2.8 3.8 1.4
Impairment of long-lived assets -- 1.8 --
--------- --------- ---------
Total operating costs and expenses 97.7 104.9 86.1
--------- --------- ---------
Income (loss) from operations 2.3 (4.9) 13.9
Interest expense (4.8) (4.7) (2.8)
Interest income 1.1 3.3 4.5
Other expense, net (0.4) (1.1) --
--------- --------- ---------
(Loss) income before income taxes (1.8) (7.4) 15.6
Income tax benefit (expense) -- 1.8 (5.2)
--------- --------- ---------
Net (loss) income (1.8) (5.6) 10.4
========= ========= =========
REVENUE
FISCAL 2003
Revenue in fiscal 2003 was $507.8 million, an increase of 38% over revenue of
$369.3 million in fiscal 2002. The growth resulted primarily from four areas of
strategic focus in fiscal 2003: an increase in our power amplifier market share;
an increase in the number of components we sold in a typical wireless handset;
diversification of our wireless handset customer base; and our expansion into
new product markets.
o Our revenue from handsets in fiscal 2003 increased 33% compared to
fiscal 2002. Estimated handsets production in calendar year 2002
increased approximately 14% compared to calendar year 2001. Thus, the
growth in the overall wireless handsets produced, coupled with our
growth in market share both contributed to our increased revenues.
o We increased the number of components we sold in a typical handset by
increasing sales of our small signal devices by 28% in fiscal 2003
over fiscal 2002.
o Our dependence on Nokia Mobile Phones Ltd. (Nokia) declined in fiscal
2003. Sales to Nokia as a percentage of revenues declined from 65% in
fiscal 2002 to 45% in fiscal 2003. In addition, during fiscal 2003 we
increased our sales to other prominent existing customers in the
handset industry, including Motorola, Inc. (Motorola), which accounted
for 14% of our revenue in fiscal 2003 compared to 5% in fiscal 2002.
We also increased original design manufacturer (ODM) revenues by 135%
in fiscal 2003 compared to 2002.
o In fiscal 2003, our wireless local area network (WLAN) revenue
increased to $31.1 million from $3.7 million in fiscal 2002. Our WLAN
product revenue was concentrated in products addressing the 802.11b
standard and represented 6% of total revenues in fiscal 2003, up from
1% of total revenues in fiscal 2002. In December 2002, we completed
the merger with Resonext Communications, Inc. (Resonext), a privately
held company providing highly integrated CMOS WLAN solutions for
802.11a and multi-band (802.11a/b/g) platforms. We believe this merger
positions us to expand WLAN product offerings more rapidly in the
802.11a and 802.11a/b/g markets.
Although we increased the number of units sold in fiscal 2003 by 56%, our
average selling price declined approximately 12% for MMICs and approximately 17%
for multi-chip module power amplifiers compared to fiscal
2002. Our markets remain highly competitive and we continue to experience
downward pressure on average selling prices of our products.
International shipments were $405.7 million and accounted for 80% of revenue in
fiscal 2003 as compared to $262.3 million, or 71% of revenue in the prior year.
Shipments to Asia totaled $274.9 million, or 54% of revenue, in fiscal 2003 and
$189.2 million, or 51% of revenue, in fiscal 2002. The establishment of our
sales and customer support centers in Taipei, Taiwan and Seoul, South Korea
contributed to our increased sales in the Asian markets.
FISCAL 2002
Revenue in fiscal 2002 was $369.3 million, an increase of 10% over revenue of
$335.4 million in fiscal 2001 due primarily to the continued growth in our GaAs
HBT revenue. GaAs HBT sales were $341.9 million, an increase of 10% over fiscal
2001 sales of $309.9 million, due to continued expansion of our customer base as
well as growth in sales to several prominent existing customers in the handset
industry. Sales to Nokia, our largest customer, represented 65% of total revenue
in fiscal 2002, an increase from 53% in fiscal 2001. No other customer generated
sales greater than 10% of total revenue in fiscal 2002. Our WLAN and Global
System for Mobile Communications (GSM) revenue also increased in fiscal 2002
compared to fiscal 2001 by 30% and 35%, representing 1% and 39% of total
revenue, respectively. WLAN revenue grew late in fiscal 2002 as our products
transitioned from prototype sales to commercial sales for personal computer
applications with contract manufacturers. GSM revenue increased as a result of
our focused development of modules, which were incorporated into handsets.
Although we increased the number of units sold in fiscal 2002 by 15%, our
average selling price declined approximately 20% for MMICs and 9% for multi-chip
module power amplifiers compared to fiscal 2001. International shipments in
fiscal 2002 were $262.3 million and accounted for 71% of total revenue, as
compared to $174.4 million, or 52% of total revenue, in fiscal 2001.
GROSS PROFIT
FISCAL 2003
Gross profit margins in fiscal 2003 increased to 36% of revenue compared to 33%
of revenue in fiscal 2002. The increase in gross profit was primarily
attributable to increased unit volume and capacity utilization, favorable
production yields and the absence of an adjustment to inventory reserves
compared to an adjustment of $15.3 million recorded in fiscal 2002 due to the
anticipated reduction in revenue from sales of MMICs that we experienced in
fiscal 2003. These positive factors were offset in part by a predicted shift in
product mix from MMICs to more complex, highly integrated multi-chip module
power amplifiers, which was driven by customer demand. Because multi-chip module
power amplifiers currently contain higher substrate and assembly costs and
components that are purchased by us from third parties, our overall manufactured
content as a percentage of total cost in a module is lower than for a MMIC,
which results in lower margins for modules than MMICs. In addition, production
yields for modules can be lower than for MMICs due to the more complex, highly
integrated nature of modules. Module-based products provide customers with a
lower cost, are more reliable, have a smaller footprint with the same
functionality and allow customers to decrease their time-to-market for products.
Module sales for fiscal 2003 represented 59% of our revenue compared to 43% for
fiscal 2002. We expect this trend will continue as our customers increasingly
seek highly integrated circuits and solutions from their suppliers rather than
discrete components.
We have historically experienced significant fluctuations in gross profit
margins and, consequently, our operating results, and we expect such
fluctuations to continue. Our test and 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 for both devices and air
standards. Management believes this decline can be mitigated by continued cost
reduction efforts including conversion of our second four-inch GaAs HBT wafer
fabrication facility into a six-inch facility, utilizing our strategic
relationship with Jazz to obtain a committed, lower-cost source of supply for
silicon wafers, achieving higher levels of product integration, successfully
implementing test yield and assembly improvement plans, lowering assembly costs
and other supply chain savings, and increasing our capacity utilization.
FISCAL 2002
Gross profit margins in fiscal 2002 declined to 33% compared to 46% in fiscal
2001. The decrease was the result of increases in inventory reserves, continued
declines in average selling prices, 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 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.
Our fiscal 2002 gross profit reflects an abnormal decrease in the first quarter
of fiscal 2002 resulting primarily from an increase in inventory reserves of
$15.3 million combined with initial higher cost of goods sold associated with
our module products and greater-than-normal yield losses associated with the
steep ramp-up of the module business. As the year progressed, our margins
improved due to improvements in production yields for new products, increased
capacity utilization and cost reduction programs for module products. During the
last three quarters of fiscal 2002, gross profit margins averaged 39%.
RESEARCH AND DEVELOPMENT
FISCAL 2003
Research and development expenses in fiscal 2003 were $101.7 million, an
increase of 37% over fiscal 2002 expense of $74.4 million. This increase was
primarily attributable to increased headcount and related personnel expenses
including salaries, benefits and equipment. The merger with RF Nitro
Communications, Inc. (RF Nitro), a privately held company with advanced
materials and products in broadband wireless and wireline (fiber-optic) markets,
and the acquisition of the global positioning system (GPS) development operation
of International Business Machines Corp. (IBM) impacted research and development
expenses for all of fiscal 2003 compared to five months in fiscal 2002. In
addition, research and development expenses associated with Resonext, which
merged with us in December 2002, represented 5% of the total research and
development expenses for fiscal 2003. Research and development expenses
excluding mergers and acquisitions increased 21% in fiscal 2003 over fiscal
2002. This increase represented a larger overall investment toward the
development of our POLARIS (TM) TOTAL RADIO (TM) solution, a multi-band chipset
that performs the major functions of the radio section of the handset and
provides handset makers with the benefits of reduced component count, flexible
baseband interfaces and lower cost of implementation. In addition, this increase
reflects additional investments we made in development activities to extend our
PowerStar (TM) family of power amplifiers modules.
We currently operate eleven off-site RFIC design centers in addition to our
design engineering staff in Greensboro, North Carolina. Our off-site design
centers are located in Scotts Valley, Irvine and San Jose, California; Cedar
Rapids, Iowa; Boston, Massachusetts; Chandler, Arizona; Pandrup, Denmark;
Calgary, Canada; Charlotte, North Carolina; Leuven, Belgium; and Moscow, Russia.
The merger with Resonext in fiscal 2003 provided us with our San Jose, Moscow,
and Leuven design centers. The Calgary and Irvine design centers were the result
of our acquisition of IBM's GPS development operations, and our Charlotte design
center resulted from the merger with RF Nitro in fiscal 2002. Research and
development employees totaled 548 at March 31, 2003 compared to 429 at March 31,
2002.
We plan to continue to make substantial investments in research and development
as evidenced by our new design center in Boulder, Colorado, which opened in
April 2003, and we expect that such expenses will continue to increase in
absolute dollar amounts in future periods.
FISCAL 2002
Research and development expenses in fiscal 2002 were $74.4 million, an increase
of 23% over fiscal 2001 expense of $60.3 million. This increase was 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
fiscal 2002 we merged with RF Nitro, a privately held company with advanced
materials and products in broadband wireless and wireline (fiber-optic) markets,
as an investment in process technology. Additionally, we acquired IBM's GPS
development operation, which provides us with advanced GPS technology and access
to IBM's chipscale packaging technology. These mergers and acquisitions
contributed to increased headcount, and also to amortization expense as a result
of an acquired technology license and covenants not to compete from key
employees.
MARKETING AND SELLING
FISCAL 2003
Marketing and selling expenses in fiscal 2003 were $36.8 million, a 27% increase
over expenses of $29.0 million in fiscal 2002. This increase was primarily
attributable to increased headcount and related personnel expenses including
salaries, benefits and equipment. The merger with RF Nitro and acquisition of
IBM's GPS development operation impacted marketing and selling expenses for all
of fiscal 2003 compared to five months in fiscal 2002. In addition marketing and
selling expenses associated with Resonext, which merged with us in December
2002, represented 3% of the total marketing and selling expenses for fiscal
2003. Marketing and selling expenses excluding mergers and acquisitions
increased 18% in fiscal 2003 over fiscal 2002. The increase was partially offset
by decreased commission expense resulting from lower commission rates and shifts
in revenue from third party commission-based accounts to in-house accounts. We
expect that marketing and selling expenses will continue to increase in absolute
dollar amounts in future periods.
We sell our products worldwide directly to customers as well as through a
network of domestic and foreign sales representative firms. During fiscal 2003,
we had sales and customer support centers in Greensboro, North Carolina; San
Diego, California; Reading, England; Oulu, Finland; Seoul, South Korea; Taipei,
Taiwan; and Beijing, China; and sales offices in Tokyo, Japan; Malmo, Sweden;
and Munich, Germany. Marketing and selling employees totaled 198 at March 31,
2003 compared to 157 at March 31, 2002. We are focusing our efforts on building
the staffing and capabilities of our existing sales infrastructure and believe
our existing sales offices and customer support centers provide the geographic
coverage necessary to address our product markets and customer base.
FISCAL 2002
Marketing and selling expenses in fiscal 2002 were $29.0 million, a 2% increase
over expenses of $28.5 million in fiscal 2001. This increase was primarily the
result of higher salaries, benefits and equipment as we conduct a greater
portion of sales and marketing efforts in-house. The increase was partially
offset by decreased commission expense resulting from lower commission rates and
shifts in revenue from third party commission-based accounts to in-house
accounts.
GENERAL AND ADMINISTRATIVE
FISCAL 2003
General and administrative expenses in fiscal 2003 were $18.4 million or 4% of
revenue, a 29% absolute dollar increase compared to fiscal 2002 expenses of
$14.2 million or 4% of revenue. General and administrative employees totaled 112
at March 31, 2003 compared to 90 at March 31, 2002. The year over year increase
in absolute dollars was 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, higher insurance premiums and bank charges for letters of
credit expenses related to our expansion in Asian markets. We expect that
general and administrative expenses will continue to increase in absolute dollar
amounts in future periods.
FISCAL 2002
General and administrative expenses in fiscal 2002 were $14.2 million, a 5%
increase compared to fiscal 2001 expenses of $13.5 million. This increase was
attributable to increased salaries and benefits due to a higher headcount and
higher professional fees associated with the merger with RF Nitro and
acquisition of IBM's GPS development operations. General and administrative
employees totaled 90 at March 31, 2002 compared to 84 at March 31, 2001.
OTHER OPERATING EXPENSES
FISCAL 2003
Other operating expenses were $14.0 million in fiscal 2003 compared to $14.1
million in fiscal 2002, a 1% decrease. Fiscal 2003 other operating expenses
includes a $10.5 million charge for acquired in-process research and development
in connection with the merger with Resonext, $2.1 million of depreciation
expense for assets held and used related to the Agere facility, and $1.4 million
of start-up costs associated with our test and tape and reel facility in
Beijing, China. Fiscal 2002 other operating expenses included start-up cost of
$13.5 million and $0.6 million attributable our second wafer fabrication
facility in Greensboro, North Carolina and our test and tape and reel facility
in Beijing, China, respectively. Fiscal 2003 included start-up costs associated
with our test and 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 fiscal 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." The Resonext related acquired
in-process research and development charge in fiscal 2003 was charged to expense
in accordance with SFAS 141. SFAS 141 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
merger date. The in-process research and development projects were related to
first and second generation products for 802.11a/b/g applications. The first
generation product is a two-chip combination of a transceiver and baseband/media
access controller (MAC) chip that support the 802.11 a/b/g protocols, and it was
determined that the in-process research and development associated with this
project had a fair value of $6.2 million. The second generation product is a
two-chip combination of a transceiver and a baseband/MAC chip that supports the
802.11 a/b/g protocols and allows for variable frequencies and it was determined
that the in-process research and development associated with this project had a
fair value of $4.3 million. The value of the acquired in-process research and
development was determined by estimating the costs to develop the purchased
in-process research and development into a commercially viable product,
estimating the resulting cash flows from the sale of the products resulting from
the completion of the in-process research and development and discounting the
net cash flows using a present value factor of 19%. The estimated cost to
complete the projects is approximately $18.0 million with an estimated
completion date in fiscal 2004.
FISCAL 2002
Other operating expenses were $14.1 million in fiscal 2002 compared to $4.6
million in fiscal 2001, a 206% increase. The increase was primarily attributable
to the inclusion of start-up costs associated with our second wafer fabrication
facility for three quarters in fiscal 2002 versus slightly more than one quarter
in fiscal 2001. In addition, fiscal 2002 expense included costs associated with
our test and tape and reel facility in Beijing, China. 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, associated expenses
transitioned from other operating expenses to cost of goods sold during that
quarter.
INTEREST EXPENSE
FISCAL 2003
Interest expense in fiscal 2003 was $24.4 million compared to $17.2 million in
fiscal 2002. The $7.2 million increase primarily resulted from the retirement of
an interest rate swap arrangement 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 underlying assets in the third quarter of
fiscal 2003. As a result, our interest rate swap cash flow hedge was no longer
eligible for hedge accounting and we elected to payoff the swap. Interest
expense is expected to decrease in future periods as a result of the termination
of the interest rate swap agreement.
FISCAL 2002
Interest expense in fiscal 2002 was $17.2 million compared to $9.3 million in
fiscal 2001. The $7.9 million increase was due to greater amounts of interest
paid on our convertible subordinated notes issued in August 2000 and expenses
associated with the interest rate swap that we retired in fiscal 2003.
INTEREST INCOME
FISCAL 2003
Interest income in fiscal 2003 was $5.5 million compared to $12.2 million in
fiscal 2002. Interest income decreased in fiscal 2003 due to lower prevailing
interest rates driven by the Federal Reserve cuts to the federal funds rate and
lower cash and investment balances.
FISCAL 2002
Interest income in fiscal 2002 was $12.2 million compared to $15.1 million in
fiscal 2001. The decrease in interest income in fiscal 2002 was due to lower
prevailing interest rates, driven by the Federal Reserve cuts to the federal
funds rate.
INCOME TAX EXPENSE
FISCAL 2003
The effective combined domestic income tax rate for fiscal 2003 was 0%. Income
tax expense of $0.25 million was incurred due to taxes on our foreign
subsidiaries. This rate is lower than the 24.9% effective rate and $6.8 million
income tax benefit in fiscal 2002 due primarily to the non-recognition of U.S.
tax benefits on the domestic net operating losses and tax credits.
FISCAL 2002
The effective combined income tax rate for fiscal 2002 was 24.9% and resulted in
an income tax benefit of $6.8 million. This rate is lower than the 33.2%
effective rate and $17.4 million income tax provision in fiscal 2001 due
primarily to the non-recognition of U.S. tax benefits on the domestic net
operating losses.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date through sales of equity and debt
securities, bank borrowings, capital equipment leases and revenue from product
sales. Through public and Rule 144A securities offerings, we have raised
approximately $462.0 million, net of offering expenses. As of March 31, 2003, we
had working capital of approximately $315.1 million, including $164.4 million in
cash and cash equivalents, compared to working capital at March 31, 2002 of
$421.1 million, including $157.6 million in cash and cash equivalents.
Operating activities in fiscal 2003 provided cash of $52.0 million, compared to
$69.1 million provided in fiscal 2002. This decrease was primarily attributable
to $11.9 million of cash used from changes in gross inventories in fiscal 2003
due to revenue growth and higher cost of more complex, highly integrated
multi-chip module power amplifiers, compared to $27.0 million cash provided from
changes in gross inventories in fiscal 2002. The cash provided in fiscal 2002
resulted from an increased focus on supply chain management through
implementation of new planning strategies and an inventory management team that
has decreased the need to build inventory to meet delivery schedules. The cash
used in inventory in fiscal 2003 was partially offset by an increase provided by
the change in net (loss) income of $11.2 million and adjustments to reconcile
net (loss) income for non-cash operating items. The non-cash operating items
increased cash provided from operating activities by $10.1 million
year-over-year due to increases in depreciation, amortization, and acquired
in-process research and development cost.
Cash used in investing activities in fiscal 2003 was $48.2 million, compared to
$183.6 million used in fiscal 2002. Uses of cash in fiscal 2003 included
purchases of securities available for sale of $261.2 million, purchases of
capital equipment and leasehold improvements of $137.0 million and purchases of
other investments totaling $30.0 million. Proceeds from maturities of securities
provided cash of $354.8 million, partially offsetting the cash used. The
year-over-year decrease is primarily attributable to the increase in proceeds
from maturities of securities and net cash acquired of $25.3 million from the
merger with Resonext.
In fiscal 2003, financing activities provided $2.9 million in cash, compared to
$6.1 million of cash provided by financing activities in fiscal 2002. This
decrease was primarily attributable to the decrease in proceeds from the
exercise of stock options, warrants and employee stock purchases.
COMMITMENTS
The following table summarizes our contractual payment obligations and
commitments (in thousands):
PAYMENT OBLIGATIONS BY FISCAL YEAR ENDING MARCH 31,
-----------------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 THEREAFTER TOTAL
------------ ----------- ----------- ------------- ----------- ----------- ------------
Capital commitments $ 13,822 $ -- $ -- $ -- $ -- $ -- $ 13,822
Capital leases 1,079 617 84 -- -- -- 1,780
Operating leases 8,701 6,760 5,981 5,187 4,625 26,390 57,644
Convertible debt 11,250 11,250 305,625 -- -- -- 328,125
Short-term note payable 30,000 -- -- -- -- -- 30,000
-------- -------- -------- -------- -------- -------- --------
Total $ 64,852 $ 18,627 $311,690 $ 5,187 $ 4,625 $ 26,390 $431,371
======== ======== ======== ======== ======== ======== ========
CAPITAL COMMITMENTS
At March 31, 2003, we had long-term capital commitments of approximately $13.8
million, consisting of approximately $7.0 million for equipment related to the
six-inch wafer project, $4.0 million related to equipment for our molecular beam
epitaxy (MBE) facility, approximately $1.0 million for equipment in our second
wafer fabrication facility, approximately $0.5 million for equipment in our test
and tape and reel facility in Greensboro, North Carolina, and the remainder for
general corporate requirements. 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 $16.4 million had been
invested as of March 31, 2003. On January 23, 2002, Agere announced that it was
seeking a buyer for its Orlando wafer fabrication operation. We currently do not
intend to make any additional investments in equipment under this arrangement.
We recently reopened discussions with Agere in order to resolve all remaining
issues between the parties under the alliance documents, including the refund to
us of amounts previously invested under our agreements with Agere. These
discussions are at an early stage and we currently cannot predict the outcome or
financial or other effects of these discussions.
CAPITAL LEASES
We have 33 capital leases with five equipment financing companies under which we
have financed the cost of capital equipment and leasehold improvements. We have
financed an aggregate of $4.3 million of leased property under these facilities.
Lease terms range from 12 months to 60 months with effective interest rates
ranging from 7.0% to 11.0%. Total minimum future lease payments under these
capital leases (excluding interest) as of March 31, 2003 were $1.8 million. In
fiscal 2003, we recorded $3.2 million in lease amortization related to capital
leases.
OPERATING LEASES
We lease our corporate headquarters facility, our first wafer fabrication
facility, our MBE facility and other facilities through several third party
operating leases. At March 31, 2003, we had minimum future lease payments of
approximately $54.7 million related to facility operating leases and
approximately $2.9 million related to equipment operating leases. In fiscal
2003, we recorded $21.0 million in rent expense under operating leases.
During fiscal 2001, we completed the sale-leaseback of our corporate
headquarters building, generating $13.0 million in cash. The sale-leaseback is
for a fifteen-year term with two ten-year options to renew.
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, we terminated 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 carrying value of the derivative financial instrument was
reflected in our balance sheet at its fair value and was included in other
long-term liabilities and accumulated other comprehensive loss. After the
termination 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
calendar year, which included the exercise by the initial purchasers of the
notes of their option to purchase an additional $50.0 million principal amount
of the notes. The net proceeds from this offering were $291.3 million and have
been and will be used 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 paid interest of
$11.3 million on these notes.
SHORT-TERM NOTE PAYABLE
We entered into a strategic relationship with Jazz Semiconductor (Jazz) in
October 2002. Under the arrangement, we obtained a committed, lower cost source
of supply for wafers fabricated utilizing Jazz's silicon manufacturing
processes. Pursuant to the relationship, we agreed to invest approximately $60.0
million in Jazz. We transferred $30.0 million in cash in 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.
FUTURE SOURCES OF FUNDING
Our future capital requirements may differ materially from those currently
anticipated and will depend on many factors, including, but not limited to,
market acceptance of our products, volume pricing concessions, capital
improvements, technological advances and our relationships with suppliers and
customers. We believe our cash requirements will be adequately met from normal
operating results during fiscal 2004. A decrease in demand for our products,
however, could result in operating cash flows being insufficient to meet our
needs. If existing resources and cash from operations are not sufficient to meet
our future requirements or if we perceive conditions to be favorable, we may
seek additional debt or equity financing or additional credit facilities. We
filed a $500.0 million shelf registration statement providing for the offering
from time to time of debt securities, common stock, preferred stock, depositary
shares, warrants and subscription rights with the Securities and Exchange
Commission on April 4, 2002. We do not, however, currently have any plans to
issue any securities under this registration statement. We cannot be sure that
any additional equity or debt financing will not be dilutive to holders of our
common stock. Further, we cannot be sure that additional equity or debt
financing, if required, will be available on favorable terms.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SHORT-TERM AND LONG-TERM INVESTMENTS
Our investments in short-term and long-term investments are classified as
available-for-sale securities and are comprised of corporate debt securities,
U.S. government/agency securities, equity securities, municipal securities and
investments in privately held companies, in accordance with an investment policy
approved by the Board of Directors. Classified as available-for-sale, all of
these investments are held at fair value. Although we manage investments under
an investment policy, economic, market and other events may occur, which we
cannot control. Although the risks are minimal, fixed rate securities may have
their fair value adversely impacted because of changes in interest rates and
credit ratings. Due in part to these factors, our future investment income may
fall short of expectations because of changes in interest rates or we may suffer
principal losses if we were to sell securities that have declined in value
because of changes in interest rates or issuer credit ratings. We do not hold or
issue derivatives, derivative commodity instruments or other financial
instruments for trading speculative purposes.
CONVERTIBLE DEBT AND CAPITAL LEASE OBLIGATIONS
Our convertible subordinated notes due 2005 have a fixed interest rate of 3.75%.
Consequently, we do not have significant interest rate cash flow exposure on our
long-term debt. However, the fair value of the convertible subordinated notes is
subject to significant fluctuations due to their convertibility into shares of
our stock and other market conditions. The fair value of these convertible
subordinated notes is also sensitive to fluctuations in the general level of the
U.S. interest rates. We would be exposed to interest rate risk, if we used
additional financing to fund capital expenditures. The interest rate that we may
be able to obtain on financings will depend on market conditions at that time
and may differ from the rates we have secured in the past.
Our capital lease obligations have fixed interest rates and the fair value of
these instruments is affected by changes in market interest rates. As a result,
we believe that the market risk arising from holdings of our financial
instruments is not material.
FOREIGN CURRENCY RISK
We have limited exposure to currency exchange fluctuations, as we manage the
sensitivity of our international sales, purchases of raw materials and equipment
by denominating most transactions in U.S. dollars. We have recently completed
the establishment of an operation in Beijing, China where sales domestically in
China are denominated in Renminbi. The currency exchange rate fluctuations in
Renminbi are immaterial to our overall operating results and cash flows. We do
not currently engage in foreign currency hedging transactions.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31,
2003 2002
ASSETS ------------------------
Current assets:
Cash and cash equivalents $ 164,422 $ 157,648
Short-term investments (NOTE 3) 92,187 186,526
Accounts receivable, less allowance of $1,078
and $1,134 as of March 31, 2003 and 2002, 66,849 56,373
respectively
Inventories (NOTE 4) 57,781 38,734
Recoverable income taxes 6,330 10,786
Prepaid expenses 3,228 2,594
Other current assets 1,824 3,309
------------------------
Total current assets 392,621 455,970
Property and equipment:
Land 3,206 1,452
Building 61,787 --
Machinery and equipment 260,815 185,281
Leasehold improvements 69,928 67,908
Furniture and fixtures 8,791 7,682
Computer equipment and software 16,343 12,647
------------------------
420,870 274,970
Less accumulated depreciation (128,968) (84,209)
------------------------
291,902 190,761
Construction in progress 20,111 30,918
------------------------
Total property and equipment, net 312,013 221,679
Goodwill (NOTES 2 & 7) 110,006 34,525
Intangible assets (NOTE 2) 56,486 11,754
Long-term investments (NOTES 2 & 3) 59,440 2,797
Other non-current assets 2,259 2,275
------------------------
Total assets $ 932,825 $ 729,000
========================
SEE ACCOMPANYING NOTES.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31,
2003 2002
------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 26,694 $ 16,909
Accrued liabilities 20,185 14,690
Jazz investment payable 29,604 --
Current obligations under capital leases (NOTE 8) 1,057 3,319
------------------------
Total current liabilities 77,540 34,918
Long-term debt, net of unamortized discount of $4,135 and $5,752 as
of March 31, 2003 and 2002, respectively (NOTE 9) 295,865 294,248
Obligations under capital leases, less current portion (NOTE 8) 611 169
Other long-term liabilities (NOTE 5) 1,409 9,980
------------------------
Total liabilities 375,425 339,315
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; 183,958 and
167,768 shares issued and outstanding as of March 31, 2003 and
2002, respectively 441,077 279,924
Additional paid-in capital 73,454 64,665
Deferred compensation (18,700) (19,652)
Accumulated other comprehensive income (loss), net of tax 95 (6,061)
Retained earnings 61,474 70,809
------------------------
Total shareholders' equity 557,400 389,685
------------------------
Total liabilities and shareholders' equity $ 932,825 $ 729,000
========================
SEE ACCOMPANYING NOTES.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED MARCH 31,
2003 2002 2001
------------------------------------
Revenue:
Product sales $ 506,805 $ 367,387 $ 333,203
Engineering revenue 1,014 1,921 2,161
------------------------------------
Total revenue 507,819 369,308 335,364
Costs and expenses:
Cost of goods sold 325,168 248,965 181,801
Research and development 101,736 74,445 60,340
Marketing and selling 36,833 28,993 28,450
General and administrative 18,364 14,224 13,495
Other operating expenses (NOTE 10) 13,961 14,085 4,607
Impairment of long-lived assets (NOTE 6) -- 6,801 --
------------------------------------
Total costs and expenses 496,062 387,513 288,693
------------------------------------
Income (loss) from operations 11,757 (18,205) 46,671
Interest expense (24,433) (17,195) (9,346)
Interest income 5,545 12,166 15,065
Other (expense) income, net (1,954) (4,179) 19
------------------------------------
(Loss) income before income taxes (9,085) (27,413) 52,409
Income tax (expense) benefit (250) 6,829 (17,435)
------------------------------------
Net (loss) income $ (9,335) $ (20,584) $ 34,974
====================================
Net (loss) income per share:
Basic $ (0.05) $ (0.12) $ 0.22
====================================
Diluted $ (0.05) $ (0.12) $ 0.20
====================================
Shares used in per share calculation:
Basic 172,706 165,827 161,820
====================================
Diluted 172,706 165,827 173,216
====================================
SEE ACCOMPANYING NOTES.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE
-------------------- PAID-IN DEFERRED (LOSS) RETAINED
SHARES AMOUNT CAPITAL COMPENSATION INCOME EARNINGS TOTAL
-------------------------------------------------------------------------
Balance, March 31, 2000 160,209 $229,275 $ 26,019 $ (8,560) $ -- $ 56,419 $ 303,153
Comprehensive income:
Net income -- -- -- -- -- 34,974 34,974
Unrealized loss on marketable
securities, net of tax -- -- -- -- (223) -- (223)
-------------------------------------------------------------------------
Total comprehensive income -- -- -- -- (223) 34,974 34,751
-------------------------------------------------------------------------
Exercise of warrants for related party
technology license 500 10,001 -- -- -- -- 10,001
Issuance of restricted stock awards -- -- 7,946 (7,946) -- -- --
Exercise of stock options 2,822 5,028 -- -- -- -- 5,028
Issuance of common stock in connection with
Employee Stock Purchase Plan 179 2,626 -- -- -- -- 2,626
Tax benefit from the exercise of stock options -- -- 19,231 -- -- -- 19,231
Amortization of deferred compensation -- -- -- 1,708 -- -- 1,708
-------------------------------------------------------------------------
Balance, March 31, 2001 163,710 $246,930 $ 53,196 $(14,798) $ (223) $ 91,393 $ 376,498
Comprehensive loss:
Net loss -- -- -- -- -- (20,584) (20,584)
Unrealized loss on marketable
securities, net of tax -- -- -- -- (48) -- (48)
Reclassification adjustment
for realized investment
gains, net of tax -- -- -- -- 312 -- 312
Unrealized loss on cash flow,
hedge,net of tax -- -- -- -- (6,003) -- (6,003)
Foreign currency translation
adjustment -- -- -- -- (99) -- (99)
-------------------------------------------------------------------------
Total comprehensive loss -- -- -- -- (5,838) (20,584) (26,422)
-------------------------------------------------------------------------
Expiration of warrants for related
party technology license -- -- (4,803) -- -- -- (4,803)
Issuance of restricted stock awards -- -- 7,332 (7,332) -- -- --
Exercise of stock options 2,630 7,875 -- -- -- -- 7,875
Issuance of common stock in connection with
Employee Stock Purchase Plan 269 3,157 -- -- -- -- 3,157
Issuance of common stock in connection with
RF Nitro merger 1,159 21,962 562 (410) -- -- 22,114
Tax benefit from the exercise of stock options -- -- 8,378 -- -- -- 8,378
Amortization of deferred compensation -- -- -- 2,888 -- -- 2,888
-------------------------------------------------------------------------
Balance, March 31, 2002 167,768 279,924 64,665 (19,652) (6,061) 70,809 389,685
Comprehensive loss:
Net loss -- -- -- -- -- (9,335) (9,335)
Unrealized loss on marketable
securities,net of tax -- -- -- -- (499) -- (499)
Reclassification adjustment for
realized investment gains, net of tax -- -- -- -- 497 -- 497
Unrealized loss on cash flow
hedge, net of tax -- -- -- -- (1,752) -- (1,752)
Reclassification of realized loss due
to change in fair value of cash flow
hedge -- -- -- -- 7,755 -- 7,755
Foreign currency translation adjustment -- -- -- -- 155 -- 155
-------------------------------------------------------------------------
Total comprehensive loss -- -- -- -- 6,156 (9,335) (3,179)
-------------------------------------------------------------------------
Issuance of restricted stock awards -- -- 1,959 (1,959) -- -- --
Accelerated vesting of options -- -- 500 (500) -- -- --
Cancellation of retired employees'
restricted awards -- -- (1,519) 1,519 -- -- --
Exercise of stock options 2,240 3,352 -- -- -- -- 3,352
Issuance of common stock in connection with
Employee Stock Purchase Plan 612 3,272 -- -- -- -- 3,272
Issuance of common stock in connection with
Resonext merger 13,338 154,529 7,715 (3,645) -- -- 158,599
Tax benefit from unrealized gain on investment -- -- 134 -- -- -- 134
Amortization of deferred compensation -- -- -- 5,537 -- -- 5,537
-------------------------------------------------------------------------
Balance, March 31, 2003 183,958 $441,077 $ 73,454 $(18,700) $ 95 $ 61,474 $ 557,400
-------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED MARCH 31,
2003 2002 2001
-----------------------------------------------------
OPERATING ACTIVITIES:
Net (loss) income $ (9,335) $ (20,584) $ 34,974
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation 45,516 34,989 29,289
Amortization 6,982 4,742 1,675
Acquired in-process research and development cost 10,500 -- --
Impairment of long-lived assets -- 6,801 --
Loss on disposal of building and equipment 1,685 125 114
Loss from other-than-temporary decline of long-term investment 1,801 3,984 --
Tax benefit from exercise of employee stock options -- 8,378 19,231
Amortization of deferred compensation 5,538 2,888 1,708
Changes in operating assets and liabilities:
Accounts receivable (10,329) (17,705) 21,175
Inventories (18,818) 32,736 (32,626)
Deferred tax asset -- 9,028 (3,257)
Prepaid expenses and other current and non-current assets 1,282 (3,093) (1,698)
Accounts payable 9,501 1,456 (706)
Accrued liabilities 3,565 4,728 273
Income taxes payable/recoverable income taxes 4,558 17,691 (27,681)
Non-current deferred tax liability -- (19,471) 13,889
Other long-term liabilities (473) 2,377 --
----------------------------------------------------
Net cash provided by operating activities 51,973 69,070 56,360
INVESTING ACTIVITIES:
Purchase of held-to-maturity securities -- -- (108,764)
Proceeds from maturities of held-to-maturity securities -- 17,950 66,875
Purchase of available-for-sale securities (261,238) (309,292) --
Proceeds from maturities of available-for-sale securities 354,762 177,343 --
Purchase of other investments (30,000) -- (5,000)
Purchase of businesses, net of cash acquired 25,257 (17,838) --
Purchase of property and equipment (136,982) (51,927) (89,742)
Proceeds from sale of property and equipment 11 256 13,022
Purchase of technology licenses -- (130) (135)
----------------------------------------------------
Net cash used in investing activities (48,190) (183,638) (123,744)
FINANCING ACTIVITIES:
Proceeds from convertible debt offering, net of debt issuance costs of
$442 and discount of $8,250 -- -- 291,308
Proceeds from exercise of stock options, warrants and employee stock 6,623 11,032 17,655
purchases
Repayment of capital lease obligations (3,679) (4,892) (4,459)
----------------------------------------------------
Net cash provided by financing activities 2,944 6,140 304,504
Net increase (decrease) in cash and cash equivalents 6,727 (108,428) 237,120
Cash and cash equivalents at beginning of year 157,648 266,076 28,956
Effect of exchange rate changes on cash 47 -- --
----------------------------------------------------
Cash and cash equivalents at end of year $ 164,422 $ 157,648 $ 266,076
====================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 22,382 $15,851 $ 6,734
====================================================
Cash paid during the year for income taxes $ 9 $ 30 $ 16,371
====================================================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Stock issued in connection with business combinations, net of cash received $ 133,342 $ 22,114 $ --
Jazz investment payable 30,000 -- --
Other comprehensive income (loss) 6,156 (5,838) (223)
FIN44 deferred compensation for business combination 3,645 410 --
Issuance of restricted stock 1,959 8,148 7,946
Retirement of restricted stock (1,518) (816) --
Acceleration of options 500 -- --
Expiration of stock warrant for technology license -- 4,803 --
SEE ACCOMPANYING NOTES.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
1. COMPANY INFORMATION
RF Micro Devices, Inc. (the Company) designs, develops, manufactures and markets
proprietary radio frequency integrated circuits (RFICs) for wireless
communications products and applications. As such, the Company operates as a
single business segment. The Company's products are primarily included in
cellular phones, base stations, wireless local area networks (WLAN), cable
television modems and global positioning systems (GPS). The Company derives
revenue from the sale of standard and custom-designed products. The Company
offers a broad array of products -- including amplifiers, mixers,
modulators/demodulators and single chip transmitters, receivers and transceivers
- -- that represent a substantial majority of the RFICs required in wireless
subscriber equipment. These RFICs perform the transmit and receive functions
that are critical to the performance of wireless devices.
The Company addresses the various wireless markets by a product delivery
strategy called OPTIMUM TECHNOLOGY MATCHING(R). This product delivery strategy
utilizes multiple distinct semiconductor process technologies: aluminum gallium
arsenide (AlGaAs) (also referred to as gallium arsenide (GaAs)), heterojunction
bipolar transistor (HBT), silicon bipolar transistor, silicon complementary
metal-oxide-semiconductor (CMOS), silicon BiCMOS (integration of bi-polar
transistors and CMOS), silicon germanium (SiGe) BiCMOS, GaAs metal-semiconductor
field-effect transistor (MESFET), and indium gallium phosphide (InGaP) HBT. The
Company is also actively developing and evaluating the development of integrated
circuits utilizing gallium nitride (GaN) and GaAs pseudomorphic high electron
mobility transistor (pHEMT). The approach to using multiple semiconductor
process technologies allows the Company to offer customers products that fulfill
their performance, cost and time-to-market requirements.
During fiscal 2002, 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 $25.1
million merger, the Company gained access to advanced compound semiconductor
processes, such as GaN, as well as additional resources to conduct advanced
research on this and other technologies. Additionally in fiscal 2002, the
Company acquired the global positioning system (GPS) development operation of
International Business Machines Corp. (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 SiGe, which reduces size, power
consumption and noise figure, and enables higher levels of integration.
In December 2002, the Company completed the merger with Resonext Communications,
Inc. (Resonext), a privately held company providing, highly integrated CMOS WLAN
solutions for 802.11a and multi-band (802.11a/b/g) platforms. The merger with
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.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
ACCOUNTING PERIODS
The Company uses a 52- or 53-week fiscal year ending on the Saturday closest to
March 31 of each year. The most recent three fiscal years ended on March 29,
2003, March 30, 2002 and March 31, 2001. Fiscal years 2003 and 2002 were 52-week
years and fiscal year 2001 was a 53-week year. For purposes of financial
statement presentation, each fiscal year is described as having ended on March
31.
RECLASSIFICATIONS
Certain amounts in the March 31, 2002 and 2001 consolidated financial statements
have been reclassified to conform to the March 31, 2003 presentation. These
reclassifications had no effect on net (loss) income or shareholders' equity as
previously reported.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and other accrued liabilities approximate
fair values as of March 31, 2003 and 2002. The Company's convertible
subordinated notes had a fair value of $274.9 million and $255.2 million as of
March 31, 2003 and March 31, 2002, respectively, on the Private Offerings,
Resale and Trading through Automated Linkages (PORTAL) Market compared to the
carrying amounts of $295.9 million and $294.3 million on such dates,
respectively
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. The Company makes
estimates for the allowance for doubtful accounts, inventory reserves, warranty
reserves, income tax valuation, investment impairments, impairments of goodwill,
long-lived assets and other financial statement amounts on a regular basis and
makes adjustments based on historical experiences and existing and expected
future conditions. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposit accounts, money market funds
and temporary, highly liquid investments with original maturities of three
months or less when purchased.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
INVESTMENTS
SHORT-TERM
Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments In
Debt and Equity Securities." Securities are classified as held-to-maturity when
the Company has the positive intent and ability to hold to maturity; securities
are classified as trading securities when the Company buys and holds principally
for the purpose of selling in the near term; and all other securities are
classified as available-for-sale. The Company currently does not hold any
trading or held-to-maturity securities.
Investments available-for-sale at March 31, 2003 consisted of corporate debt
securities, U.S. government/agency securities, equity and municipal securities.
All securities had original maturities of less than one year when purchased.
Investments available-for-sale at March 31, 2002 consisted of corporate debt
securities, U.S. government/agency securities, equity securities, municipal
securities and a foreign government security. Available-for-sale securities are
carried at fair value as determined by quoted market prices, with the unrealized
gains and losses, net of tax, reported as a separate component of shareholders'
equity in accordance with SFAS 115. The cost of securities sold is based on the
specific identification method and any realized gain or loss is included in
other (expense) income. The amortized cost of debt securities is adjusted for
amortization of premium and accretion of discounts and is included as a portion
of interest. The Company monitors investments for impairment and records
other-than-temporary declines in value if the market value is estimated to be
below its cost basis for an extended period or the issuer has experienced
significant financial difficulties. During fiscal 2003, the Company recorded a
$0.5 million charge for the impairment of a public equity security, which
represents management's best estimate of an other-than-temporary decline in
value based on historical and current market prices.
LONG-TERM
The Company has an investment in the equity of a privately held company,
originally valued at $5.0 million. The investment represents less than 5%
ownership, and the Company does not have the ability to exercise significant
influence in the management of the investee company. This investment was 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, (APB
18) "The Equity Method of Accounting for Investments in Common Stock." The
Company monitors this investment for impairment and recognizes
other-than-temporary declines in value if the market value is estimated to be
below its cost basis for an extended period or the issuer has experienced
significant financial difficulties. During fiscal 2002, the Company recorded a
$3.6 million charge for the impairment of this investment, which represents
management's best estimate of an other-than-temporary decline in value. The
charge was included in other (expense) income, net. During fiscal 2003, the
Company recorded an additional $1.3 million charge for impairment of this
investment, which represents management's best estimate of an
other-than-temporary decline in value. As of March 31, 2003 this investment is
valued at $0.05 million.
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 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;
accordingly, the Company does not believe it will have the ability to exercise
significant influence over the management of Jazz operations. This investment is
carried at its original cost and accounted for using the cost method of
accounting for investments in accordance with APB 18.
In making impairment determinations for investments of privately held companies
and investments of available-for-sale securities, the Company utilizes certain
assumptions, including, but not limited to each company's cash position,
financing needs, earnings, revenue outlook, operational performance, management
or ownership changes as well as competition. In making impairment determinations
for investments of available-for-sale securities, the Company additionally
reviews the current market price for other-than-temporary decline in values.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market determined using the
average cost method. The Company's business is subject to the risk of
technological and design changes. The Company 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. 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. 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 and the
inventory value and related reserve will be written off by the Company.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is provided using the straight-line method over the estimated useful
lives of the assets, ranging from three to 20 years. The Company's assets
acquired under capital leases and leasehold improvements are amortized over the
lesser of the asset life or lease term and included in depreciation.
INTANGIBLES AND GOODWILL
Intangibles consist primarily of technology licenses and assets resulting from
business combinations. Technology licenses 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 ten
years. In fiscal 2003, the Company acquired $47.6 million of product technology
related to the Resonext merger (SEE NOTE 7). The following summarizes certain
information regarding gross carrying amounts and amortization of intangibles (in
thousands):
MARCH 31, 2003 MARCH 31, 2002
-------------------------------- ---------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------------ ---------------- ------------ -----------------
Intangible Assets:
Technology licenses $ 11,980 $ 3,302 $ 11,980 $ 2,503
Acquired product technology and other 50,579 2,771 2,680 403
- ---------------------------------------------------------------------------------------------------------------------
Total $ 62,559 $ 6,073 $ 14,660 $ 2,906
=====================================================================================================================
Intangible asset amortization expense was $3.2 million, $1.5 million and $1.1
million in fiscal 2003, 2002 and 2001, respectively. The following table
provides the Company's estimated future amortization expense based on current
amortization periods for the periods indicated (in thousands):
ESTIMATED
YEAR ENDING MARCH 31, AMORTIZATION EXPENSE
---------------------- ------------------------
2004 $ 6,832
2005 6,147
2006 6,147
2007 5,865
2008 5,249
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
The Company assesses the recoverability of its intangibles and other assets by
determining its ability to generate future cash flows sufficient to recover the
unamortized balances over the remaining useful lives. Intangibles and other
assets determined to be unrecoverable based on future cash flows would be
written off in the period in which the determination was made as required by
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142) and Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144).
Goodwill represents the excess of the purchase price over the fair value of
assets acquired and liabilities assumed in a business combination. SFAS 142
eliminates the amortization of goodwill and instead requires that the goodwill
be evaluated for impairment on an annual basis, or whenever events indicate
impairment may have occurred. In accordance with SFAS 142, the Company evaluated
its goodwill and found no indication of impairment in fiscal 2003. The methods
used to evaluate goodwill included two generally accepted valuation
methodologies: the income approach - discounted cash flows, and the market
approach - enterprise value and guideline company analysis. Newly acquired
goodwill determinations are based on independent appraisals.
The following summarizes information regarding the gross carrying amount of
goodwill (in thousands):
MARCH 31, 2003 MARCH 31, 2002
---------------- ----------------
GROSS GROSS
CARRYING CARRYING
AMOUNT AMOUNT
---------------- -------------
Resonext goodwill (NOTE 7) $ 75,481 $ -
RF Nitro goodwill 19,379 19,379
GPS goodwill 15,146 15,146
-------------------------------- ---------------- -------------
Total $ 110,006 $ 34,525
================================ ================ =============
REVENUE RECOGNITION
Revenue from product sales is recognized when the title, and risk and rewards of
product ownership, is transferred. The Company also enters into engineering
agreements with certain customers relating to the development of customer
specific applications. Revenue is recognized for engineering contracts as it is
earned.
The Company's products generally carry 12 to 27 month warranties against defects
depending on the specific type of product. The Company provides for estimated
warranty costs in the period the related sales are made based on historical
experience, as well as an assessment of the overall risk.
SHIPPING AND HANDLING COST
The Company recognizes amounts billed to a customer in a sale transaction
related to shipping and handling as revenue. The costs incurred by the Company
for shipping and handling are classified as cost of goods sold.
RESEARCH AND DEVELOPMENT
The Company charges all research and development costs to expense as incurred.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. The Company recognized
advertising expense of $1.0 million for each of the fiscal years ended March 31,
2003, 2002 and 2001.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Under SFAS 109, the liability method is used in accounting for income
taxes, and deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities.
STOCK-BASED COMPENSATION
The Company accounts for employee stock options and employee restricted stock in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25). Under APB 25, no compensation expense is
recognized for stock options or restricted stock issued to employees with
exercise prices or share prices at or above quoted market value. For stock
options or restricted shares granted at exercise prices below quoted market
value, the Company records deferred compensation expense for the difference
between the price of the shares and the market value. Deferred compensation
expense is amortized ratably over the vesting period of the related options or
shares of restricted stock.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123) provides an alternative to APB 25 in accounting for
stock-based compensation issued to employees. SFAS 123 provides for a fair value
based method of accounting for employee stock options and similar equity
instruments. Companies that continue to account for stock-based compensation
arrangements under APB 25 are required by SFAS 123 to disclose the pro forma
effect on net (loss) income and net (loss) income per share as if the fair value
based method prescribed by SFAS 123 had been applied. The Company has continued
to account for stock-based compensation using the provisions of APB 25 and
presents the information required by SFAS 123 as amended by Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" (SFAS 148).
PRO FORMA DISCLOSURES
Pro forma information regarding net (loss) income and net (loss) income per
share is required by SFAS 123 as amended by SFAS 148, and has been determined as
if the Company accounted for its employee stock options using the fair value
method of SFAS 123 as amended by SFAS 148.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions:
YEARS ENDED MARCH 31,
2003 2002 2001
-------- ------- --------
Expected dividend yield -- -- --
Risk-free interest rate 3.7% 5.2% 4.8%
Expected volatility 102.2% 111.7% 125.5%
Weighted average expected life 7.6 8.3 8.5
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of stock-based
awards is amortized to expense over the awards' vesting periods. The weighted
average fair value of options granted during fiscal years 2003, 2002 and 2001
was $7.28, $16.39 and $24.32, respectively. The pro forma stock-based
compensation costs for fiscal 2002 and 2001 have been revised from amounts
previously reported. The Company's pro forma information follows (in thousands,
except per share data):
YEAR ENDED MARCH 31,
2003 2002 2001
------------------------------------------
Net (loss) income, as reported $ (9,335) $ (20,584) $ 34,974
Non-cash stock-based compensation included in net
(loss) income 5,537 2,888 1,708
Pro forma stock-based compensation cost (82,804) (79,681) (78,669)
---------------------------------------
Pro forma net (loss) income $ (86,602) $ (97,377) $ (41,987)
=======================================
Basic net (loss) income per share, as reported $ (0.05) $ (0.12) $ 0.22
---------------------------------------
Diluted net (loss) income per share, as reported $ (0.05) $ (0.12) $ 0.20
---------------------------------------
Pro forma basic net (loss) income per share $ (0.50) $ (0.59) $ (0.26)
---------------------------------------
Pro forma diluted net (loss) income per share $ (0.50) $ (0.59) $ (0.26)
---------------------------------------
SALES AND ACCOUNTS RECEIVABLE
The Company operates as a single business segment engaged in the design and sale
of integrated circuits. Revenues from significant customers, those representing
10% or more of total sales for the respective periods, are summarized as
follows:
YEAR ENDED MARCH 31,
2003 2002 2001
--------------- ------------------ ------------------
Customer 1 45% 65% 53%
Customer 2 14% 5% 4%
Additionally, 27%, 56% and 40% of the Company's accounts receivable were due
from customer one at March 31, 2003, 2002 and 2001, respectively. The Company's
accounts receivable at March 31, 2001 included a balance from a second customer
of 13%. At March 31, 2002 and March 31, 2003 the Company's accounts receivable
did not include any balances from other customers greater than 10% of the
accounts receivable balance.
The Company's principal financial instrument subject to potential concentration
of credit risk is accounts receivable, which is unsecured. The Company provides
an allowance for doubtful accounts equal to estimated losses expected to be
incurred in the collection of accounts receivable.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The financial statements of foreign subsidiaries have been translated into
United States dollars in accordance with Statement of Financial Accounting
Standards No. 52 "Foreign Currency Translation". All balance sheet accounts have
been translated using the exchange rates in effect at the balance sheet dates.
Income statement amounts have been translated using the average exchange rates
for the respective years. The gains and losses resulting from the changes in
exchange rates from year to year have been reported in accumulated other
comprehensive income (loss) included in the consolidated statements of
stockholders' equity.
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
adoption of SFAS 146 did not 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 did 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 has adopted the disclosure provisions for
interim periods beginning after March 31, 2003 and has adopted the annual
financial reporting requirements in fiscal 2003. The Company's adoption of SFAS
148 did not have a significant impact on the Company's consolidated financial
position, results of operations or cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). FIN 44 is the interpretation of Accounting
Research Bulletin No. 51 "Consolidated Financial Statements," which addresses
consolidation by business enterprises of variable interest entities. FIN 46 is
effective immediately for all variable interest entities created after January
31, 2003 and effective for fiscal years beginning after June 15, 2003 for
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. The Company will adopt FIN 46 in fiscal
2004. The adoption of FIN 46 is not expected to have a significant impact on our
consolidated financial position, results of operations or cash flows.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
The following is a summary of available-for-sale securities at March 31, 2003
and March 31, 2002 (in thousands):
AVAILABLE-FOR-SALE SECURITIES
-------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------- ---------- ---------- ----------
MARCH 31, 2003
U.S. government / agency securities $ 10,992 $ 4 $ -- $ 10,996
Corporate debt securities 79,808 44 (11) 79,841
Equity securities 121 -- -- 121
Municipal debt securities 1,350 -- -- 1,350
-------------------------------------------
$ 92,271 $ 48 $ (11) $ 92,308
===========================================
MARCH 31, 2002
U.S. government / agency securities $ 74,888 $ 77 $ (57) $ 74,908
Corporate debt securities 99,983 97 (39) 100,041
Equity securities 617 -- (183) 434
Municipal debt securities 10,035 -- (1) 10,034
Foreign debt securities 2,537 11 -- 2,548
-------------------------------------------
$188,060 $ 185 $ (280) $187,965
===========================================
The estimated fair value of available-for-sale securities was based on the
prevailing market values on March 31, 2003 and March 31, 2002.
In addition to the available-for-sale securities above, the Company has an
investment in the equity of a privately held company with a fair market value at
March 31, 2002 of $1.4 million. At March 31, 2003, the Company has an investment
in the equity of two privately held companies with a fair market value of $59.3
million, net of discount related to the note payable for the Jazz investment.
Debt securities held at March 31, 2003 are due within one year. Expected
maturities may differ from contractual maturities because the issuers of the
securities may have the right to prepay obligations.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORIES
The components of inventories are as follows (in thousands):
MARCH 31,
2003 2002
----------------------------------
Raw materials $ 15,942 $ 16,263
Work in process 30,174 26,136
Finished goods 29,672 21,528
----------------------------------
75,788 63,927
Inventory reserves (18,007) (25,193)
----------------------------------
Total inventories $ 57,781 $ 38,734
==================================
5. DERIVATIVE FINANCIAL INSTRUMENTS
On April 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). The standard establishes a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities.
FINANCIAL REPORTING POLICY
The Company used an interest rate swap agreement to effectively convert a $95.0
million notional amount of its variable rate synthetic lease to a fixed rate
basis, thus reducing the impact of interest rate changes on future results of
operations commencing April 2001 through November 2004. The interest rate swap
was a cash flow hedge and was recorded on the consolidated balance sheet at its
fair value of $6.0 million as of March 31, 2002, which was included in other
long-term liabilities and comprehensive loss with no impact on earnings.
During fiscal 2002, the terms and provisions of the interest-rate swap and the
$95.0 million hedged item (synthetic lease) exactly matched, enabling the
Company to use the hypothetical method of accounting for derivatives as defined
by SFAS 133. This hedge was an amortizing swap that was 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 matched the principal reduction in the synthetic lease transaction. This
agreement involved 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 resulted in cash to
be paid or received and was recognized as an adjustment to interest expense or
income for the reporting period.
On November 19, 2002, the Company terminated 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 was no longer eligible for hedge accounting. The interest rate swap was
valued at $7.8 million and was paid off on November 21, 2002 in connection with
the synthetic lease termination. The termination of the interest rate swap was
recognized as a loss for financial reporting purposes in the Company's
consolidated statements of operations and was included as an expense in other
(expense) income.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. 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 which 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), establishes a single accounting
model for long-lived assets to be disposed of by sale and resolves
implementation issues related to SFAS 121. 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 pursuant to SFAS 144 had not been met for these assets. As a
result, the assets were measured at the lower of the net carrying amount
(reflecting accumulated depreciation and impairment loss) or the estimated 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".
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."
7. BUSINESS COMBINATION
RESONEXT COMMUNICATIONS, INC.
On December 19, 2002, the Company completed the merger with Resonext, a
privately held company providing highly integrated silicon CMOS WLAN solutions
for 802.11a and multi-band (802.11a/b/g) platforms. The merger with 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 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 $9.50 per share. The Company issued
13,329,896 shares of common stock (net of dissenters) 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.
This merger 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 merger. There are no significant differences
between the accounting policies of the Company and Resonext.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. BUSINESS COMBINATION (CONTINUED)
The aggregate purchase price value of the Resonext merger determined in
accordance with SFAS 141 was $161.2 million, including a total of 14.0 million
shares of common stock and replacement stock options and warrants valued at
$158.6 million and $2.5 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
were 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.
The total purchase price components are as follows (in thousands):
Common stock issued $ 155,559
Value of options and warrants 6,697
Unvested equity compensation (3,657)
---------
Total stock, options and warrants $ 158,599
Transaction costs 2,542
Cash paid for dissenters 95
---------
Total purchase price $ 161,236
=========
The total purchase price of $161.2 million was allocated to the assets acquired
and liabilities assumed based on their fair values as determined by an
independent appraisal as of December 19, 2002 and evaluated by the Company, as
follows (in thousands):
Total purchase price $161,236
========
Current assets, including cash of $27.7 million $ 28,411
Property, plant and equipment 2,538
Other assets 157
Identifiable intangible assets:
Core technology 45,100
In-process research and development 10,500
Developed technology 2,500
Customer contracts 300
--------
Total assets acquired $ 89,506
========
Current liabilities $ 1,892
Long-term debt 1,859
--------
Total liabilities assumed $ 3,751
========
Resulting goodwill $ 75,481
========
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. BUSINESS COMBINATION (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 on a straight-line basis over
their estimated useful lives of four and ten years, respectively. The value of
the acquired in-process research and development was determined by estimating
the costs to develop the purchased in-process research and development into a
commercially viable product, estimating the resulting cash flows from the sale
of the products resulting from the completion of the in-process research and
development and discounting the net cash flows using a present value factor of
19%. The acquired in-process research and development with no alternative future
use was charged to expense at the merger date (Note 2) in accordance with SFAS
142. The remaining customer contract value will be amortized over the estimated
useful life of one year.
The $75.5 million allocated to goodwill represents the excess of the purchase
price over the fair value of assets acquired and liabilities assumed. The
goodwill is allocated to the consolidated Company as a whole because the Company
operates as a single reporting unit. 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 Company's consolidated results of operations for the periods ended March 31,
2003 and March 31, 2002 as if the Resonext merger had occurred on April 1, 2002
and 2001, respectively (in thousands).
YEAR ENDED
MARCH 31,
----------------------------
2003 2002
------------ -------------
Revenue $ 507,819 $ 369,308
Net (loss) income $ (32,464) $ (33,646)
Net (loss) income per share:
Basic $ (0.17) $ (0.19)
Diluted $ (0.17) $ (0.19)
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
merger actually taken place on April 1, 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 CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LEASES
The Company leases certain equipment and facilities under capital and
non-cancelable operating leases. The table below depicts capitalized leased
equipment balances included in property and equipment (in thousands):
MARCH 31,
2003 2002
-------- --------
Machinery and equipment-leased $ 4,287 $ 22,327
Accumulated amortization (2,174) (12,305)
------- --------
Total $ 2,113 $ 10,022
======= ========
The Company is a party to 33 capital leases with five equipment-financing
companies under which it has financed the cost of capital equipment and
leasehold improvements. Lease terms range from 12 months to 60 months with
effective interest rates ranging from 7.0% to 11.0%. Capital lease amortization
totaling approximately $3.2 million, $3.6 million and $3.5 million is included
in depreciation expense for the fiscal years ended March 31, 2003, 2002 and
2001, respectively. No interest expense related to this equipment under capital
leases has been capitalized in fiscal 2003, 2002 or 2001.
The Company leases the majority of its facilities from several third party real
estate developers including the corporate facility, the first wafer fabrication
facility, the molecular beam epitaxy (MBE) facility, and other facilities. The
terms of these operating leases range from four to 15 years and several have
renewal options up to two ten-year periods. The Company also leases various
machinery and equipment and office equipment under non-cancelable operating
leases.
Minimum future lease payments under non-cancelable capital and operating leases
as of March 31, 2003 are as follows (in thousands):
YEAR ENDING MARCH 31, CAPITAL OPERATING
-------- ----------
2004 $ 1,079 $ 8,701
2005 617 6,760
2006 84 5,981
2007 -- 5,187
2008 -- 4,625
Thereafter -- 26,390
------- ------
Total minimum payments 1,780 $57,644
======
Less amounts representing interest (112)
------
Present value of net minimum payments 1,668
Less current portion (1,057)
------
Obligations under capital leases, less current
portion $ 611
======
Rent expense under operating leases, including facilities and equipment, was
approximately $21.0 million, $28.4 million and $14.6 million for the fiscal
years ended March 31, 2003, 2002 and 2001, respectively.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LEASES (CONTINUED)
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 of equipment and our second
wafer fabrication facility for $84.5 million, with available cash on hand. As a
result, the Company's interest rate swap cash flow hedge was no longer eligible
for hedge accounting and was removed from the Company's balance sheet as of
December 31, 2002. The amount terminated for the interest rate swap was $7.8
million and was settled on November 21, 2002. The termination 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 (expense) income.
SALE-LEASEBACK
The Company completed a sale-leaseback transaction with respect to the Company's
corporate headquarters in March 2001. The transaction included the sale of the
land and building for total consideration of $13.4 million. The lease covers an
initial term of 15 years with options to extend the lease for two additional
periods of ten years each. Annual rent expense will be approximately $1.3
million for each of the first five years and will escalate by 2% each year
thereafter. The Company will recognize rent expense on a straight-line basis in
accordance with Statement of Financial Accounting Standards No. 13, "Accounting
for Leases" (SFAS 13), starting with the beginning of the lease term. The
transaction was deemed a normal leaseback as defined in Statement of Financial
Accounting Standards No. 98, "Accounting for Sales of Real Estate" (SFAS 98).
The Company recorded a sale and operating lease, thus removing the property from
the Company's consolidated balance sheet and is deferring the profit of $1.4
million over the 15-year lease term in accordance with Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate" (SFAS 66) and
SFAS 13.
9. LONG-TERM DEBT
On August 11, 2000, the Company completed the private placement of $300.0
million aggregate principal amount of 3.75% convertible subordinated notes due
2005. The notes are convertible into a total of approximately 6.7 million shares
of the Company's common stock at a conversion price of $45.085 per share as
adjusted for the August 25, 2000 two-for-one common stock split. The trading
value of the Company's stock on the commitment date, August 7, 2000, was $35.50
(adjusted for the common stock split). The net proceeds of the offering were
approximately $291.3 million after payment of the underwriting discount and
expenses of the offering, which are being amortized over the term of the notes
based on the effective interest method.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. OTHER OPERATING EXPENSES
Other operating expenses for fiscal 2003 include approximately five months of
pre-production costs associated with the start-up of the Company's test and tape
and reel facility in Beijing, China and an acquired in-process research and
development charge of $10.5 million related to the Resonext merger 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 merger 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.
11. INCOME TAXES
Deferred income tax assets and liabilities are determined based upon differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The components of the income tax
(provision) benefit are as follows (in thousands):
YEAR ENDED MARCH 31,
2003 2002 2001
-------------------------------
Current:
Federal $-- $ 12,670 $ (6,055)
State -- 3,368 (748)
Foreign (250) (73) --
Deferred (expense) benefit -- (9,136) (10,632)
-------------------------------
Total $(250) $ 6,829 $(17,435)
===============================
The Company has recorded tax benefits provided by the Job Creation and Worker
Assistance Act of 2002, enacted on March 9, 2002, which include additional
accelerated tax depreciation, expanded carry-back opportunities and reduction of
alternative minimum tax limitations. As a result of these law changes,
additional tax benefits and refundable taxes in excess of earlier estimates are
now available to the Company and are included herein.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred income taxes are as follows (in thousands):
MARCH 31,
2003 2002
---------------------
Current deferred tax assets (liabilities):
Allowance for bad debts $ 405 $ 423
Warranty reserve 388 386
Inventory reserve 6,758 9,394
Accrued vacation 1,652 1,231
Sale/leaseback 516 487
Other 1,190 1,034
---------------------
Total current deferred tax assets 10,909 12,955
Valuation reserve for current deferred tax assets (10,909) (12,955)
---------------------
Net current deferred asset (liability) $ -- $ --
=====================
Non-current deferred tax assets (liabilities):
Interest rate swap derivative $ -- $ 2,673
Net operating loss carry-forwards 29,610 9,675
Research and other credits 20,135 11,951
Write down of investment 2,171 1,486
Accumulated depreciation/basis difference (25,978) (24,584)
Merger related basis difference (18,088) --
Other (63) (262)
---------------------
Total non-current deferred tax assets (liabilities) 7,787 939
Valuation reserve for non-current deferred tax assets (7,787) (939)
---------------------
Net deferred asset (liability) $ -- $ --
=====================
The Company's overall tax rate differed from the statutory rate principally due
to the non-recognition of the U.S. tax benefits on the domestic net operating
losses, and tax rate differences on foreign transactions.
At March 31, 2003, the Company had recorded a valuation reserve for deferred tax
assets of $18.7 million related to U.S. domestic operating losses, state
operating losses and credits against U.S. and state tax established in
accordance with the Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," as it is management's opinion that it is more
likely than not that some portion of these benefits may not be realized. Of the
valuation allowance, $5.8 million was recorded against equity to offset the tax
benefit of employee stock options recorded in equity. Federal losses of
approximately $72.9 million may expire in years 2022-2024, and state losses of
approximately $89.9 million may expire in years 2009-2024 if unused. Federal
credits of $14.4 million and state credits of $3.8 million may expire in years
2013-2024 and 2003-2008, respectively. Federal alternative minimum tax credits
of $1.9 million will carry-forward indefinitely. Included in the amounts above
are certain net operating losses (NOLs) and other tax attribute assets acquired
in conjunction with the close of the Resonext merger. The utilization of
acquired assets may be subject to certain annual limitations as required under
Internal Revenue Code Section 382.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
The Company is in the process of expanding into international jurisdictions, and
it is anticipated that such expansion and investments abroad will continue. Each
endeavor may expose the Company to taxation in multiple foreign jurisdictions.
It is management's opinion that upon commencement of foreign operations, any
future foreign undistributed earnings will either be permanently reinvested or
such future distributions, if any, will not result in incremental U.S. taxes.
Accordingly, no provision for U.S. federal and state income taxes has been made
thereon. It is not practical to estimate the additional tax that would be
incurred, if any, if the permanently reinvested earnings were repatriated.
A reconciliation of the (provision for) and benefit from income taxes to income
tax expense computed by applying the statutory federal income tax rate to
pre-tax (loss) income for the fiscal years ended March 31, 2003, 2002 and 2001
is as follows (dollars in thousands):
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------------------
2003 2002 2001
-------------------------------------------------------------------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
-------------------------------------------------------------------------------------
Income tax benefit (expense) at
statutory federal rate $ 3,180 (35.00)% $ 9,595 (35.00)% $ (18,358) (35.00)%
Decrease (increase) resulting
from:
State tax, net of federal
benefit 1,454 (16.01) 419 (1.54) (920) (1.75)
Research and development
credits 4,105 (45.19) 4,722 (17.23) 1,221 2.33
Foreign Sales Corporation
benefit -- -- -- -- 632 1.20
Foreign tax expense (250) 2.75 (73) 0.27 -- --
Change in reserve for deferred
tax assets (5,889) 64.82 (8,520) 31.08 -- --
In-process research and
development (3,675) 40.45 -- -- -- --
Other 825 (9.07) 686 (2.49) (10) (0.02)
------------------------------------------------------------------------------------
$ (250) 2.75% $ 6,829 (24.91)% $(17,435) (33.24)%
====================================================================================
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. NET (LOSS) INCOME PER SHARE
The following table sets forth the computation of basic and diluted net (loss)
income per share (in thousands, except per share data):
YEAR ENDED MARCH 31,
2003 2002 2001
---------------------------------
Numerator for basic and diluted net (loss) income per share:
Net (loss) income $ (9,335) $ (20,584) $ 34,974
=================================
Denominator:
Denominator for basic net (loss) income per share -
weighted average shares 172,706 165,827 161,820
Effect of dilutive securities:
Employee stock options -- -- 11,396
---------------------------------
Denominator for diluted net (loss) income per share - adjusted
weighted average shares and assumed conversions 172,706 165,827 173,216
=================================
Basic net (loss) income per share $ (0.05) $ (0.12) $ 0.22
=================================
Diluted net (loss) income per share $ (0.05) $ (0.12) $ 0.20
=================================
Options to purchase 12.6 million shares, 3.4 million shares and 2.0 million
shares of common stock were outstanding during fiscal 2003, 2002 and 2001,
respectively, but were not included in the computation of diluted net (loss)
income per share for the fiscal years ended March 31, 2003, 2002 and 2001,
respectively, because the exercise price of the options was greater than the
average market price of the common shares. The computation of diluted net (loss)
income per share for the years ended March 31, 2003, 2002 and 2001 similarly did
not assume the conversion of the 3.75% convertible subordinated notes due 2005
that were issued in August 2000 because the inclusion would be anti-dilutive.
13. 401(K) PLAN
Each employee is eligible to participate in the Company's fully qualified 401(k)
plan after three months of service. An employee may invest a maximum of 15% of
pretax earnings in the plan. Employer contributions to the plan are made at the
discretion of the Company and its Board of Directors. An employee is fully
vested in the employer contribution portion of the plan after completion of five
continuous years of service. The Company contributed $1.4 million, $1.2 million
and $0.9 million to the plan during fiscal years 2003, 2002 and 2001,
respectively.
14. EMPLOYEE STOCK PURCHASE PLAN
In April 1997, the Company adopted its Employee Stock Purchase Plan (ESPP),
which qualifies as an "employee stock purchase plan" under Section 423 of the
Internal Revenue Code. All regular full-time employees of the Company (including
officers) and all other employees who meet the eligibility requirements of the
plan may participate in the ESPP. The ESPP provides eligible employees an
opportunity to acquire the Company's common stock at 85% of the lower of the
closing price per share of the Company's common stock on the first or last day
of each six-month purchase period. An aggregate of 4.0 million shares of common
stock has been reserved for offering under the ESPP and are available for
purchase thereunder, subject to anti-dilution adjustments in the event of
certain changes in the capital structure of the Company. The Company makes no
cash contributions to the ESPP, but bears the expenses of its administration.
During fiscal years 2003, 2002 and 2001, respectively, 611,898 shares, 268,738
shares, and 179,488 shares were purchased under the ESPP.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STOCK-BASED AWARDS
SUMMARY OF STOCK OPTION PLANS
1992 STOCK OPTION PLAN
The Company's 1992 Stock Option Plan (the 1992 Option Plan) was adopted by the
Company and its shareholders in February 1992. The 1992 Option Plan provided for
the granting of both incentive and nonqualified options to purchase common stock
to key employees, non-employee directors and advisors and consultants in the
service of the Company. The 1992 Option Plan was terminated following the
Company's initial public offering in June 1997, at which time options to
purchase 8.7 million shares had been granted.
1997 KEY EMPLOYEES' STOCK OPTION PLAN
In April 1997, the Company and its shareholders adopted the 1997 Key Employees'
Stock Option Plan (the 1997 Option Plan), which provides for the granting of
options to purchase common stock to key employees and independent contractors in
the service of the Company. The 1997 Option Plan permits the granting of both
incentive options and nonqualified options. The aggregate number of shares of
common stock that may be issued pursuant to options granted under the 1997
Option Plan may not exceed 10.4 million shares, subject to adjustment in the
event of certain events affecting the Company's capitalization.
DIRECTORS' OPTION PLAN
In April 1997, the Company and its shareholders adopted the Non-Employee
Directors' Stock Option Plan. Under the terms of this plan, directors who are
not employees of the Company are entitled to receive options to acquire shares
of common stock. An aggregate of 1.6 million shares of common stock have been
reserved for issuance under this plan, subject to adjustment for certain events
affecting the Company's capitalization. During fiscal years 2003, 2002 and 2001,
respectively, the Company issued options to purchase 100,000, 60,000 and 80,000
shares, respectively, to eligible participants under the plan. In addition,
during fiscal 1999, the Company granted options to purchase 120,000 shares to
certain directors outside of the Non-Employee Directors' Stock Option Plan.
1999 STOCK INCENTIVE PLAN
The 1999 Stock Incentive Plan (the 1999 Stock Plan), which the Company's
shareholders approved at the 1999 annual meeting of shareholders, provides for
the issuance of a maximum of 16.0 million shares of common stock pursuant to
awards granted thereunder. The maximum number of shares of common stock that may
be issued under the plan pursuant to grant of restricted awards shall not exceed
2.0 million shares. The number of shares reserved for issuance under the 1999
Stock Plan and the terms of awards may be adjusted upon certain events affecting
the Company's capitalization. No awards may be granted under the 1999 Stock Plan
after June 30, 2009. The Company recorded deferred compensation of $2.0 million,
$7.0 million, and $7.9 million in fiscal 2003, 2002 and 2001, respectively,
associated with the awarding of 414,700, 524,900 and 557,628 shares,
respectively, of non-vested restricted stock to key employees at no cost under
the 1999 Stock Plan. This deferred compensation is being amortized to expense
over the vesting periods of such restricted stock awards, up to four years.
During fiscal 2003, 2002 and 2001, 225,578, 113,574 and 49,998 shares of these
restricted stock awards were exercised, respectively.
RF NITRO COMMUNICATIONS, INC. 2001 STOCK INCENTIVE PLAN
In connection with its merger with RF Nitro, the Company assumed the RF Nitro
Communications, Inc. 2001 Stock Incentive Plan. This plan provides for the grant
of options to purchase common stock to key employees, non-employee directors and
consultants in the service of the Company. This plan permits the grant of
incentive, nonqualified and restricted stock awards. The aggregate number of
shares reserved for issuance under the plan is 52,123. The terms of awards may
be adjusted upon certain events affecting the Company's capitalization. No
awards may be granted under the plan after May 29, 2011. The Company recorded
deferred compensation of $0.3 million in fiscal 2002 associated with the
awarding of 17,356 shares of non-vested restricted stock to key employees at no
cost under this plan. During each of fiscal 2003 and 2002, 3,471 shares of these
restricted stock awards were exercised.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STOCK-BASED AWARDS (CONTINUED)
RESONEXT COMMUNICATIONS, INC. 1999 STOCK OPTION PLAN
In connection with its merger with Resonext, the Company assumed the Resonext
1999 Stock Option Plan. This plan provides for the grant of options to purchase
common stock to key employees, non-employee directors and consultants in the
service of the Company. This plan permits the grant of incentive, and
nonqualified options, however does not allow for restricted grants. Stock
purchase rights may also be granted under the plan. The aggregate number of
shares reserved for issuance under the plan is 1,370,301 shares. The terms of
awards may be adjusted upon certain events affecting the Company's
capitalization. No awards may be granted under the plan after November 23, 2009.
A SUMMARY OF ACTIVITY OF THE COMPANY'S DIRECTORS AND EMPLOYEE STOCK OPTION
FORMAL PLANS FOLLOWS (IN THOUSANDS, EXCEPT PER SHARE DATA):
NUMBER OF SHARES OPTION PRICES
------------------------------ --------------------------
AVAILABLE OPTIONS
FOR GRANT OUTSTANDING PER SHARE RANGE
-------------- --------------- --------------------------
March 31, 2000 12,485 16,163 $ 0.02 - $ 87.50
Granted (4,684) 4,684 11.13 - 80.13
Exercised - (2,762) 0.02 - 24.84
Canceled 421 (421) 0.11 - 87.50
-------------- --------------- ------------ -------------
March 31, 2001 8,222 17,664 $ 0.03 - $ 87.50
Reserved 34 - - -
Granted (4,027) 4,027 2.16 - 34.03
Exercised - (2,501) 0.03 - 25.88
Canceled 576 (576) 0.15 - 80.13
-------------- --------------- ------------ -------------
March 31, 2002 4,805 18,614 $ 0.03 - $ 87.50
Reserved 1,371 - - -
Granted (6,166) 6,166 0.52 - 18.98
Exercised - (2,645) 0.03 - 14.25
Canceled 1,121 (1,121) 0.52 - 80.13
Repurchased 57 - 0.52 - 2.58
-------------- --------------- ------------ -------------
March 31, 2003 1,188 21,014 $ 0.03 - $ 87.50
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STOCK-BASED AWARDS (CONTINUED)
OUTSTANDING AND EXERCISABLE OPTIONS
Exercise prices for options outstanding as of March 31, 2003, ranged from $0.03
to $87.50. The weighted average remaining contractual life of outstanding
options was 7.4 years. The weighted average exercise price of outstanding
options at March 31, 2003 was $15.10. At March 31, 2003, 2002 and 2001, awards
to purchase 8.5 million, 5.8 million and 4.1 million shares of common stock were
exercisable, respectively.
The following table summarizes in more detail information regarding the
Company's directors and employee stock option formal plans outstanding at March
31, 2003 (in thousands, except per share and award life data):
Outstanding Options Exercisable Options
- ---------------------------------------------------------------------------------- -----------------------------
Weighted- Weighted- Weighted-
Range of Number Average Average Number Average
Exercise Of Exercise Remaining Of Exercise
Prices Options Price Contractual Life Options Price
- --------------------------- ---------------- -------------- ---------------------- ------------- ---------------
$ 0.03- 8.75 7,981 $ 4.31 7.5 years 2,990 $ 2.36
8.75- 17.50 7,864 14.41 7.5 2,871 13.79
17.50- 26.25 2,894 21.80 7.0 1,496 21.88
26.25- 35.00 531 32.01 7.1 293 32.25
35.00- 43.75 604 38.50 7.0 312 38.32
43.75- 52.50 690 49.03 6.4 333 49.02
52.50- 61.25 102 59.25 6.9 51 58.91
61.25- 70.00 116 64.40 7.1 53 64.58
70.00- 78.75 44 72.50 7.0 26 72.50
78.75- 87.50 188 82.80 7.0 113 82.79
---------------- -------------- ---------------------- ------------- ---------------
21,014 $15.10 7.4 years 8,538 $ 15.79
================ ============== ====================== ============= ===============
16. SHAREHOLDER RIGHTS PLAN
On August 10, 2001, the Company's Board of Directors adopted a shareholder
rights plan, pursuant to which un-certificated stock purchase rights were
distributed to shareholders at a rate of one right for each share of common
stock held of record as of August 30, 2001. The rights plan is designed to
enhance the Board's ability to prevent an acquirer from depriving shareholders
of the long-term value of their investment and to protect shareholders against
attempts to acquire the Company by means of unfair or abusive takeover tactics.
The rights become exercisable based upon certain limited conditions related to
acquisitions of stock, tender offers and certain business combination
transactions involving the Company. The rights plan was amended in May 2003 to
provide for a periodic review, at least once every three years, by the
Governance and Nominating Committee of the Board to evaluate whether the rights
plan is in the best interest of the Company and its shareholders.
17. COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At March 31, 2003, the Company had reserved a total of 38.0 million of its
authorized 500.0 million shares of common stock for future issuance as follows
(in thousands):
Outstanding stock options under directors and employees stock option formal plans 21,014
Possible future issuance under Company stock option plans 1,188
Outstanding directors' options outside of non-employee directors' option plan 93
Employee stock purchase plan 2,487
Restricted stock-based awards granted 1,333
Possible future issuance of restricted stock-based awards 289
Possible future issuance pursuant to convertible subordinated notes 11,620
-------------------
Total shares reserved 38,024
===================
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. RELATED PARTY TRANSACTIONS
The Company and Northrop Grumman Space Technology sector (NGST), formerly known
as TRW Space & Electronics, Inc. (TRW) entered into a license arrangement in
June 1996 whereby TRW granted the Company a worldwide, perpetual, royalty-free
license for GaAs HBT commercial wireless applications in exchange for shares of
the Company's stock. In connection with the expansion of the license
arrangements with TRW for use of the GaAs HBT technology to manufacture products
for commercial coaxial and other non-fiber wire applications in November 1999,
the Company granted TRW two warrants for the purchase of shares of common stock.
The first warrant was for 500,000 shares of common stock which became
exercisable on December 31, 2000 and was exercised on January 3, 2001. The
second warrant was for 1.0 million shares of common stock and was exercisable
between December 31, 2000 and December 31, 2001 if the Company achieved certain
annualized sales milestones. The performance conditions were not satisfied, and
the warrant was forfeited. In accordance with EITF 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services" and EITF 00-8 "Accounting by a
Grantee for an Equity Instrument to Be Received in Conjunction with Providing
Goods or Services," the unamortized intangible asset value and corresponding
equity value as of December 31, 2001 was removed from the Company's consolidated
financial statements as of March 31, 2002. During the fourth quarter of fiscal
2002, TRW sold its remaining shares in the Company and was no longer a principal
owner.
19. COMMITMENTS AND CONTINGENCIES
JAZZ SEMICONDUCTOR STRATEGIC RELATIONSHIP
The Company entered into a strategic relationship with Jazz. 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
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 $30.0 million payable is recorded in other current liabilities
net of the effective discount rate of one year LIBOR plus 1.0%.
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 $16.4 million had been invested as of
March 31, 2003. On January 23, 2002, Agere announced that it was seeking a buyer
for its Orlando wafer fabrication operation. The Company currently does not
intend to make any additional investments in equipment under this arrangement.
The Company recently reopened discussions with Agere in order to resolve all
remaining issues between the parties under the alliance documents, including the
refund to the Company of amounts previously invested by it under its agreements
with Agere. These discussions are at an early stage and the Company currently
cannot predict the outcome or financial or other effects of these discussions.
Due to the pending sale, the Company classified the assets as "assets held for
sale" during fiscal 2002. The plan for sale did not occur in fiscal 2003,
therefore, the Company reclassified the "assets held for sale" to "assets held
and used" pursuant to FAS 144 and began depreciation of these assets in fiscal
2003.
LEGAL
The Company is involved in various legal proceedings and claims that have arisen
in the ordinary course of its business that have not been fully adjudicated.
These actions, when finally concluded and determined, will not, in the opinion
of management, have a material adverse effect upon the consolidated financial
position or results of operations of the Company.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. GEOGRAPHIC INFORMATION
The consolidated financial statements include sales to customers by geographic
region that are summarized as follows:
YEAR ENDED MARCH 31,
2003 2002 2001
-----------------------------------------
SALES:
United States 20% 29% 48%
Asia 54 51 27
Europe 18 13 19
Central and South America 7 6 4
Canada <1 <1 2
Other <1 <1 <1
The consolidated financial statements include the following long-lived assets
amounts related to operations of the Company by geographic region (in
thousands):
MARCH 31,
--------------------------------
Long-lived assets: 2003 2002
---------------- ---------------
United States $ 297,728 $ 219,151
Asia 12,941 1,370
Europe 1,344 1,158
---------------- ---------------
Total long-lived assets $ 312,013 $ 221,679
Sales, for geographic disclosure purposes, are based on the "bill to" address of
the customer. The "bill to" address is not always an accurate representation of
the location of final consumption of the Company's components by either the
original equipment manufacturer (OEM) or the OEM's customer. Long-lived assets
include property and equipment.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. SUMMARY OF QUARTERLY RESULTS (UNAUDITED):
FISCAL 2003 QUARTER
(IN THOUSANDS, EXCEPT PER
SHARE DATA) FIRST SECOND THIRD FOURTH
--------------- -------------- ---------------
Revenue $103,942 $119,735 $ 145,813 $ 138,329
Gross profit 41,438 45,997 54,426 40,790
Net income (loss) 2,349 6,485 (5,183) (12,986)
Net income (loss) per share:
Basic $ 0.01 $ 0.04 $ (0.03) $ (0.07)
Diluted $ 0.01 $ 0.04 $ (0.03) $ (0.07)
FISCAL 2002 QUARTER
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
FIRST SECOND THIRD FOURTH
--------- -------- --------- ----------
Revenue $ 70,052 $ 98,271 $ 100,551 $ 100,434
Gross profit 4,151 36,369 38,893 40,930
Net (loss) income (28,386) 1,532 3,501 2,769
Net (loss) income per share:
Basic $ (0.17) $ 0.01 $ 0.02 $ 0.02
Diluted $ (0.17) $ 0.01 $ 0.02 $ 0.02
Report of Independent Auditors
Board of Directors and Shareholders
RF Micro Devices, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of RF Micro
Devices, Inc. and subsidiaries as of March 29, 2003 and March 30, 2002, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended March 29, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of RF
Micro Devices, Inc. and subsidiaries at March 29, 2003 and March 30, 2002, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended March 29, 2003, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Greensboro, North Carolina
April 16, 2003