UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-22511
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RF MICRO DEVICES, INC.
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(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1733461
- ------------------------------------------ -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7628 THORNDIKE ROAD
GREENSBORO, NORTH CAROLINA 27409-9421
- ------------------------------------------ -----------------
(Address of principal executive offices) (Zip Code)
(336) 664-1233
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
------- -------
As of October 31, 2004, there were 187,362,758 shares of the registrant's
common stock outstanding.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Condensed Consolidated Balance Sheets as of September 30, 2004
and March 31, 2004....................................................3
Condensed Consolidated Statements of Operations for the three months
ended September 30, 2004 and 2003.....................................4
Condensed Consolidated Statements of Operations for the six months
ended September 30, 2004 and 2003.....................................5
Condensed Consolidated Statements of Cash Flows for the six months
ended September 30, 2004 and 2003.....................................6
Notes to Condensed Consolidated Financial Statements..................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..........................................14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........21
ITEM 4. CONTROLS AND PROCEDURES............................................21
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............21
ITEM 6. EXHIBITS..........................................................22
OTHER EVENTS................................................................22
-2-
PART I - FINANCIAL INFORMATION
ITEM 1.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, March 31,
2004 2004
------------- -------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 93,247 $ 220,915
Short-term investments 117,491 106,930
Accounts receivable, net of allowances of
$701 at September 30, 2004 and $1,547 at
March 31, 2004 86,495 86,287
Inventories (Note 3) 81,072 58,552
Prepaid expenses 5,447 3,854
Other current assets 6,095 6,244
---------- ----------
Total current assets 389,847 482,782
Property and equipment, net of accumulated
depreciation of $202,167 at September 30,
2004 and $179,492 at March 31, 2004 288,219 280,356
Goodwill 114,806 110,006
Long-term investments 59,621 59,739
Intangible assets, net of amortization of
$16,218 at September 30, 2004 and $12,952
at March 31, 2004 51,027 50,165
Investment in equity method investee -- 3,169
Other non-current assets 1,835 1,799
---------- ----------
Total assets $ 905,355 $ 988,016
========== ==========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 46,058 $ 33,465
Accrued liabilities 24,101 22,206
Current obligations under capital leases 173 213
---------- ----------
Total current liabilities 70,332 55,884
Long-term debt, net of unamortized discount
of $4,202 at September 30, 2004 and $5,374
at March 31, 2004 225,798 324,626
Other long-term liabilities 4,404 4,368
---------- ----------
Total liabilities 300,534 384,878
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; 187,123 and 186,257 shares
issued and outstanding at September 30,
2004 and March 31, 2004, respectively 451,816 448,942
Additional paid-in capital 78,737 76,957
Deferred compensation (13,410) (14,442)
Accumulated other comprehensive
income, net of tax (Note 4) 150 499
Retained earnings 87,528 91,182
---------- ----------
Total shareholders' equity 604,821 603,138
---------- ----------
Total liabilities and
shareholders' equity $ 905,355 $ 988,016
========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
-3-
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
September 30, September 30,
2004 2003
------------- -------------
Revenue $ 149,107 $ 163,464
Operating costs and expenses:
Cost of goods sold 100,040 99,653
Research and development 37,143 30,568
Marketing and selling 11,407 11,437
General and administrative 5,338 5,219
Other operating expenses 453 527
------- -------
Total operating costs and expenses 154,381 147,404
------- -------
(Loss) income from operations (5,274) 16,060
Interest expense (2,243) (5,137)
Interest income 1,128 722
Loss in equity method investee -- (818)
Other expense, net (58) (55)
------- -------
(Loss) income before income taxes $ (6,447) $ 10,772
Income tax expense (Note 6) 220 183
------- -------
Net (loss) income $ (6,667) $ 10,589
======= =======
Net (loss) income per share (Note 2):
Basic $ (0.04) $ 0.06
Diluted $ (0.04) $ 0.05
Shares used in per share calculation:
Basic 186,639 184,363
Diluted 186,639 219,238
See accompanying Notes to Condensed Consolidated Financial Statements.
-4-
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Six Months Ended
September 30, September 30,
2004 2003
-------------- --------------
Revenue $ 314,881 $ 294,985
Operating costs and expenses:
Cost of goods sold 200,927 189,936
Research and development 72,489 61,903
Marketing and selling 22,539 21,734
General and administrative 11,174 9,771
Other operating expenses 7,056 1,054
-------- -------
Total operating costs and expenses 314,185 284,398
-------- -------
Income from operations 696 10,587
Interest expense (4,391) (8,615)
Interest income 2,181 1,599
Loss in equity method investee (1,761) (956)
Other (expense) income, net (154) 84
-------- -------
(Loss) income before income taxes $ (3,429) $ 2,699
Income tax expense (Note 6) 225 332
-------- -------
Net (loss) income $ (3,654) $ 2,367
======== =======
Net (loss) income per share (Note 2):
Basic $ (0.02) $ 0.01
Diluted $ (0.02) $ 0.01
Shares used in per share calculation:
Basic 186,513 184,271
Diluted 186,513 189,041
See accompanying Notes to Condensed Consolidated Financial Statements.
-5-
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED
--------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
--------------------------------
Cash flows from operating activities:
Net (loss) income $ (3,654) $ 2,367
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Depreciation 27,922 28,024
Amortization 5,541 8,420
Acquired in-process research and
development cost 6,201 --
Loss on disposal of assets, net 986 142
Loss from equity method investee 1,761 956
Amortization of deferred compensation 2,812 3,891
Other 26 169
Changes in operating assets and liabilities:
Accounts receivable, net (101) (13,883)
Inventories (22,282) 5,130
Recoverable income taxes -- 6,330
Prepaid expense and other current and
non-current assets (746) (1,465)
Accounts payable and accrued liabilities 9,481 6,451
Other liabilities (223) 3,250
--------- ---------
Net cash provided by operating activities 27,724 49,782
Investing activities:
Purchase of property and equipment (36,286) (17,603)
Proceeds from sale of property and equipment 911 --
Purchase of license (747) --
Proceeds from maturities of securities available-
for-sale 76,297 92,180
Purchase of securities available-for-sale (88,152) (113,832)
Purchase of business, net of cash received (10,133) --
Purchase of non-public investment -- (4,000)
--------- ---------
Net cash used in investing activities (58,110) (43,255)
Financing activities:
Proceeds from exercise of stock options,
warrants and employee stock purchases 2,874 2,692
Proceeds from 1.50% convertible subordinated
notes, net -- 224,781
Repurchase of 3.75% convertible subordinated
notes (100,000) (200,000)
Repayment of capital lease obligations (120) (427)
--------- ---------
Net cash (used in) provided by financing
activities (97,246) 27,046
--------- ---------
Net (decrease) increase in cash and cash
equivalents (127,632) 33,573
Effect of exchange rate changes on cash (36) 39
Cash and cash equivalents at the beginning
of the period 220,915 164,422
--------- ---------
Cash and cash equivalents at the end of
the period $ 93,247 $ 198,034
========= =========
Non-cash investing and financing activities:
Issuance of restricted stock $ 3,135 $ 3,542
Cancellation of restricted stock (1,355) --
Non-cash stock purchase for assets -- 842
Available-for-sale investment equity change,
net of tax 335 75
Currency translation change, net of tax 14 54
See accompanying Notes to Condensed Consolidated Financial Statements.
-6-
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed consolidated financial statements of RF Micro
Devices, Inc. and Subsidiaries (the Company) have been prepared in conformity
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires management to make
estimates and assumptions, which could differ materially from actual results.
In addition, certain information or footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed, or omitted,
pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the financial statements include
all adjustments (which are of a normal and recurring nature) necessary for
the fair presentation of the results of the interim periods presented. For
comparative purposes, certain fiscal 2004 amounts have been reclassified to
conform to fiscal 2005 presentation. These reclassifications had no effect
on net income (loss) or shareholders' equity as previously stated. The
results of operations for interim periods are not necessarily indicative of
the results that may be expected for a full year. These condensed
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended March
31, 2004.
The condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. The Company
reports information as one operating segment in accordance with Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131).
The Company uses a 52- or 53-week fiscal year ending on the Saturday
closest to March 31 of each year. The first fiscal quarter of each year ends
on the Saturday closest to June 30, the second fiscal quarter of each year
ends on the Saturday closest to September 30 and the third fiscal quarter of
each year ends on the Saturday closest to December 31; however, in this report
the Company's fiscal year is described as ending on March 31 and the first,
second, and third quarters of each fiscal year are described as ending June
30, September 30 and December 31, respectively.
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).
-7-
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2004 2003 2004 2003
-------------------- --------------------
Net (loss) income, as reported $ (6,667) $ 10,589 $ (3,654) $ 2,367
Non-cash stock-based compensation
included in net income 948 2,140 2,812 3,891
Pro forma stock-based
compensation cost (11,015) (17,825) (22,937) (34,920)
------- ------- ------- ------
Pro forma net loss $(16,734) $ (5,096) $(23,779) $(28,662)
======= ======= ======= =======
Basic net (loss) income per
share, as reported $ (0.04) $ 0.06 $ (0.02) $ 0.01
======= ======= ======= =======
Diluted net (loss) income per
share, as reported $ (0.04) $ 0.05 $ (0.02) $ 0.01
======= ======= ======= =======
Pro forma basic net loss
per share $ (0.09) $ (0.03) $ (0.13) $ (0.16)
======= ======= ======= =======
Pro forma diluted net loss
per share $ (0.09) $ (0.03) $ (0.13) $ (0.16)
======= ======= ======= =======
-8-
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
2. NET INCOME PER SHARE
The following table sets forth a reconciliation of the numerators and
denominators in the computation of basic and diluted net (loss) income per
share (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2004 2003 2004 2003
-------------------- --------------------
Numerator for basic and diluted
net (loss) income per share:
Net (loss) income available to
common shareholders -
Numerator for basic $ (6,667) $ 10,589 $ (3,654) $ 2,367
Plus: Income impact of assumed
conversions:
Interest on 1.50% convertible
notes -- 990 -- --
Net (loss) income plus assumed
conversion- ------- ------- ------- -------
Numerator for diluted $ (6,667) $ 11,579 $ (3,654) $ 2,367
======= ======= ======= =======
Denominator for basic net (loss)
income per share-weighted
average shares 186,639 184,363 186,513 184,271
Effect of dilutive securities:
Stock options -- 5,783 -- 4,770
Assumed conversion 1.50%
convertible notes -- 29,092 -- --
------- ------- ------- -------
Denominator for diluted net (loss)
income per share - adjusted
weighted average shares and
assumed conversion 186,639 219,238 186,513 189,041
======= ======= ======= =======
Basic net (loss) income per
share $ (0.04) $ 0.06 $ (0.02) $ 0.01
======= ======= ======= =======
Diluted net (loss) income per
share $ (0.04) $ 0.05 $ (0.02) $ 0.01
======= ======= ======= =======
In the computation of diluted net loss per share for the three months and six
months ended September 30, 2004, all outstanding stock options were excluded
because the effect of their inclusion would have been anti-dilutive. In the
computation of the net income for the three months and six months ended
September 30, 2003, outstanding stock options to purchase approximately 13.2
million shares and 15.0 million shares, respectively, were excluded because
the exercise price of the options was greater than the average market price of
the underlying common stock and the effect of their inclusion would have been
anti-dilutive.
On August 15, 2004, the Company called for the redemption of the remainder of
its outstanding 3.75% convertible subordinated notes. As an alternative to
redemption, the holders of the notes were entitled to convert the notes at a
price of $45.09 per share. However, on the date that the redemption was
announced (July 27, 2004), the closing price of the Company's common stock
was $5.92. Accordingly, all of the 3.75% convertible subordinated notes were
surrendered by the holders for redemption.
-9-
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
2. NET INCOME PER SHARE (continued)
The computation of diluted net (loss) income per share for the three months
and six months ended September 30, 2004 did not assume the conversion of
the Company's 1.50% convertible subordinated notes due 2010 because the
inclusion would have been anti-dilutive. The 1.50% notes are convertible
at a price of $7.63 per share, and the closing price of the Company's common
stock on the date that it committed to sell the notes was $5.78.
3. INVENTORIES
Inventories are stated at the lower of cost or market determined using the
average cost method. The components of inventories are as follows (in
thousands):
SEPTEMBER 30, MARCH 31,
2004 2004
----------------- ---------------
Raw materials $ 24,189 $ 17,876
Work in process 40,658 27,729
Finished goods 38,606 32,136
--------- ---------
103,453 77,741
Inventory reserve (22,381) (19,189)
--------- ---------
Total inventories $ 81,072 $ 58,552
========= =========
4. OTHER COMPREHENSIVE (LOSS) INCOME
Accumulated other comprehensive (loss) income for the Company consists of
accumulated unrealized (losses) and gains on marketable securities and foreign
currency translation adjustments. This amount is included as a separate
component of shareholders' equity. The components of comprehensive (loss)
income, net of tax, are as follows for the periods presented (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------
2004 2003 2004 2003
--------------------- --------------------
Net (loss) income $ (6,667) $ 10,589 $ (3,654) $ 2,367
Comprehensive (loss) income,
net of tax:
Unrealized (loss) gain on
marketable securities (8) 113 (335) 75
Foreign currency translation
(loss) gain (25) (6) (14) 54
------- ------- ------- -------
Comprehensive (loss) income,
net of tax $ (6,700) $ 10,696 $ (4,003) $ 2,496
======= ======= ======= =======
5. LONG-TERM DEBT
During August 2004, the Company repurchased all of its outstanding 3.75%
convertible subordinated notes ("Notes") due 2005. The Notes were redeemed for
$100.0 million, plus accrued interest of $1.9 million. The Company also
recorded a non-cash charge of $0.6 million in interest expense related to the
repurchase for unaccreted discounts and unamortized issuance costs.
The Company's 1.50% convertible subordinated notes had a fair value of $268.2
million as of September 30, 2004, on the Private Offerings, Resale and Trading
Through Automated Linkages (PORTAL) Market.
-10-
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
6. INCOME TAXES
Income tax expense for the second quarter of fiscal 2005 and fiscal 2004 was
$0.22 million and $0.18 million, respectively, primarily representing foreign
income taxes on international operations. Income tax expense for the six
months ended September 30, 2004 and September 30, 2003 was $0.23 million and
$0.33 million, respectively, primarily representing foreign income taxes
on international operations. The effective combined domestic income tax rate
was 0% for both the second quarter of fiscal 2005 and the second quarter of
fiscal 2004. The Company's overall tax rate for the second quarter of fiscal
2005 and 2004 differed from the statutory rate due to adjustments to the
valuation allowance primarily related to the partial recognition of the U.S.
tax benefits on the domestic net operating losses, tax credits, rate
differences on foreign transactions, and other differences between book and
tax treatment of certain expenditures.
At September 30, 2004, the Company had outstanding net operating loss
carryforwards (NOLs) for federal domestic tax purposes of approximately
$65.1 million, which will begin to expire in 2022, if unused, and state
losses of approximately $65.4 million, which will begin to expire in 2009,
if unused. Included in the amounts above are certain NOLs and other tax
attribute assets acquired in conjunction with the Company's acquisitions of
Resonext Communications, Inc. and Silicon Wave, Inc. The utilization of
acquired assets may be subject to certain annual limitations as required under
Internal Revenue Code Section 382. In accordance with the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," a
valuation allowance of $24.7 million related to domestic operating losses
and credit carryforwards has been established because it is more likely
than not that some portion of the deferred tax assets will not be
realized. The Company considered this review, along with the timing of the
reversal of the Company's temporary differences and the expiration dates
of the NOLs and credits, in reaching its decision.
7. BUSINESS ACQUISITION
On May 24, 2004, the Company completed the acquisition of Silicon Wave,
Inc., a privately held San Diego-based supplier of highly integrated
Bluetooth-Registered Trademark- solutions for wireless personal area
networks. As a result of the Silicon Wave acquisition, the Company
acquired all of the assets and liabilities of Silicon Wave, including in-
process research and development, and approximately 70 former Silicon Wave
employees have joined the Company. Silicon Wave's Bluetooth product
portfolio includes integrated single-chip silicon CMOS radio processors
(including the radio modem and digital baseband functions), as well as
stand-alone CMOS radio modem solutions.
The Company paid approximately $16.8 million in cash for all outstanding
shares of Silicon Wave capital stock with available cash on hand.
Immediately prior to the closing of the acquisition, the Company sold all of
the shares of Silicon Wave that the Company had purchased during fiscal 2004
to an existing Silicon Wave investor group for $6.0 million, the Company's
original cost for these shares. As a result, the Company paid net cash
consideration of $10.8 million for all Silicon Wave shares not previously
owned by the Company. In addition to the above-mentioned payment, the
Company agreed to pay earn-out consideration to the former Silicon Wave
stockholders upon achievement of certain revenue goals for the period from
April 4, 2004 to April 1, 2006. If the Company's revenue derived from
Silicon Wave products for the period from April 4, 2004 to April 2, 2005
exceeds $6.0 million, it will pay an aggregate cash amount equal to one-half
of the revenue derived from Silicon Wave products during this period. The
Company currently expects that the revenue threshold will be met in the third
quarter of fiscal 2005, triggering the contingent liability and purchase
price adjustment. If the Company's revenue derived from Silicon Wave
products for the period from April 3, 2005 to April 1, 2006 exceeds $25.0
million, it will pay an additional aggregate cash amount equal to the revenue
derived from Silicon Wave products during this period up to a maximum of
$75.0 million. The Silicon Wave acquisition was accounted for in accordance
with APB Opinion No. 18, "The Equity Method of Accounting for Investments in
Common Stock," as a step acquisition and in accordance with the Statement of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141),
using the purchase method of accounting.
The Company has incurred direct acquisition costs related to the Silicon
Wave business combination of $0.3 million. The direct acquisition costs of
$0.3 million were accounted for as part of the Company's purchase price
allocation. These costs consist of legal, accounting and appraisal fees.
The direct costs of the business combination will be included in the
Company's purchase price allocation in accordance with SFAS 141.
-11-
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
7. BUSINESS ACQUISITION (continued)
The total purchase price components are as follows (in thousands):
Cash paid at closing $ 16,810
Transaction costs 315
-------
Total purchase price $ 17,125
=======
The total purchase price of $17.1 million (which includes direct
acquisition costs of $0.3 million) was preliminarily allocated to the
assets acquired and liabilities assumed based on their fair values as
determined by the Company with the assistance of a third party valuation
specialist as of May 24, 2004, as follows (in thousands):
Current assets, including cash of
$1.0 million $ 1,884
Property, plant and equipment 1,500
Other assets 173
Identifiable intangible assets:
Core and developed technology 3,339
In-process research and development 6,201
------
Total assets acquired $13,097
Current liabilities assumed (5,363)
Adjustment of equity method investment 4,591
Resulting goodwill 4,800
------
Total purchase price $17,125
======
Of the $9.5 million of acquired identifiable intangible assets, $3.3
million represents the value of acquired core and developed technology and
$6.2 million represents the value of in-process research and development
cost that has no alternative future use (Note 8). The core and developed
technology assets acquired are being amortized over their estimated useful
lives of two and ten years, respectively, and such amortization is included
in cost of goods sold. The acquired in-process research and development
with no alternative future use was charged to "other operating expense" at
the acquisition date in accordance with SFAS 141.
The $4.8 million allocated to goodwill represents the excess of the
purchase price over the fair value of assets acquired and liabilities
assumed. In accordance with Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" (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.
The following unaudited pro forma consolidated financial information for
the three and six months ended September 30, 2004 and September 30, 2003
assumes that the Silicon Wave acquisition, which was closed by the Company
on May 24, 2004, was completed at the beginning of the periods presented
below (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
2004 2003 2004 2003
---------------------- ----------------------
Revenue $ 149,108 $ 163,846 $ 315,142 $ 296,636
Net (loss) income $ (6,667) $ 6,854 $ (8,558) $ (5,983)
Basic net (loss) income per
common share $ (0.04) $ 0.04 $ (0.05) $ (0.03)
Diluted net (loss) income
per common share $ (0.04) $ 0.03 $ (0.05) $ (0.03)
These pro forma results have been prepared for comparative purposes only and
do not purport to be indicative of the operating results that would have been
achieved had the acquisition actually taken place at the beginning of the
periods presented above. 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.
-12-
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. GOODWILL AND INTANGIBLE ASSETS
During the first quarter of fiscal 2005, the Company acquired $3.3 million of
core and developed technology as a result of the Silicon Wave acquisition.
This acquisition also resulted in a $4.8 million excess purchase price over
the fair value of the assets acquired and liabilities assumed, which was
allocated to goodwill.
The change in the carrying amount of goodwill for the six months ended
September 30, 2004 is as follows (in thousands):
Balance as of March 31, 2004 $ 110,006
Goodwill acquired during the period 4,800
---------
Balance as of September 30, 2004 $ 114,806
=========
The components of identifiable intangible assets are as follows (in thousands):
SEPTEMBER 30, 2004 MARCH 31, 2004
--------------------- -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ------------ -------- -------------
Technology licenses $ 12,503 $ 4,362 $ 11,714 $ 3,934
Acquired product technology
and other 54,742 11,856 51,403 9,018
------- ------- ------- -------
Total $ 67,245 $ 16,218 $ 63,117 $ 12,952
======= ======= ======= =======
Intangible asset amortization expense was $1.6 million and $3.3 million for
the three months and six months ended September 30, 2004 and $2.0 million
and $3.9 million for the three and six months ended September 30, 2003.
Amortization expense for the Company's identifiable intangible assets as of
September 30, 2004 is estimated to be $3.3 million for the remainder of
fiscal 2005, $6.7 million in fiscal 2006, $6.6 million in fiscal 2007, $5.8
million in fiscal 2008 and $5.7 million in fiscal 2009.
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that
relate to our plans, objectives, estimates and goals. Words such as
"expect," "anticipate," "intend," "plan," "believe," and "estimate," and
variations of such words and similar expressions, identify such forward-
looking statements. Our business is subject to numerous risks and
uncertainties, including the following:
- The rate of growth and development of wireless markets;
- The risks associated with the operation of our molecular beam epitaxy (MBE)
facility, our wafer fabrication facilities and our other foreign and
domestic manufacturing facilities;
- Our ability to attract and retain skilled personnel and develop leaders for
key business units and functions;
- Dependence on third parties, including wafer foundries, passive component
manufacturers, assembly and packaging suppliers and test, tape and reel
suppliers;
- The risks associated with the development of our own assembly capabilities
for module production packaging in Beijing, China;
- Variability in operating results;
- Variability in production yields, raw material costs and availability;
- Dependence on a limited number of customers;
- Dependence on our gallium arsenide (GaAs) heterojunction bipolar transistor
(HBT) products;
- Our ability to reduce costs and improve margins in response to declining
average selling prices by implementing innovative technologies;
- Our ability to adjust production capacity in a timely fashion in response
to changes in demand for our products;
- Our ability to bring new products to market in response to market shifts and
to use technological innovation to shorten time-to-market for our products;
- Currency fluctuations, tariffs, trade barriers, taxes and export license
requirements and health and security issues associated with our foreign
operations; and
- Our ability to integrate acquired companies, including the risk that we may
not realize expected synergies from our business combinations.
These and other risks and uncertainties, which are described in more
detail in our most recent Annual Report on Form 10-K filed with the
Securities and Exchange Commission, could cause the actual results and
developments to be materially different from those expressed or implied by
any of these forward-looking statements.
-14-
OVERVIEW
We design, develop, manufacture and market proprietary radio frequency
integrated circuits (RFICs) for wireless communications products and
applications. 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 manufacturer of GaAs HBT, 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 (WLANs), 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, Bluetooth-Registered Trademark- products and receivers and
transceivers that represent a substantial majority of the RFICs required in
wireless subscriber equipment. Our goal is to be the premier supplier of low-
cost, high-performance integrated circuits and solutions for applications
that enable wireless connectivity.
SECOND QUARTER FISCAL 2005 FINANCIAL AND OPERATIONAL HIGHLIGHTS:
- - Quarterly revenue decreased by 8.8% as compared to the corresponding quarter
of fiscal 2004, reflecting weakness in the market for Global System for
Mobile Communications (GSM)/General Packet Radio System (GPRS) cellular
handsets in Asia.
- - Gross profit margin for the quarter was 32.9% as compared to 39.0% in the
corresponding quarter of fiscal 2004 due to lower sales volume coupled with
the ramp of several new product platforms and a change in our product mix.
- - Inventory turns decreased to 4.9 in the second quarter as compared to 7.6 in
the corresponding quarter of fiscal 2004.
- - We achieved a significant milestone in the handset market as we became the
first company to ship more than a billion cellular power amplifiers.
- - We began ramping volume production of our first power amplifier modules
containing silicon control chips from Jazz Semiconductor, reaping the benefit
of our investment in a silicon foundry.
- - We commenced production shipments of our POLARIS-TRADEMARK- TOTAL RADIO-
TRADEMARK- cellular transceivers and began high-volume customer shipments for
use in multiple wireless devices.
- - We achieved production qualification at our Beijing module assembly
manufacturing facility and expect reduced-cost shipments from this facility
in the third quarter of fiscal 2005.
During the current quarter, we experienced lower sales volume to certain
customers, specifically GSM handset manufacturers located in Asia, which we
believe was a result of excess inventory levels in the supply chain. The lower
sales volume negatively impacted our gross margin for the quarter and
contributed partially to our increase in inventory. Inventory levels were also
impacted by a build up of POLARIS 2 components to support current backlog for a
leading customer. We currently anticipate that our inventory levels will
decline in the December quarter as POLARIS ramps and the environment in Asia
continues to improve.
We believe that the overall handset market remains healthy despite the impact
of softness in Asia, as our customers are currently forecasting sequential
handset unit growth for the December quarter. We believe that there are
several opportunities for growth for the Company in the near future, including
increasing our cellular content in handsets through market share gains in our
primary market of cellular power amplifiers (PAs), through sales of our POLARIS
- -Trademark- TOTAL RADIO-Trademark- transceivers and through the proliferation
of multiple radio protocols in mobile and portable wireless devices. We plan
to continue to diversify our product portfolio by introducing products that
increase the content we provide for existing applications and by introducing
products to markets that we do not currently address, thereby expanding our
total available market opportunity.
We have implemented a number of strategic initiatives relating to margin
improvement, including ramping volume production of our first PA modules
containing silicon control chips from Jazz Semiconductor and shipping products
from our recently qualified module packaging production line in Beijing, China.
We anticipate that these and other initiatives, along with anticipated
increases in sales volume, will allow us to improve gross margin over the next
12 months.
-15-
RESULTS OF OPERATIONS
The following table sets forth our unaudited condensed consolidated statement
of operations data expressed as a percentage of total revenue for the periods
indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------
2004 2003 2004 2003
-------- --------- ------- -------
Revenue 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses:
Cost of goods sold 67.1 61.0 63.8 64.3
Research and development 24.9 18.7 23.0 21.0
Marketing and selling 7.6 7.0 7.2 7.4
General and administrative 3.6 3.2 3.6 3.3
Other operating expenses 0.3 0.3 2.2 0.4
----- ----- ----- -----
Total operating costs and
expenses 103.5 90.2 99.8 96.4
----- ----- ----- -----
(Loss) income from operations (3.5) 9.8 0.2 3.6
Other (expense) income:
Interest expense (1.5) (3.1) (1.4) (2.9)
Interest income 0.7 0.4 0.7 0.5
Loss in equity method
investee -- (0.5) (0.6) (0.3)
----- ----- ----- -----
(Loss) income before income
taxes (4.3) 6.6 (1.1) 0.9
Income tax expense 0.2 0.1 0.1 0.1
----- ----- ----- -----
Net (loss) income (4.5)% 6.5% (1.2)% 0.8%
===== ===== ===== =====
REVENUE
Revenue for the three months ended September 30, 2004 decreased 8.8% to $149.1
million, compared to $163.5 million for the three months ended September 30,
2003. For the six months ended September 30, 2004, revenue increased 6.7% to
$314.9 million, compared to $295.0 million for the six months ended September
30, 2003. The decrease in revenue for the three months ended September 30,
2004 as compared to the three months ended September 30, 2003 was primarily due
to lower sales volume to certain customers, specifically GSM handset
manufacturers located in Asia, which was a result of excess inventory levels
in the supply chain. Due to the lower demand, sales of our GSM products were
not sufficient to offset the year over year decline in the U.S. market for Time
Division Multiple Access (TDMA) products.
The increase in revenue for the six months ended September 30, 2004 as compared
to September 30, 2003 was primarily due to growth in demand from large handset
manufacturers and market share gains for our power amplifier products during
the first quarter of fiscal 2005. During the three months ended September 30,
2004, Bluetooth revenue increased as a result of increased demand and the
resolution of the silicon supply constraints experienced during our first
quarter of fiscal 2005.
International shipments were $125.6 million and accounted for 84.2% of revenue
for the three months ended September 30, 2004, compared to $132.3 million, or
80.9% of revenue for the three months ended September 30, 2003. For the six
months ended September 30, 2004 international shipments were $256.7 million, or
81.5% of revenue, up from $241.5 million, or 81.9% of revenue, for the six
months ended September 30, 2003. Although sales dollars to Asia decreased 7.4%
for the three months ended September 30, 2004 as compared to the three months
ended September 30, 2003, sales to Asia as a percentage of total sales remained
relatively flat. The decrease in GSM sales volume to certain customers in Asia
was partially offset by new wireless connectivity business which positively
impacted revenue for the three and six months ended September 30, 2004 as
compared to the same periods in the prior year.
-16-
GROSS PROFIT
Gross profit for the three months ended September 30, 2004 decreased to $49.1
million, or 32.9% of revenue, compared to $63.8 million, or 39.0% of revenue,
for the three months ended September 30, 2003. For the six months ended
September 30, 2004, gross profit increased to $114.0 million, or 36.2% of
revenue, compared to $105.0 million, or 35.7% of revenue, for the same period
ended September 30, 2003. The gross profit percentage decrease for the three
months ended September 30, 2004 compared to the three months ended September
30, 2003 was primarily due to lower sales and production volumes and price
erosion, coupled with the ramp of several new product platforms and a change in
our product mix. The increase in the gross profit percentage for the six
months ended September 30, 2004 compared to the six months ended September 30,
2003 was primarily due to yield improvement of our power amplifier products,
ongoing cost savings initiatives and increased capacity utilization.
We have historically experienced significant fluctuations in gross profit
margins and, consequently, our operating results, and we expect such
fluctuations to continue. Gross margins are routinely affected by downward
pressure on average selling prices and the cost of silicon components and other
raw materials. As a result, we will continue to focus on cost reduction
efforts, including (1) strategic supply relationships, such as Jazz
Semiconductor, Inc., which provides us with a committed, lower-cost source of
supply for silicon wafers, (2) achieving higher levels of product integration,
(3) successfully implementing test yield and assembly improvement plans, such
as investing in our own assembly capabilities in Beijing, China, to obtain a
lower overall cost structure and other supply chain savings, and (4) increasing
our capacity utilization.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended September 30, 2004
were $37.1 million, or 24.9% of revenue, compared to $30.6 million, or 18.7% of
revenue, for the three months ended September 30, 2003. For the six months
ended September 30, 2004, research and development expenses were $72.5 million,
or 23.0% of revenue, compared to $61.9 million, or 21.0% of revenue, for the
same period in the prior year. The increase year over year was primarily
attributable to increased headcount and related personnel expenses including
salaries and benefits. The acquisition of Silicon Wave during the first
quarter of fiscal 2005 and the ramp of our POLARIS-Trademark- transceiver
products were responsible for the increased headcount and related personnel
expenses. We plan to continue to make investments in research and development
and expect that such expenses will continue to increase in absolute dollars in
future periods.
MARKETING AND SELLING
Marketing and selling expenses for the three months ended September 30, 2004
were $11.4 million, or 7.6% of revenue, compared to $11.4 million, or 7.0% of
revenue, for the three months ended September 30, 2003. For the six months
ended September 30, 2004, marketing and selling expenses increased to $22.5
million, or 7.2% of revenue, compared to $21.7 million, or 7.4% of revenue, for
the six months ended September 30, 2003. We plan to continue to make
investments in marketing and selling and expect that such expenses will
continue to increase in absolute dollars in future periods.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended September 30,
2004 were $5.3 million, or 3.6% of revenue, compared to $5.2 million, or 3.2%
of revenue, for the three months ended September 30, 2003. For the six months
ended September 30, 2004, general and administrative expenses were $11.2
million, or 3.6% of revenue, compared to $9.8 million, or 3.3% of revenue, in
the same period last fiscal year. The increase in absolute dollars for the six
months ended September 30, 2004 was primarily due to increased headcount and
related personnel expenses. We expect that general and administrative expenses
will continue to increase in absolute dollars in future periods.
OTHER OPERATING EXPENSE
Other operating expense for both the three months ended September 30, 2004 and
September 30, 2003 was $0.5 million. Other operating expense for the six
months ended September 30, 2004 was $7.1 million compared to $1.1 million for
the six months ended September 30, 2003. During the first quarter of fiscal
2005, we recorded a $6.2 million charge in accordance with SFAS 141 for
acquired in-process research and development associated with the Silicon Wave
acquisition, for which the Company determined, with the assistance of an
independent valuation firm, had no alternative future use. SFAS 141 specifies
that the portion of the purchase price 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 was primarily related to a single-chip
integrated circuit built on 0.13-micron CMOS technology and designed for usage
with mobile phones. As of the valuation date, the fair value of the acquired
in-process research and development was estimated to be $6.2 million, based on
a discounted cash flow model. As of September 30, 2004, the estimated cost to
complete this project is approximately $5.0 million with an estimated
completion date during the fiscal year of 2006.
-17-
Also included in other operating expense was $0.9 million related to start-up
costs associated with the expansion of the Company's test, tape and reel
facility in Beijing, China to add module assembly manufacturing functions.
The 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
module assembly manufacturing functions at the Beijing facility will be
included in cost of goods sold once the facility begins producing economic
value from the plant expansion. At the end of the September quarter we
achieved production qualification at this facility.
LOSS IN EQUITY METHOD INVESTEE
Prior to the Company's acquisition of Silicon Wave, the Company invested an
aggregate of $6.0 million in Silicon Wave in two installments during fiscal
2004 as part of a broader strategic relationship between the companies. During
the first quarter of fiscal year 2004, the Company made a $4.0 million
investment which represented less than a 20% ownership interest, and, because
the Company did not have the ability to exercise significant influence over the
management of Silicon Wave, the investment was carried at its original cost and
accounted for using the cost method of accounting for investments in accordance
with APB Opinion No. 18, "The Equity Method of Accounting for Investments in
Common Stock" (APB 18).
During the third quarter of fiscal 2004, the Company made an additional $2.0
million equity investment in Silicon Wave. The additional investment increased
the Company's ownership interest to greater than 20%. In accordance with APB
18, the Company re-evaluated its ownership interest and whether it had the
ability to exercise significant influence over the operation of Silicon Wave
and determined that the additional investment triggered a change in accounting
for the investment from the cost method to the equity method, which the Company
adopted in the third quarter of fiscal 2004. As required by APB 18, the
investment and results of operations for the prior periods presented were
adjusted retroactively and have been restated to reflect the application of the
equity method. Application of the equity method resulted in an equity method
loss in Silicon Wave of $1.8 million for the period from March 31, 2004 through
May 24, 2004 (the closing date of the Silicon Wave acquisition) and a $0.8
million equity method loss and $1.0 million equity method loss for the three
and six months ended September 30, 2003, respectively.
INTEREST EXPENSE
Interest expense was $2.2 million for the three months ended September 30,
2004, compared to $5.1 million for the second quarter of the prior year.
Interest expense for the six months ended September 30, 2004 and 2003 was $4.4
million and $8.6 million, respectively. During the second quarter of fiscal
2004, we repurchased $200.0 million of the $300.0 million aggregate principal
amount of 3.75% convertible subordinated notes due 2005. This transaction
resulted in a non-cash charge for unaccreted discounts and unamortized issuance
costs of $2.6 million. During the second quarter of fiscal 2005, the Company
repurchased the remaining $100.0 million principal of its outstanding 3.75%
convertible subordinated notes and recorded a non-cash charge of $0.6 million
for unaccreted discounts and unamortized issuance costs. The decrease in
interest expense for the six months ended September 30, 2004 compared to
September 30, 2003 was due to the lower write-off of the unaccreted discounts
and unamortized issuance costs as well as lower outstanding debt during the
period.
INCOME TAX
Income tax expense for the second quarter of fiscal 2005 and fiscal 2004 was
$0.22 million and $0.18 million, respectively, primarily representing foreign
income taxes on international operations. Income tax expense for the six
months ended September 30, 2004 and September 30, 2003 was $0.23 million and
$0.33 million, respectively, primarily representing foreign income taxes on
international operations. The effective combined domestic income tax rate was
0% for both the second quarter of fiscal 2005 and the second quarter of fiscal
2004. Our overall tax rate for the second quarter of fiscal 2005 and 2004
differed from the statutory rate due to adjustments to the valuation allowance
primarily related to the partial recognition of the U.S. tax benefits on the
domestic net operating losses, tax credits, rate differences on foreign
transactions, and other differences between book and tax treatment of certain
expenditures.
At September 30, 2004, we had outstanding net operating loss carryforwards
(NOLs) for federal domestic tax purposes of approximately $65.1 million, which
will begin to expire in 2022, if unused, and state losses of approximately
$65.5 million, which will begin to expire in 2009, if unused. Included in the
amounts above are certain NOLs and other tax attribute assets acquired in
conjunction with the Company's acquisitions of Resonext Communications and
Silicon Wave. The utilization of acquired assets may be subject to certain
annual limitations as required under Internal Revenue Code Section 382. In
accordance with the Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," a valuation allowance of $24.7 million related
to domestic operating losses and credit carryforwards has been established
because it is more likely than not that some portion of the deferred tax assets
will not be realized. We considered this review, along with the timing of the
reversal of our temporary differences and the expiration dates of the NOLs and
credits, in reaching our conclusion.
-18-
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 $687.0 million, net of offering expenses. As of September 30,
2004, our working capital was $319.5 million, including $93.2 million in cash
and cash equivalents, compared to working capital at March 31, 2004 of $426.9
million. The decrease in working capital was primarily due to the redemption
on August 15, 2004 of the remainder of the Company's outstanding 3.75%
convertible subordinated notes for $100.0 million plus accrued interest of $1.9
million.
Operating activities for the six months ended September 30, 2004 generated
$27.7 million in cash, compared to $49.8 million for the six months ended
September 30, 2003. This year over year decrease was primarily attributable to
lower earnings and an increase in inventory. The increase in inventory was
attributable to a build up of Polaris 2 components to support current backlog
and the lower than anticipated sales to certain customers in Asia because of
excess inventory levels in the supply chain.
Net cash used in investing activities for the six months ended September 30,
2004 was $58.1 million, compared to $43.3 million in the prior year. The year
over year increase in cash used was primarily attributable to lower proceeds
from maturities of securities available-for-sale, increased purchases of
property and equipment and the acquisition of Silicon Wave.
Net cash used in financing activities for the six months ended September 30,
2004 was $97.2 million, compared to cash provided of $27.0 million for the six
months ended September 30, 2003 due to the repurchase of the $100.0 million
outstanding principal amount of our 3.75% convertible subordinated notes.
COMMITMENTS
Convertible Debt - During fiscal 2004, we completed the private placement of
$230.0 million aggregate principal amount of 1.50% convertible subordinated
notes due 2010. The net proceeds of the offering were approximately $224.7
million after payment of the underwriting discount and expenses of the offering
totaling $5.3 million. The net proceeds from the 1.50% offering were offset by
the repurchase of $200.0 million of the $300.0 million aggregate principal
amount of our 3.75% convertible subordinated notes due 2005. On August 15,
2004, the Company redeemed the remainder of the outstanding principal amount of
the Notes for $100.0 million plus accrued interest with cash flow from
operations and cash on hand. Our interest expense will decrease by $3.75
million over the next 12 months as a result of this redemption.
Capital Commitments - At September 30, 2004, we had long-term capital
commitments of approximately $70.0 million, consisting of approximately $44.7
million for the expansion of our wafer fabrication facilities, approximately
$7.9 million for equipment related to our molecular beam epitaxy facility,
approximately $8.5 million for our investment in assembly capabilities as we
continue to develop an internal manufacturing process for module production
packaging in Beijing, China, approximately $2.8 million for equipment related
to our U.S. and Beijing, China, test, tape and reel facilities, and the
remainder for general corporate requirements.
Business Combination Contingency - We agreed to pay earn-out
consideration to former Silicon Wave stockholders upon achievement of certain
revenue goals for the period from April 4, 2004 to April 1, 2006. If our
revenue derived from Silicon Wave products for the period from April 4, 2004
to April 2, 2005 exceeds $6.0 million, it will pay an aggregate cash amount
equal to one-half of the revenue derived from Silicon Wave products during
this period. We currently expect that the revenue threshold will be met in
the third quarter of fiscal 2005 triggering the contingent liability to be
paid on or before May 2, 2005. If our revenue derived from Silicon Wave
products for the period from April 3, 2005 to April 1, 2006 exceeds $25.0
million, we will pay an additional aggregate cash amount equal to the revenue
derived from Silicon Wave products during this period up to a maximum of $75.0
million.
-19-
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, demand for our products,
technological advances and our relationships with suppliers and customers.
Based on current and projected levels of cash flow from operations, coupled
with our most recent note offering, we believe that we have sufficient
liquidity to meet both our short-term and long-term cash requirements.
However, if there is a decrease in demand for our products, or in the event
that growth is faster than we anticipated, operating cash flows may be
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, additional
credit facilities or obtain asset-based financing. We maintain 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. 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.
-20-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk has not changed significantly for the risks disclosed
in Item 7A of the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company's Chief
Executive Officer and the Chief Financial Officer evaluated the effectiveness
of the Company's disclosure controls and procedures in accordance with Rule
13a-15 under the Exchange Act. Based on their evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the Company's disclosure
controls and procedures enable the Company to record, process, summarize and
report in a timely manner the information that the Company is required to
disclose in its Exchange Act reports.
There were no changes in the Company's internal control over financial
reporting that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of shareholders was held on July 27, 2004. At the meeting,
our shareholders elected eight directors for one-year terms and until their
successors are duly elected and qualified and ratified the appointment of Ernst
& Young LLP as the Company's independent auditors for the fiscal year ending
March 31, 2005. Votes cast by our shareholders at the meeting were as follows:
Nominees for Director: Shares Voted in Favor: Shares Withheld:
Robert A. Bruggeworth 161,430,473 2,270,132
David A. Norbury 161,428,074 2,272,531
William J. Pratt 161,449,632 2,250,973
Daniel A. DiLeo 162,060,733 1,639,872
Frederick J. Leonberger 161,984,865 1,715,740
Albert E. Paladino 161,475,468 2,225,137
Erik H. van der Kaay 162,079,080 1,621,525
Walter H. Wilkinson, Jr. 161,487,410 2,213,195
Ratification of appointment of Ernst & Young LLP:
Shares Voted in Favor Shares Voted Against Shares Abstaining
162,854,837 613,968 231,801
-21-
ITEM 6. EXHIBITS
10.1 Form Stock Option Agreement for Senior Officers pursuant to the
2003 Stock Incentive Plan of RF Micro Devices, Inc.*
10.2 Form Restricted Stock Award Agreement for Senior Officers pursuant
to the 2003 Stock Incentive Plan of RF Micro Devices, Inc.*
31.1 Certification of Periodic Report by Robert A. Bruggeworth, as Chief
Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the
Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification of Periodic Report by William A. Priddy, Jr., as
Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a)
of the Exchange Act, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Periodic Report by Robert A. Bruggeworth, as Chief
Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Periodic Report by William A. Priddy, Jr., as
Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
* Executive compensation plan or agreement
Other Events
- -------------
The Company's independent auditors, Ernst & Young LLP ("E&Y"),
recently advised the SEC, the Public Company Accounting Oversight Board
and the Audit Committee of the Company's Board of Directors that certain
of E&Y's foreign affiliates have provided non-audit services to a number
of public companies, including the Company, that raise questions regarding
E&Y's independence with respect to its performance of audit services for
these companies. E&Y informed the Audit Committee that from January 2000
to October 2002, E&Y's Taiwan affiliate performed payroll tax calculation
and preparation services for certain employees at the Company's division
in Taipei, Taiwan and E&Y's Taiwan affiliate made payment of the relevant
taxes on behalf of the Company. All such services were discontinued in
October 2002 and the total fees paid to E&Y's Taiwan affiliate in
connection with the provision of these services for the years ended March
31, 2000, 2001, 2002 and 2003 was approximately $3,500, $10,250, $13,900
and $7,300, respectively.
The Audit Committee has met with E&Y regarding these independence
issues and has discussed E&Y's independence with respect to the Company in
light of the foregoing facts. E&Y has informed the Audit Committee that
it does not believe that the provision of these services to an immaterial
subsidiary of the Company impaired E&Y's independence with respect to the
audit of the Company's consolidated financial statements for any of the
periods in question. In that regard, E&Y has issued an Independence
Standards Board Standard No. 1 letter to the Company, dated November 3,
2004, in which E&Y concluded that in its opinion it is and has been
independent with respect to the Company within the meaning of the federal
securities laws and applicable regulations, including the rules of the
Public Company Accounting Oversight Board.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
RF Micro Devices, Inc.
Date: November 8, 2004
/s/ William A. Priddy, Jr.
------------------------------------------
WILLIAM A. PRIDDY, JR.
Chief Financial Officer and
Corporate Vice President of Administration
(Principal Financial Officer)
Date: November 8, 2004
/s/ Barry D. Church
------------------------------------------
BARRY D. CHURCH
Vice President and Corporate Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
10.1 Form Stock Option Agreement for Senior Officers pursuant to the
2003 Stock Incentive Plan of RF Micro Devices, Inc.*
10.2 Form Restricted Stock Award Agreement for Senior Officers pursuant
to the 2003 Stock Incentive Plan of RF Micro Devices, Inc.*
31.1 Certification of Periodic Report by Robert A. Bruggeworth, as Chief
Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the
Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification of Periodic Report by William A. Priddy, Jr., as
Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of
the Exchange Act, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Periodic Report by Robert A. Bruggeworth, as Chief
Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Periodic Report by William A. Priddy, Jr., as
Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Executive compensation plan or agreement
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