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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 25, 2000
COMMISSION FILE NUMBER 0-22511
RF MICRO DEVICES, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1733461
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7628 THORNDIKE ROAD 27409-9421
GREENSBORO, NORTH CAROLINA (Zip code)
(Address of principal executive offices)
(336) 664-1233
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant was approximately $6,927,804,406 as of June 19,
2000. For purposes of such calculation, shares of common stock held by persons
who hold more than 10% of the outstanding shares of common stock and shares held
by directors and officers of the registrant and their immediate family members
have been excluded because such persons may be deemed to be affiliates. This
determination is not necessarily conclusive. There were 80,475,096 shares of the
registrant's common stock outstanding as of June 19, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's proxy statement with respect to the 2000
annual meeting of shareholders of the registrant have been incorporated by
reference herein.
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This Annual Report on Form 10-K contains forward-looking statements that
relate to our plans, objectives, estimates and goals. Words such as "expects,"
"anticipates," "intends," "plans," "believes" and "estimates," and variations of
such words and similar expressions, identify such forward-looking statements.
Our business is subject to numerous risks and uncertainties, including probable
variability in our quarterly operating results, risks associated with our
operation of a wafer fabrication facility and construction of a second facility,
our ability to manage rapid growth, variability in our production yields,
constraints in our manufacturing capacity, our dependence on a limited number of
customers and our dependence on third parties. These and other risks and
uncertainties, many of which are addressed in more detail below in the sections
entitled "Business - Additional Factors That May Affect Future Results" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," could cause our actual results and developments to be materially
different from those expressed or implied by any of these forward-looking
statements.
We use a 52 or 53 week fiscal year ending on the Saturday closest to March
31 of each year. Each of the 1998, 1999 and 2000 fiscal years was a 52-week
year. Our other fiscal quarters end on the Saturday closest to June 30,
September 30 and December 31 of each year. For purposes of this Annual Report on
Form 10-K (including the Financial Statements and Notes thereto), we describe
each fiscal year as having ended on March 31 and each of the first three
quarters of each fiscal year is described as having ended on June 30, September
30 and December 31.
Where appropriate, we have adjusted references in this Annual Report on
Form 10-K to prices and share numbers of our common stock to reflect two 2-for-1
stock splits. The first split was effected in the form of a 100% share dividend
payable on March 31, 1999 to record holders of common stock on March 17, 1999,
and the second split was effected in the form of a 100% share dividend payable
on August 18, 1999 to record holders of common stock on August 2, 1999.
PART I
ITEM 1. BUSINESS
INTRODUCTION
We design, develop, manufacture and market radio frequency integrated
circuits, or RFICs, for rapidly growing wireless communications products and
applications. Our products are included in cellular and PCS phones, cordless
phones, wireless local area networks, wireless local loop handsets, industrial
radios, wireless security systems and remote meter readers. The majority of our
revenue is derived from sales of RFICs designed for cellular and PCS phones. 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. These RFICs perform the transmit and receive
functions that are critical to a phone's performance.
We currently design products using four semiconductor process technologies:
gallium arsenide heterojunction bipolar, silicon bipolar transistor, silicon
germanium and gallium arsenide MESFET. Generally speaking, gallium arsenide, or
GaAs, products offer better electrical performance while silicon-based products
are less expensive. Original equipment manufacturers, or OEMs, 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).
We design most of our GaAs products using a type of transistor called a
heterojunction bipolar transistor, or HBT. We believe that our GaAs HBT RFICs
have significant advantages in the areas of linearity, efficiency and size.
Because of the importance of design to many of our parts and the strength of our
GaAs HBT technology, we are a single-sourced supplier to many customers. Our
products are purchased by leading OEMs such as Nokia Mobile Phones Ltd., LG
Information & Communications, Ltd., Samsung Electronics Co., Ltd, Motorola,
Inc., Bosch Telecom, Inc., NEC Corp., Kyocera America, Inc. and Ericsson Mobile
Communications. We also recently
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announced an alliance with QUALCOMM Inc. to provide advanced power amplifiers
for the Code Division Multiple Access, or CDMA, digital wireless communications
market.
TRW Inc., which is our largest shareholder, has granted us a license (in
exchange for shares of our common stock) to use its GaAs HBT process to design
and manufacture products for commercial wireless applications. TRW manufactured
all of our GaAs HBT products before September 1998. We now manufacture the
majority of our GaAs HBT products under this license at our own manufacturing
facility, but we will continue to purchase GaAs HBT products from TRW at least
until December 31, 2000. As of March 31, 2000, TRW owned 11.9 million shares or
about 15% of our common stock.
INDUSTRY BACKGROUND
The wireless communications industry has grown rapidly over the past decade
as cellular, paging, PCS and other services have become more widely available
and affordable. Technological advances, changes in telecommunications
regulations and the allocation and licensing of additional radio spectrum have
helped cause this growth worldwide. Technological advances have also led to the
development of competing wireless communications services, the establishment of
wireless applications such as second-generation digital cordless telephony,
wireless LANs, WLL, wireless security and remote meter reading, and the
emergence of third generation services that offer the prospect of even higher
data access speeds, multimedia capabilities, simultaneous access to multiple
services and true global roaming. As wireless usage grows, wireless service
providers continue to improve the quality and function of the services they
offer and seek to offer greater bandwidth for more capacity.
To expand capacity from first generation cellular communications networks,
certain national governments made available less congested frequency bands for
new wireless communications services. In the United States, the Federal
Communications Commission allocated and auctioned 10 MHz and 30 MHz portions of
spectrum in the 1850 to 1990 MHz range for PCS, and allocated broad band
spectrum in the 2.4 GHz range for wireless LANs. Capacity and functionality also
are being addressed by the wireless industry's movement from wireless networks
that use analog signal modulation techniques to wireless networks that use
digital signal modulation techniques. As compared to analog technologies,
digital technologies generally provide better signal quality, help the
transmission of both voice and data and improve capacity by allowing the
transmission of more information in a smaller amount of frequency space. These
digital technologies place a premium on linear power amplification, which can
mean higher quality signals.
The wireless communications markets have many different air interface
signal transmission standards in different parts of the world, including digital
standards, such as Global System for Mobile Communications, Time Division
Multiple Access and CDMA, analog standards, such as Advanced Mobile Phone
Service and Total Access Communications Systems, and certain hybrid standards.
For PCS, the FCC has approved seven different air interface standards. The
handsets designed for each air interface standard generally require unique RF
and baseband integrated circuit solutions that must be designed to meet the
demands of subscriber equipment users for greater functionality, smaller and
lighter equipment, longer battery life and better security, all at reduced
costs. As a result of these technical challenges and end user demands, it has
become increasingly difficult for OEMs of subscriber equipment to develop and
supply all the required components in a timely and cost-effective manner. This
has caused some OEMs to rely increasingly on third party value-added technology
providers that have the component and systems level expertise to design and the
production capacity to supply these solutions. In addition, because new entrants
to the wireless subscriber equipment market, such as large consumer electronics
companies, tend to be less vertically integrated than established OEMs, they
must rely even more on third party suppliers. This technology outsourcing trend
is particularly evident in the RF segment of the equipment due to the scarcity
of RFIC engineers and the design complexity of the technology.
RF OVERVIEW
A typical subscriber device for wireless personal communications, such as a
handset, contains digital, baseband and RF components. Digital components
control the overall circuitry and encrypt the voice or other data intended for
transmission and reception, while baseband components are used to process
signals into or from
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their original electrical form (low frequency analog voice or data). RF
components, such as amplifiers, mixers, attenuators, switches, modulators,
demodulators, oscillators and frequency synthesizers, convert, switch, process
and amplify the high frequency signals that carry the information to be
transmitted or received.
RF technology presents different engineering challenges than standard
semiconductor design. In general, digital and baseband semiconductor design
engineers create standard semiconductor circuit designs by combining "cells"
that previously have been evaluated and characterized. Because cells have
predictable performance, the design engineer can use computers to automate the
design process, which helps accelerate the development of these components. Each
RF component, however, has distinctly different characteristics that influence
overall system performance in complex ways. Instead of having stable inputs and
outputs, the RF circuit characteristics can drift based on process variations,
temperature, power supply and other variables. As a result, performance
characteristics are unique for each device, and the RF engineer must evaluate
and develop new designs on a continuous basis for each system performance level
and air interface standard. In addition to being skilled in semiconductor
circuit design, the RF circuit designer must have a thorough understanding of
signal processing principles, must understand the totality of the system for
which the device is intended and must be able to create designs that function
within the unique parameters of different wireless system architectures. As RF
technology has moved from discrete components to integrated circuit solutions,
the scarcity of engineers with both integrated circuit design and RF expertise
has become more pronounced.
In early wireless communications equipment, individually packaged discrete
components were mounted on circuit boards to form complex circuits used to
transmit and receive RF signals. Size, reliability and cost concerns ultimately
led to a move from discrete devices to silicon-based integrated circuits.
Particularly for the critical power amplifier function, the use of silicon
integrated circuits at cellular and PCS frequencies has been limited because of
decreased operating performance. In particular, at high frequencies silicon
integrated circuits consume more power, have relatively higher noise and
distortion parameters and create excess heat.
Within the last decade, GaAs semiconductor technology has emerged as an
effective alternative or complement to silicon technology in many high
performance RF applications. GaAs has inherent physical properties that allow
electrons to move up to five times faster than in silicon, which permits the
manufacture of GaAs devices that operate at much higher speeds than silicon
devices or at the same speeds with lower power consumption. This is particularly
important in battery powered portable applications such as handsets. Moreover,
the semi-insulating GaAs substrate significantly reduces some of the unwanted
parasitic effects of the conductive silicon substrate that cause its performance
to degrade at high frequencies.
GaAs integrated circuits were first implemented using a type of transistor
known as MESFET. While GaAs MESFET integrated circuits have become accepted for
many high frequency applications, these devices have certain limitations. In
particular, for power amplifiers used in digital systems it is important to have
a linear signal (i.e., one that is not altered or distorted when amplified).
GaAs MESFET devices have difficulty meeting high linearity performance criteria
without sacrificing other performance criteria. In addition, GaAs MESFET power
amplifiers generally require both a positive and negative power supply for power
stages, which requires the inclusion of additional components or circuitry and a
corresponding increase in device size and complexity. Additionally, the lateral
structure of GaAs MESFET devices hinders the ability to shrink the device size
to enhance manufacturing yields and reduce costs. A different type of GaAs
transistor known as an HBT, which has been used in military and space
applications over the past decade, emerged recently in commercial RF
applications.
Our GaAs HBT products include power amplifiers and small signal devices
that have been designed into advanced subscriber handsets manufactured by
leading OEMs such as Nokia, LGIC, Samsung, Motorola, Bosch, NEC, Kyocera and
Ericsson. In addition to the advantages that GaAs provides over silicon in terms
of speed, efficiency and the ability to operate at high frequencies, we believe
that GaAs HBT components offer benefits over GaAs MESFET devices in comparable
applications in a number of ways, including efficiency, linearity, size and
complexity.
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STRATEGY
Our goal is to be the leading worldwide supplier of RFICs for a broad range
of commercial wireless applications. To meet this goal, we have developed a
focused strategy. The key elements are:
- Continue to Expand Manufacturing Capacity. We have completed
construction of an approximately 64,000 square foot fabrication facility
and have been fabricating our own GaAs HBT wafers since September 1998.
The facility currently has a maximum capacity of approximately 35,000
wafers per year, and we are in the process of completing a capacity
expansion that we believe will increase its total annual potential output
to 60,000 wafers by December 31, 2000. We also began construction of a
second, 128,000 square foot wafer fabrication facility in September 1999
at a site near our first facility. Operating our own GaAs HBT wafer
fabrication facility has improved our ability to respond to customer
demand for GaAs HBT products and is providing us with greater
opportunities to enhance product and process quality and reliability. We
believe that our future success depends heavily upon our ability to
maintain and expand our manufacturing capacity.
- Offer a Wide Range of RF Products. We offer a full line of products that
include power amplifiers, low noise amplifiers/mixers, quadrature
modulators/demodulators and single chip transceivers. For cellular and
PCS applications, we offer products addressing virtually all of the
analog and digital air interface standards. Our design engineering staff
has developed proprietary design and fabrication modeling techniques and
tools to enable us to deliver state-of-the-art integrated circuit designs
that meet our customers' stringent technical specifications. In response
to customer requests, we are also offering RFICs in a "module" package
that, in addition to one or more RFMD-designed integrated circuits,
includes passive components, such as capacitors, inductors and resistors,
that are commonly incorporated into end-user devices. We are assembling
and packaging these modules both in-house and through one of our
packaging vendors. Developing this module product capability has
presented and continues to present us with a variety of challenges in the
areas of technical ability, maintenance of component supply and
production, and testing line processes. However, we believe this is a
necessary step for us to remain competitive in our industry.
- Maintain Diversification in Process Technologies. We believe that we are
the only provider of RFICs in commercial volumes that is able to design
products in four distinct process technologies -- GaAs HBT, GaAs MESFET,
silicon BiCMOS and silicon germanium. We believe that our GaAs HBT
expertise allows us to deliver high efficiency, high performance
components such as linear power amplifiers and low noise amplifiers to
the wireless communications markets. While attempting to leverage our
GaAs HBT capabilities, we also intend to continue to expand our line of
silicon-based RFICs and to maintain or increase the portion of overall
revenue attributable to sales of silicon products. As a part of this
strategy, in March 1998, we entered a multi-year agreement with
International Business Machines Corporation that provides for expanded
development, manufacture and sale of custom RFICs by us using IBM's
advanced Blue Logic silicon process technology. We have developed more
than 62 RFICs using silicon based technology, and revenues represented by
sales of silicon based technology products have increased from $5.2
million in fiscal 1998 to $15.0 million in fiscal 1999 and $27.2 million
in fiscal 2000. Also, in January 1999, we expanded our relationship with
IBM to add access to IBM's silicon germanium foundry services, and we are
now also designing and selling products using this technology.
- Focus Primarily on Wireless Markets. Since RFMD's formation in 1991, we
have focused our efforts almost exclusively on the design, development,
manufacture and sale of RFICs to participants in the commercial wireless
markets. We have developed and sold integrated circuits for a broad range
of applications within these markets, including cellular and PCS,
cordless telephony, industrial radios, wireless LANs, WLL, wireless
security and wireless utility meter reading. Our customers include some
of the leading OEMs, including Nokia, LGIC, Samsung, Motorola, Bosch,
NEC, Kyocera and Ericsson. Also, on February 28, 2000, we announced that
we had entered into an alliance with QUALCOMM Inc. to provide advanced
power amplifiers for the CDMA market. Despite our focus on wireless
markets, we also evaluate other markets and will attempt to enter them if
the opportunity presents itself. In November 1999, for example, we
expanded our GaAs HBT license arrangement with TRW to include products
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commercial coaxial and other non-fiber wire applications, and we have
begun designing products for these markets.
- Maintain Balanced Product Mix. We strive to maintain a balance between
custom and standard products. Custom-designed products are usually
developed for volume production orders from large OEMs. Custom products
normally are manufactured on an exclusive basis for the originating
customer for an agreed period of time. Once exclusive production is over,
we attempt to move custom products quickly into the standard product
category in order to broaden our customer base and leverage our design
and product development expenditures.
MARKETS
We design, develop, manufacture and market our products to both domestic
and international OEMs for commercial applications in the wireless markets,
including cellular and PCS handsets, cordless telephony, industrial radios,
wireless LAN equipment, WLL handsets, wireless security systems and wireless
utility meter reading systems.
Cellular Telephony and Personal Communication Services
In cellular and PCS applications, calls are placed through handheld
subscriber devices by making a connection with a base station via RF channels.
While the initial PCS services are similar to cellular telephony, as PCS becomes
more widely used, it is expected that a subscriber will be able to use a single
small, lightweight handset and a single phone number for all calls in the home,
office or elsewhere with relatively seamless routing.
Cordless Telephony
Cordless telephones have moved from first generation analog phones to
digital cordless phones operating at higher frequencies. These digital cordless
phones typically use spread spectrum modulation to provide improved range and
voice quality, less interference and greater security.
Wireless Local Loop Systems
A WLL system is a fixed location wireless communications system in which
the end user is connected to the local telephone company's central switch via a
wireless connection. WLL systems employ simplified cellular or PCS technology.
The absence of high speed mobility, roaming or intercell handoff requirements
make the infrastructure and operating costs of WLL systems significantly lower
than traditional wired and cellular systems. WLL systems can be rapidly
deployed, even in difficult terrain areas, and are easily scalable.
Wireless Networks
Wireless networking involves the transmission and reception of data such as
e-mail, faxes and computer files by desktop and portable computers via wireless
RF links rather than wired lines. Network coverage ranges from wireless LANs,
which might be found within a business or single building, to metropolitan area
networks, which would be limited to a defined metropolitan or geographic area,
to wide area networks, which connect individuals and work groups over larger
geographic areas.
Industrial Radios
Industrial digital radios are trunked radio networks that transmit voice
communications from one location to another (point-to-point) and from one
location to many locations (point-to-multipoint). Industrial radios are
primarily used by law enforcement officers and in other public safety
applications.
Other Wireless Markets
We also supply custom components for other applications in wireless
markets, such as wireless security systems and wireless utility meter reading
systems. We are pursuing other emerging wireless markets, including
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enhanced two-way paging, wireless monitoring devices, interactive toys, home
networking, keyless entry and wireless handheld devices used for point-of-sale,
bar coding and other applications.
Wire Applications
We pursue opportunities to leverage the technological advantages of our RF
components by identifying applications in other markets. In November 1999, we
expanded our license arrangements with TRW in order to use its GaAs HBT
technology to manufacture products for commercial coaxial and other non-fiber
wire applications such as cable modems, set-top converter boxes, television
tuners and products for the digital subscriber line market, and we have begun
designing such products. We also market various GaAs HBT and MESFET components
for satellite and microwave communications applications, and certain of our
components, such as gain blocks and attenuators, are used for instruments and in
other non-wireless applications.
MANUFACTURING, PACKAGING AND TESTING
Our manufacturing cycle consists of semiconductor wafer fabrication,
assembly and packaging, and final product testing. We began manufacturing GaAs
HBT products at our wafer fabrication facility in September 1998 and also use
independent foundries to manufacture our products. We currently use two
independent foundries to supply our silicon-based product requirements and one
independent foundry to supply our GaAs MESFET devices. We also purchase a
portion of our GaAs HBT wafers from TRW. Although our first wafer fabrication
facility is operational, we will continue to rely on independent foundries for
the manufacturing of a significant portion of our products for the foreseeable
future. This reliance involves a number of risks, including the possibility of
material disruptions in the supply of key RFICs and the lack of control over
delivery schedules, manufacturing yields, quality and fabrication costs.
Our first wafer fabrication facility, located in Greensboro, North
Carolina, occupies approximately 64,000 square feet and includes a clean room of
approximately 16,300 square feet. During fiscal 2000, our wafer fabrication
facility accounted for $180.5 million in sales, or 62.5% of our total revenues.
The facility currently has a maximum capacity of approximately 35,000 wafers per
year, and we are in the process of completing a capacity expansion that we
believe will increase its total annual potential output to 60,000 wafers by
December 31, 2000.
We began construction of a second, 128,000 square foot wafer fabrication
facility in September 1999 at a site near our first facility. The estimated
capacity for the first phase of this facility, projected for completion in late
calendar 2000 at a cost of $140 million, will be 60,000 four-inch wafers per
year. We plan to increase this new facility's capacity with a second phase of
construction designed to increase the facility's total output to the equivalent
of 210,000 four-inch wafers per year and budgeted at $180 million.
We maintain an inventory of certain standard products based on our internal
forecasts of expected demand for these products. For custom-designed products,
designs of our products are verified both by us and by the customer before
orders for production wafers are placed. Upon receipt of orders from an OEM, we
schedule production based on order size, customer delivery requirements,
production schedules and other production considerations.
We currently use six vendors located in Asia and one vendor located in the
United States to package and assemble our products. All of these vendors are
certified to applicable ISO 9000 series specifications, which means that their
operations have in each case been determined by independent examiners to comply
with certain internationally developed quality control standards. We qualify and
monitor assembly contractors based on cost and quality. These contractors
typically provide us with per-unit pricing.
We have encountered packaging quality problems with certain of our vendors,
particularly with regard to GaAs products. In particular, we took non-recurring
charges in the fourth quarter of fiscal 1998 of approximately $4.6 million to
cover product returns and the establishment of inventory reserves for products
with packaging-related problems. This packaging problem ultimately was resolved
to our satisfaction and the satisfaction of our customer. We have taken steps to
improve the reliability of packaging quality, including the hiring of a Vice
President of Quality, the expansion of our in-house package testing and
qualification line and the employment of
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additional packaging engineers to engage in both package testing and the
development of new packaging designs; however, we cannot be sure that we will
not experience additional packaging quality problems in the future. We believe
that we will have to continue to monitor closely our vendors as our production
volumes increase.
In addition to using independent packaging vendors, we are assembling and
packaging in-house certain RFICs in a "module" package that, in addition to one
or more RFMD-designed integrated circuits, includes passive components, such as
capacitors, inductors and resistors, that are commonly incorporated into
end-user devices. We had not previously packaged any type of RFIC on a
commercial basis, and this vertical expansion of our business has necessitated
significant investment in equipment and additional personnel and is requiring us
to develop expertise in new production techniques that are significantly
different from RFIC fabrication processes. To date, we have spent approximately
$6.9 million in developing our in-house module packaging capability and have
budgeted an additional $16.8 million for expenditures in fiscal year 2001.
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PRODUCTS AND APPLICATIONS
We offer a broad range of standard and custom-designed RFICs.
Custom-designed products are usually developed for volume production orders from
large OEMs. Custom orders are normally manufactured on an exclusive basis for a
negotiated period. Once exclusivity periods expire, we attempt to convert custom
products into standard products to broaden our customer base and leverage our
design and product expenditures. At March 31, 2000, we offered 323 products.
Below is a list of our current products by category, the number of products in
each category, the semiconductor process technology used to fabricate these
products and the types of OEM devices into which these products are
incorporated.
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PRODUCT CATEGORY FABRICATION TECHNOLOGY END USER DEVICE
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SILICON GAAS MESFET GAAS HBT
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Power Amplifiers 1 - 139 - Cellular and PCS handsets
- Cordless phones
- Industrial radios
- CATV line amplifiers
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Quadrature 14 7 3 - Cellular and PCS handsets
Modulators/ - Cellular and PCS
Demodulators base stations
- Cordless phones
- Wireless LAN cards
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Low Noise 26 8 47 - Cellular and PCS handsets
Amplifiers/Mixers - Cordless phones
- Wireless security
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IF Components 10 - 4 - Cellular and PCS handsets
- Cordless phones
- Industrial radios
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Gain Blocks 3 2 18 - Cellular and PCS handsets
- Cordless phones
- Instruments
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Transmitters, 26 - 8 - Wireless meter
Receivers, VCOs and reading
Transceivers - Cordless phones
- Keyless car locks
- Monitoring devices
- Interactive toys
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Attenuators - 4 3 - Cellular and PCS handsets
- PCS base stations
- Instruments
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Power Amplifiers
Power amplifiers provide signal amplification in the transmitter section of
a wireless system in order to boost a signal through the antenna. Power
amplifiers operate at different frequencies, power levels and air interface
standards and generally are classified either as linear amplifiers, which add a
minimum amount of distortion to the shape of the input signal, or non-linear
amplifiers, which are used in analog devices. Power amplifiers are often the
most critical RF component for a number of reasons. They frequently are the most
expensive component and are difficult to design and implement. In addition,
power amplifiers normally use the greatest amount of battery power in a handset,
which impacts talk time, and they generally dissipate the greatest amount of
heat. Our
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GaAs HBT power amplifiers offer low distortion, small size, high efficiency,
improved linearity and operation from a single polarity power source.
Quadrature Modulators/Demodulators
Quadrature modulators are devices in the transmitter section of a wireless
system that combine digital information with an RF signal by varying the phase
and amplitude of the signal so that the resulting signal can be transmitted.
Quadrature demodulators reverse this process in the receiver section by taking
received RF signals and recovering the embedded digital information for further
processing.
Low Noise Amplifiers/Mixers
A LNA is a device in the receiver section of a wireless system that
receives signals from an antenna at extremely low microvolt levels and amplifies
the signals by a factor of approximately 10 to 1,000 times with the addition of
as little "white noise" as possible. In general, the less noise added by a LNA,
the weaker the signal it can process. LNAs are commonly integrated into circuits
with mixers (also referred to as "down-mixers" or "down converters"), and this
combination generally is referred to as a "receiver front end." Mixers accept
the filtered output from the LNA, which is typically at a high frequency and
difficult to process, and mix it with a local oscillator signal to produce a
lower frequency (IF) signal, which is easier to process.
IF Components
In a typical handset, high frequency RF signals are converted into lower
frequency IF signals by the LNA/Mixer and then to baseband in the receive
functions. In the transmit function, baseband inputs (e.g., voice) are converted
from analog to digital form and processed through the IF range to the higher RF
frequency before transmission through the antenna. Our IF devices include
digitally controlled IF amplifiers, which amplify baseband signals after they
have been converted from analog to digital form, and IF amplifiers with
automatic gain control and received signal strength indicators, which are used
for IF-to-baseband conversion in the receive mode.
Gain Blocks
Gain blocks are simple general-purpose amplifiers that boost signals over a
broad frequency range. They are used for amplifier applications whenever noise
is not a concern and whenever a signal's strength has been diminished by
processing through a filter or other component.
Transmitters, Receivers and Transceivers
Single chip transmitters and receivers send and receive wireless signals.
Transceivers are highly integrated circuits that combine transmitters with
receivers into a single device. Because this degree of integration generally
results in some performance compromises, single chip transceivers tend to be
used in cost-sensitive applications where performance is less critical.
Attenuators
An attenuator is a device that reduces the level of an input signal by
controllable amounts. Our attenuators are programmable through use of an
external analog or digital control signal to reduce signals to desired levels
with minimal noise and signal loss when the device is not active. Like gain
blocks, attenuators have many applications both within and outside the wireless
markets.
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CUSTOMERS
The following list identifies, by market, our customers that have placed
cumulative orders of greater than $100,000 in the 12 months ended March 31,
2000.
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CELLULAR/PCS HANDSETS CELLULAR/PCS BASE STATIONS OTHER WIRELESS APPLICATIONS
- ---------------------------------------------------------------------------------------------------------------
Nokia Mobile Phones Ltd. Ericsson, Inc. Lucent Technologies Inc.,
Motorola Inc. Motorola Inc. SpectraLink Corp.
Bosch Telecom, Inc. Lucent Technologies Inc. Hexagram, Inc. (Cordless
LG Information & Communications, Ltd. Spectrian Corp. Telephones)
NEC Corp. Dovatron (a division of Motorola Inc., Celestica, Inc.
Hyundai Electronics Industries Co., Flextronics International (Paging; Industrial Radios)
Ltd. Ltd.) Alcatel Network Systems
Samsung America Inc. GSS Array Technology Public (Point to Point Radio)
Appeal Telecommunications Co. Ltd. Co. Ltd. Hoshing Telecom Ltd.
Kyocera America, Inc. MicroElit S.P.A. (Child Locators)
Telson Electronics Co., Ltd. Optical Microwave Networks, Digital Security Controls Ltd.
Denso Wireless Communications Co., Ltd. Inc. (Wireless Security)
PanTech Engineering Corp. Qtron, Inc. Research In Motion Ltd.
Acer Peripherals, Inc. TRL Technologies, Inc. (Paging)
Eagletron Telecommunications Ltd. ----------------------------- Sensus Technologies, Inc.
GVC Corporation WIRELESS DATA (Meter Reading)
Hutel Inc. ----------------------------- TRL Technologies, Inc.
Hyper Tech Lucent Technologies, Inc. (Repeater; Auto)
Maxon America, Inc. Motorola Inc. Mattel Vendor Operations
MicroElit S.P.A. Anatronic S.A. Asia Ltd. (Toys)
Mitsubishi Consumer Electronics, Inc. Celestica Asia Inc. Label S.A. (Security)
NIXXO Standard Telecomm Co., Ltd. Hitachi America, Ltd. Hyper Tech (Handsets;
SAGEM Groupe Natsteel Electronics, Ltd. Satellites; WLL)
SEWON Telecom Ltd. Optical Microwave Networks, Hughes Network Systems
SK Telecom Co., Ltd. Inc. (Satellite; Military)
SMTEK International, Inc. Senao International Co., Ltd. Anatronic S.A.
Solectron Washington, Inc. Tellabs Operations, Inc. (Point-to-Point
Trinity Communications Inc. communications; Satellite;
CATV)
Dewell Elecom Inc. (Paging)
California Amplifier, Inc.
(Point-to-point
communications)
- ---------------------------------------------------------------------------------------------------------------
We have agreed in principle with TRW and Nokia to cooperate to develop and
supply Nokia with RFICs that are manufactured using TRW's GaAs HBT processes.
The arrangement contemplates that Nokia and we will negotiate separate
agreements to address the development and supply of each component. Pursuant to
the arrangement, we have agreed to provide Nokia with access to certain RFIC
technologies and to our GaAs HBT wafer fabrication facility, and Nokia has
agreed to provide us with rights to bid for and supply Nokia's requirements for
certain RFICs.
Pursuant to separate agreements resulting from our arrangement with Nokia,
we have developed a number of RFICs and supplied them to Nokia in commercial
quantities. During fiscal 2000, sales to Nokia were approximately $169 million,
representing approximately 59% of our revenue.
Our agreement in principle with TRW and Nokia can be terminated without
penalty by any of the parties for any reason. This arrangement does not obligate
Nokia to purchase any additional products from us, and there can be no assurance
that Nokia will remain a significant customer of ours or that this relationship
will continue.
On February 28, 2000, we announced that we had entered into an alliance
with QUALCOMM to provide advanced power amplifiers for the CDMA market.
Initially, we have agreed with QUALCOMM to cooperate on the development of CDMA
power amplifiers for inclusion in present and future QUALCOMM CDMA chipsets.
Future development may include other RFICs for the CDMA market.
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Although we cannot provide any assurances, we believe this joint
development, using the expertise of both companies, will yield products that
will provide higher levels of integration and, with advanced packaging
technology, enable handset manufacturers to produce phones with smaller form
factors and increased talk-time. Under this agreement, QUALCOMM will market and
sell the jointly developed CDMA power amplifiers using our wafer foundry for
manufacturing. QUALCOMM will provide the necessary software and system
development tools to enable faster development cycles for manufacturers using
these jointly developed power amplifiers.
SALES AND MARKETING
We sell our products worldwide directly to customers as well as through a
network of 17 domestic sales representative firms and 14 foreign sales
representative firms. One sales representative firm, Jittek, accounted for about
18% of our revenue during fiscal 2000. We select our domestic and foreign
representatives based on technical skills and sales experience, as well as the
presence of complementary product lines and the customer base served. We provide
ongoing training to our representatives to keep them knowledgeable of our
products. We maintain an internal marketing organization that is responsible for
key account management, application engineering support to customers, developing
sales and advertising literature, such as product announcements, catalogs,
brochures and magazine articles in trade and other publications, and preparing
technical presentations for industry conferences. In June 1999, we opened a
small sales office in the United Kingdom to enhance our ability to serve our
European customers, and in April 2000 we established a sales and support team in
Taiwan. During fiscal 2000, we have been increasing our internal sales force to
enable us to provide a greater level of direct customer support and the ability
to deepen our strategic relationships, and we expect that trend to continue.
We believe that maintaining a close relationship with customers and
providing customers with ongoing technical support is essential to customer
satisfaction in the wireless communications industry. Our marketing application
staff interacts with customers during all stages of design and production,
provides customers with current product application notes and engineering data,
maintains regular contact with customer engineers and assists in the resolution
of technical problems. We assign to our largest customers a contract account
manager who maintains regular contact with the customer to determine its product
needs and concerns. Members of senior management also are involved in managing
relationships with significant customers. We believe that maintaining close
contact with customers improves their level of satisfaction and enables us to
anticipate their future product needs.
STRATEGIC RELATIONSHIP WITH TRW
In June 1996, we entered into a broad strategic relationship with TRW based
on several agreements that evidence an investment by TRW in RFMD, a technology
license from TRW to us and a supply arrangement between the parties. As a part
of this alliance, TRW provided us with $25 million of equity and debt financing
and became a significant shareholder of RFMD. Our key goal in entering into this
alliance was to enable us to construct a four-inch wafer fabrication facility to
manufacture products using GaAs HBT technologies developed by TRW and licensed
to us.
Under our license agreement, TRW has granted us fully paid up,
royalty-free, worldwide licenses with respect to certain of TRW's existing and
future GaAs HBT patent rights and MBE process patent rights, with accompanying
know-how and technical information, to design, develop, manufacture, market,
service and repair certain existing products of ours and any GaAs HBT product in
which the emitter of the GaAs HBT has a width of one to three microns. These
products must be for commercial wireless communications applications and operate
on signals having a frequency of less than 10 GHz. The license with respect to
the GaAs HBT rights became effective in June 1996, and the MBE license became
effective on June 15, 1998, the date agreed upon by the parties as the point at
which our wafer fabrication facility became operational. Subject to TRW's right
to use the licensed technology to provide to customers on an ongoing basis
certain specified foundry services, both licenses are exclusive as to all
persons including TRW, but may be made non-exclusive at the option of TRW if we
fail to meet certain revenue goals.
TRW also granted us non-exclusive licenses to use certain of its existing
GaAs HBT rights and MBE rights for the development and sale of certain of our
existing products for applications other than commercial wireless
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communications or that operate on signals having a frequency of 10 GHz or more.
The license agreement provides that TRW will offer to us, on the same terms as
are offered to third parties, certain future non-HBT related technologies that
it develops for a period of 10 years following June 15, 1998, which is the date
on which our wafer fabrication facility became operational. We have agreed to
share with TRW any modifications or improvements that we make in the technology
or the products developed therefrom, and to grant TRW a non-exclusive,
royalty-free license to use any of these modifications or improvements in
applications outside our field of use. The licenses granted under the license
agreement are granted without representation or warranty as to validity or
noninfringement. Upon any termination of the license agreement for default,
whether due to our default or otherwise, our rights to TRW's technologies would
cease.
In November 1999, we expanded our license with TRW to permit us to use
TRW's GaAs HBT technology also to manufacture products for commercial coaxial
and other non-fiber wire applications. In consideration for this expanded
license, we granted TRW two additional warrants for the purchase of shares of
our common stock. The first is for 250,000 shares of common stock and is
exercisable after December 31, 2000 and expires on June 30, 2001. The second
warrant is for 500,000 shares of common stock and is exercisable after December
31, 2000 and expires on December 31, 2001, but will become null and void if we
fail to achieve certain annualized sales milestones. The exercise price of these
warrants will be the average closing price of our common stock in the last 10
trading days before December 31, 2000 multiplied by 0.75. The value of these
warrants has been estimated to be $10.0 million, which represents the cost of
our right to use TRW's technology for these new applications. TRW also agreed to
maintain ownership of at least 7,941,161 shares of RFMD common stock (10% of the
shares then outstanding) until at least May 1, 2001.
Under the terms of the supply agreement, we have agreed to purchase from
TRW, and TRW has agreed to sell to us, certain minimum quantities of three-inch
GaAs HBT processed wafers and four-inch GaAs epitaxial wafer starting material
until December 31, 2000. We are currently evaluating whether to extend this
agreement.
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused primarily on the
development of new integrated circuit products, and also at improving
manufacturing processes and yields. At March 31, 2000, there were 230 persons in
our research and development organization. Because of the relative scarcity of
RFIC design engineers, we have decided to locate some of our design personnel
outside of our Greensboro, North Carolina headquarters. During fiscal 2000, we
opened design centers in Scotts Valley, California, Cedar Rapids, Iowa,
Chandler, Arizona and Boston, Massachusetts that are currently staffed by a
total of 53 engineers, and we anticipate that we may open additional RFIC design
centers in other locations during fiscal 2001.
Our circuit design staff is continually developing RFIC design solutions
for new and emerging wireless applications. Our research and development
activities include not only new circuit designs, but also the development and
refinement of proprietary design tools and models to facilitate new product
development. Moreover, we are continually evaluating test RF circuits under
emerging semiconductor process technologies to augment our Optimum Technology
Matching(R) program and to meet our customers' future wireless equipment needs.
In fiscal 1998, 1999 and 2000, we incurred approximately $8.8 million,
$14.2 million and $33.3 million, respectively, in research and development
expenses. We do not separately account for RFMD-sponsored and customer-sponsored
research and development expenses.
The market for RFICs is characterized by rapid changes in product designs
and the emergence of new semiconductor technologies used to fabricate higher
performance devices. Because the demand of OEMs for continual improvements in
product performance is expected to increase, we believe that our future success
depends in part on our ability to design RFICs under emerging wafer fabrication
technologies that meet the cost and performance parameters of its customers.
Moreover, we believe we must be able to attract and retain qualified research
and development personnel.
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COMPETITION
Competition in the markets for our products is intense. We face competition
from several companies engaged in the business of designing, manufacturing and
selling RFICs, as well as suppliers of discrete products such as transistors,
capacitors and resistors. We have begun to experience competition for GaAs HBT
products and we may face future competition from companies that have or develop
GaAs HBT or other fabrication processes. In addition, our current and potential
competitors include OEMs that have or may develop the ability to produce RFICs
or discrete products internally for their own requirements. Our primary
competitors include Conexant Systems, Inc., Fujitsu Limited, Hitachi Ltd.,
Matsushita Communication Industrial Co., and Philips N.V.
We believe that competition within the markets for our products is driven
primarily by the ability to design and deliver high performance and price
competitive products in sufficient quantities and in a timely manner.
Competition is also affected by the quality of customer service and technical
support and the ability to design customized products that address each
customer's particular requirements and cost limitations. Many of our current and
potential competitors have entrenched market positions, established patents,
copyrights, trade names, trademarks and intellectual property rights and
substantial technological capabilities. Further, many of our competitors have
significantly greater financial, technical, manufacturing and marketing
resources than we do. Increased competition could adversely affect our revenue
and profitability by causing us to reduce prices or by reducing demand for our
products.
INTELLECTUAL PROPERTY
It is our practice to seek U.S. patent and copyright protection on our
products and developments, where appropriate, and to protect our proprietary
technology under U.S. and foreign laws affording protection for trade secrets
and for integrated circuit designs. We own two U.S. patents for GaAs HBT power
amplifiers, both of which were issued in 1997 and will expire in 2015. Numerous
additional patent applications are pending, although it is possible that the
inventions referenced in patent applications will not mature to issued patents
or will infringe upon intellectual property rights of others. It is also
possible that a court will find the issued patents invalid or unenforceable
under numerous legal principles relating to prior art disclosures or inequitable
conduct before the U.S. Patent and Trademark Office.
We have numerous trademark registrations and applications pending in the
United States and throughout the world. We seek registrations for our primary
trademarks, servicemarks and trade names; however, others may have trademark
rights superior to ours in certain jurisdictions, and in some instances our
designations may not be viewed as sufficiently distinctive to warrant exclusive
trademark protection. We believe that we have the right to use our selected
designations, and that these designations are distinctive and capable of
trademark protection. Nevertheless, if our marks are successfully challenged on
these bases, it is possible that we will not be permitted to operate in a
jurisdiction under our trademark, servicemark or trade name or that we will not
have the exclusive right to use these designations.
We rely also upon trade secrets, technical know-how and other unpatented
proprietary information relating to our product development and manufacturing
activities. To protect our trade secrets, technical know-how and other
proprietary information, our employees are required to enter into agreements
providing for maintenance of confidentiality and the assignment of rights to
inventions made by them while in our employ. We also have entered into
non-disclosure agreements to protect our confidential information delivered to
third parties in conjunction with possible corporate collaborations and for
other purposes. However, we cannot be sure that these types of agreements will
effectively prevent unauthorized disclosure of our confidential information,
that these agreements will not be breached, that we would have adequate remedies
for any breach or that our trade secrets and proprietary know-how will not
otherwise become known or independently discovered by others.
While we have not been involved in any patent litigation, we cannot be sure
that third parties will not assert claims against us, our customers or TRW with
respect to existing and future products. Any litigation to determine the
validity of any third party's claims could result in significant expense to us,
and divert the efforts of our technical and management personnel, whether or not
the litigation is determined in our favor. The wireless industry is subject to
frequent litigation regarding patent and other intellectual property rights.
Leading
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companies and organizations in the wireless industry have numerous patents that
protect their intellectual property rights in these areas. In the event of an
adverse result of any intellectual property rights litigation, we could be
required to expend significant resources to develop non-infringing technology or
to obtain licenses to the technology, which is the subject of the litigation. We
cannot be sure that we would be successful in such development or that any such
license would be available on commercially reasonable terms. We have on occasion
been made aware that aspects of our technology may overlap technology discussed
or claimed in issued United States patents. On these occasions, we attempt to
investigate thoroughly the underlying issues and determine whether design
changes or patent licenses are appropriate. To date, we have not entered into
patent licenses of this nature.
BACKLOG
At March 31, 2000, our backlog was approximately $108.9 million, compared
to approximately $64.6 million at the end of fiscal 1999. We include in backlog
all accepted product purchase orders for which delivery has been specified
within one year. Product orders in our backlog are subject to changes in
delivery schedules or to cancellation at the option of the purchaser without
significant penalty. Our backlog may vary significantly from time to time
depending upon the level of capacity available to satisfy unfilled orders.
Accordingly, although useful for scheduling production, backlog as of any
particular date may not be a reliable indicator of sales for any future period.
EMPLOYEES
At March 31, 2000, we had 817 employees. We believe that our future
prospects will depend, in part, on our ability to continue to attract and retain
skilled technical, marketing and management personnel. Competition for such
personnel is intense, and the number of persons with relevant experience,
particularly in engineering, RFIC design and technical marketing, is limited.
None of our employees is represented by a labor union, and we have never
experienced any work stoppage. We believe that our employee relations are good.
ENVIRONMENTAL MATTERS
By virtue of operating our wafer fabrication facility, we are subject to a
variety of extensive and changing federal, state and local governmental laws,
regulations and ordinances related to the use, storage, discharge and disposal
of toxic, volatile or otherwise hazardous chemicals used in the RFIC
manufacturing process. Any failure to comply with such requirements currently in
effect or subsequently adopted could result in the imposition of fines on us,
the suspension of production or a cessation of operations. In addition, such
requirements could restrict our ability to expand our facilities or require us
to acquire costly equipment or incur other significant expenses to comply with
environmental regulations or clean up discharges. We believe that costs arising
from existing environmental laws will not have a material adverse effect on our
financial position or results of operations. There can be no assurance, however,
that the environmental laws will not become more stringent in the future or that
we will not incur significant costs in the future in order to comply with these
laws.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the other information in this Annual Report on Form 10-K,
readers should carefully consider the following important factors. These
factors, among others, in some cases have affected, and in the future could
affect, our financial condition and results of operations and could cause our
future results to differ materially from those expressed or implied in any
forward-looking statements that appear in this Annual Report on Form 10-K or
that we have made elsewhere.
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Our Operating Results Fluctuate Significantly and We May Not Be Able to
Maintain Our Existing Growth Rate.
Our revenue, earnings and other operating results have fluctuated
significantly in the past and may fluctuate significantly in the future.
Although we have had significant revenue and earnings growth in recent quarters,
we may not be able to sustain these growth rates. Our future operating results
will depend on many factors, including the following:
- our ability to design, manufacture and deliver our products in a timely
and cost-effective manner;
- our ability to design, manufacture and deliver our products in large
enough volumes to satisfy our customers' requirements;
- the ability of third party foundries and assemblers to manufacture and
assemble our products in a timely and cost-effective manner that meets
our customers' requirements;
- unexpected poor line, assembly or test yields for our products;
- our ability to expand our production of GaAs HBT wafers at our wafer
fabrication facility;
- our ability to complete the construction of our second wafer fabrication
facility and to bring it into operation;
- demand for our products;
- demand for our customers' products;
- competition; and
- general industry and global economic conditions.
It is likely that our future operating results will be adversely affected by
these or other factors. If our future operating results are below the
expectations of stock market analysts or our investors, our stock price may
decline.
We Face Challenges Managing Rapid Growth.
We are experiencing a period of significant growth that will continue to
place a great strain on our management and other resources. We have grown from
133 employees on March 31, 1997 to 817 employees on March 31, 2000. To manage
our growth effectively, we must:
- implement and improve operational and financial systems;
- coordinate the construction, upfit and expansion of our physical
facilities in multiple locations;
- expand our presence in international locations;
- train and manage our employee base; and
- attract qualified people with experience in RF engineering, integrated
circuit design, wafer fabrication, wireless systems and technical
marketing and support.
Competition for these people is intense. We must also manage multiple
relationships with various customers, business partners and other third parties,
such as our foundry and assembly partners. Moreover, we will spend substantial
amounts in connection with our rapid growth and may have additional unexpected
costs. Our systems, networks, software tools, procedures or controls may not be
adequate to support our operations and we may not be able to expand quickly
enough to exploit potential market opportunities. Our future operating results
will also depend on expanding sales and marketing, research and development and
administrative support. If we cannot attract qualified people or manage growth
effectively, our operating results will be adversely affected.
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We Face Risks Associated with Our Wafer Fabrication Facility Construction and
Operation Activities.
Developing, expanding and exploiting our own GaAs HBT manufacturing
capacity has been and continues to be a key element of our overall business
strategy. In June 1998, we completed the first phase of a 64,000 square foot
GaAs HBT wafer fabrication facility located in Greensboro, North Carolina, and
we are currently working on an expansion of the facility's capacity. In
addition, in September 1999, we began construction on a second wafer fabrication
facility at a nearby site.
We began commercial shipments of products from our first facility in
September 1998. Production from the facility has gradually increased since then,
and we expect it to continue to increase into fiscal 2001. As we increase
production at this facility, we must qualify each new RFIC design with our
customers. As parts are brought into production, we must maintain our cycle
times and our line yields, assembly yields and test yields in order to reach our
manufacturing goals. A number of factors will affect the future success of this
facility, including the following:
- our ability to qualify new products in a timely manner;
- demand for our products;
- our manufacturing cycle times;
- our production yields;
- our ability to generate revenues in amounts that cover the significant
fixed costs of operating a wafer fabrication facility;
- our ability to hire, train and manage qualified production personnel;
- our compliance with applicable environmental and other laws and
regulations; and
- our inability to use all or any significant portion of our facility for
prolonged periods of time for any reason.
The capacity expansion that we are currently undertaking has involved
moving our MBE wafer starting equipment out of the facility to a new leased
location, reconfiguring the space formerly occupied by this equipment with
additional wafer production equipment and hiring additional production
personnel. We currently expect the facility to be capable of its maximum output
of approximately 60,000 four-inch wafers per year by December 31, 2000. Capacity
expansion activities like this are subject to a number of risks, including the
following:
- unforeseen environmental or engineering problems;
- unavailability or late delivery of process equipment;
- work stoppages and delays; and
- delays in bringing production equipment on-line.
If we fail or are delayed in our efforts to expand this facility, it could
have a material adverse effect on our business, financial condition and results
of operations.
The full capacity output of the first phase of our second GaAs HBT wafer
fabrication facility is anticipated to be the equivalent of approximately 60,000
four-inch wafers. This facility is projected to begin production of wafers in
late calendar year 2000. Construction for this first phase is currently on
schedule. An anticipated second phase of construction, which is expected to be
completed near the end of calendar year 2001, would increase the facility's
total output to the equivalent of 210,000 four-inch wafers per year. The
projected cost for this facility is approximately $140 million for the first
phase and $180 million for the second phase.
The construction of this facility is subject to various risks and
conditions beyond our control, including:
- inclement weather conditions;
- unforeseen hazards or conditions that hinder, delay or increase the cost
of development;
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- unavailability of building materials;
- delays in receiving necessary governmental permits;
- unavailability of manufacturing equipment; and
- construction delays.
We therefore cannot be sure that we will be able to complete this construction
by the time indicated above. A significant delay could have a material adverse
effect on our business, financial condition and results of operations. Bringing
this new fabrication facility on-line will be labor intensive, technically
challenging, time consuming and logistically complex. It will require us to make
significant investments of labor and capital. The major steps include:
- facility design;
- equipment and material specifications and sourcing;
- clean room certification;
- equipment installation; and
- the hiring and training of skilled production personnel.
Once the clean room is operational, we must transfer our manufacturing
process and run test wafers until the manufacturing process is adjusted to the
point where commercial production is feasible. Before production can commence,
wafers must be qualified by individual customers on a component-by-component
basis, even for products previously qualified at our first facility. While many
of these steps must occur concurrently, other steps must occur after the
achievement of certain milestones. Thus, the delay in one or more steps could
materially delay the entire process.
As a result, we cannot be sure that we will be able to implement
successfully and in a timely manner our GaAs HBT processes at this facility or
that we will be able successfully to produce GaAs HBT wafers at acceptable
manufacturing yields or in a manner that allows us to offer GaAs HBT products
from this facility at competitive prices. A failure or delay in our efforts to
fabricate GaAs HBT wafers at acceptable manufacturing cycle times, yields, costs
and quality and in volumes sufficient to satisfy customer demands could have a
material adverse effect on our business, financial condition and results of
operations.
We Depend on a Few Large Customers.
Historically, a substantial portion of our revenue has come from large
purchases by a small number of customers. We expect that trend to continue. For
example, in fiscal 2000, our top five customers accounted for 79% of total
revenue; in fiscal 1999, our top five customers accounted for 87% of our total
revenue; and in fiscal 1998, our top five customers accounted for 70% of our
total revenue. Accordingly, our future operating results depend on the success
of our largest customers and on our success in selling large quantities of our
products to them.
The identity and the predominance of our largest customers have varied
significantly from year to year. During fiscal 2000, sales to Nokia accounted
for 59% of our revenue. In fiscal 1999, sales to Nokia accounted for 73% of our
revenue. In fiscal 1998, sales to Nokia accounted for 42% and sales to LGIC
accounted for 13% of our revenue. In fiscal 1997, sales to QUALCOMM accounted
for 32% and sales to Samsung accounted for 23% of our revenue.
We typically manufacture custom products on an exclusive basis for one
customer for a negotiated period of time. This factor, along with capacity
constraints, makes it difficult for us to diversify our customer base. The
concentration of our revenues with a few large customers makes us particularly
dependent on factors affecting those customers. For example, if demand for their
products decreases, they may stop purchasing our products and our operating
results would suffer. Most of our customers can cease incorporating our products
into their products with little notice to us and with little or no penalty. The
loss of a large customer and failure to add new customers
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to replace lost revenue would have a material adverse effect on our business,
financial condition and results of operations.
If We Experience Poor Production Yields, Our Operating Results May Suffer.
Our integrated circuit products, especially our GaAs HBT products, are very
complex. Each product has a unique design and each product is fabricated using
semiconductor process technologies that are highly complex. In many cases, the
products are assembled in customized packages. Our customers incorporate our
RFICs into high volume products such as cellular and PCS handsets and they
insist that our products meet their exact specifications for quality,
performance and reliability.
Our products are manufactured on round GaAs or silicon substrates, or
starting material, called wafers. Before our customers can use our products, the
wafers must be processed and cut or sawed into individual die. The die must then
be assembled, or packaged, and then the final product must be tested. Our
manufacturing yield is a combination of:
- line yield, which is the number of usable wafers that result from our
fabrication process;
- assembly yield, which is the number of assembled parts we actually
receive from the packaging house divided by the number of die available
on the wafer; and
- test yield, which is the number of assembled parts that pass all
component level testing divided by the total number of parts tested.
Our customers also test our RFICs once they have been assembled into their
products. The number of usable RFICs that result from our production process can
fluctuate as a result of many factors, including the following:
- design errors;
- defects in photomasks used to print circuits on a wafer;
- minute impurities in materials used;
- contamination of the manufacturing environment;
- equipment failure or variations in the fabrication process;
- losses from broken wafers or other human error; and
- defects in packaging.
Because average selling prices for our products tend to decline over time
and because many of our manufacturing costs are fixed, we are constantly trying
to improve our manufacturing yields. For a given level of sales, when our yields
improve, our gross margins improve; and when our yields decrease, our unit costs
are higher, our margins are lower, and our operating results are adversely
affected. In the past, we have experienced difficulties in achieving acceptable
yields on certain new products, and this has adversely affected our gross
margins and our operating results. For example, during the fourth quarter of
fiscal 1998, we took an unexpected charge of about $4.6 million to cover
defective products that had packaging-related problems. We may experience
similar problems in the future and we cannot predict when they may occur or
their severity. These problems could significantly affect our future operating
results.
Our Operating Results Are Substantially Dependent on Demand for Our GaAs HBT
Products.
Although we design products using four distinct process technologies, a
substantial portion of our revenue comes from the sale of GaAs HBT products. For
example, during fiscal 2000, 89% of our revenue came from the sale of GaAs HBT
products. We currently expect that this process concentration will continue. Our
dependence on GaAs HBT products could ultimately hurt our operating results in
the future. Competitors have begun to enter the market and offer their own GaAs
HBT products, and direct competition with competitors with GaAs HBT process
technology could adversely affect our selling prices. Also, new process
technologies are constantly being developed and one or more of these processes
could have characteristics that are superior to GaAs HBT. If we are
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unable to access these technologies through licenses or foundry service
arrangements, we will be competitively disadvantaged. These and other factors
could reduce the demand for GaAs HBT components or otherwise adversely affect
our operating results.
Our Operating Results Are Substantially Dependent on Development of New
Products.
Our future success will depend on our ability to develop new RFIC solutions
for existing and new markets. We must introduce new products in a timely and
cost-effective manner and we must secure production orders from our customers.
The development of new RFICs is a highly complex process, and we have
experienced delays in completing the development and introduction of new
products at times in the past. Our successful product development depends on a
number of factors, including the following:
- the accuracy of our prediction of market requirements and evolving
standards;
- acceptance of our new product designs;
- the availability of qualified RFIC designers;
- our timely completion of product designs; and
- acceptance of our customers' products by the market.
We may not be able to design and introduce new products in a timely or
cost-efficient manner and our new products may fail to meet the requirements of
the market or our customers. In that case, we likely will not reach the expected
level of production orders, which could adversely affect our operating results.
Even when a design win is achieved, our success is not assured. Design wins
require significant expenditures by us and typically precede volume revenues by
six to nine months or more. The actual value of a design win to us will
ultimately depend on the commercial success of our customers' products.
Our Efforts to Develop Module Products Present Significant Challenges.
In response to demands from OEMs, we are currently developing products that
combine one or more integrated circuits with one or more passive components,
such as capacitors, inductors and resistors, into a stand-alone module package.
In addition to using an independent packaging vendor for these products, we are
assembling and packaging some of these products in-house. We have not previously
packaged any type of RFIC on a commercial basis, and this vertical expansion of
our business requires significant investment in equipment and additional
personnel. It also requires us to develop expertise in new production processes
that are significantly different from RFIC fabrication processes.
The manufacture of modules requires us to obtain passive components from
third party suppliers, some of which may be difficult to obtain at times. To
avoid shortages, we may be required to maintain significant inventories of these
components and may be unable to pass these inventory costs on to our customers
if they cancel orders for module products. Also, given the complexity of these
products, developing a thorough method of testing modules once they have been
assembled presents significant technical challenges.
We began shipping commercial quantities of module units that we have
packaged ourselves during the first calendar quarter of 2000. We cannot be sure,
however, that we will successfully develop, implement and maintain this in-house
packaging capability or that we will otherwise be able to meet the needs of our
customers, including Nokia and QUALCOMM, for module products. This development
effort has presented and continues to present many technical and logistical
challenges, and if we are unsuccessful, our operating results could be adversely
affected.
Our Industry's Technology Changes Rapidly and We Depend on Development and
Growth of Wireless Markets.
We depend on the development and growth of markets for wireless
communications products and services, including cellular and PCS telephony,
wireless LANs, wireless security systems and other wireless applications. We
cannot be sure about the rate at which markets for these products will develop
or our ability to produce competitive products for these markets as they
develop.
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We supply RFICs almost exclusively for wireless applications. The wireless
markets are characterized by frequent introduction of new products and services
in response to evolving product and process technologies and consumer demand for
greater functionality, lower costs, smaller products and better performance. As
a result, we have experienced and will continue to experience some product
design obsolescence. We expect our customers' demands for improvements in
product performance will increase, which means that we must continue to improve
our product designs and develop new products using new wafer fabrication
technologies. It is likely that a competing process technology will emerge that
permits the fabrication of integrated circuits that are superior to the RFICs we
make under existing processes. If that happens and we cannot design products
using that technology or develop competitive products, our operating results
will be adversely affected.
We Depend Heavily on Our Relationship with Nokia.
We have agreed in principle with TRW and Nokia to cooperate to develop and
supply Nokia with RFICs manufactured using TRW's GaAs HBT processes. The
arrangement contemplates that we will negotiate separate agreements with Nokia
for each component. Also, we have agreed to give Nokia access to some of our
RFIC technologies and to our GaAs HBT wafer fabrication facility, and Nokia has
agreed to give us rights to bid for and supply Nokia's needs for certain RFICs.
Under the separate agreements resulting from our arrangement with Nokia, we have
developed a number of RFICs and supplied them to Nokia in commercial quantities.
In fiscal 2000, sales to Nokia were about $169 million, or 59% of our revenue.
In fiscal 1999, sales to Nokia were about $112 million, or 73% of our revenue.
In fiscal 1998, Nokia sales were about $19 million, or 42% of our revenue.
Our arrangement with Nokia and TRW can be ended without penalty by any of
the parties for any reason. The arrangement does not obligate Nokia to purchase
any additional products from us, and we cannot be sure that Nokia will remain a
significant customer or that our relationship will continue. The loss of Nokia
as a customer for any reason would have a material adverse effect on our
operating results.
We Depend on TRW for GaAs HBT Wafers and Technology.
Although we manufacture GaAs HBT products at our own facility, we continue
to rely on TRW as a supplier for GaAs HBT wafers. During fiscal 2000, $257.8
million of our revenue came from the sale of GaAs HBT products, of which $180.5
million was attributable to products produced at our facility.
TRW has agreed to supply to us, and we have agreed to buy from TRW, certain
minimum quantities of GaAs HBT wafers. These obligations continue until December
31, 2000. If TRW is unable to manufacture and deliver to us wafers in the
quantities we need on a timely basis, our operating results could be adversely
affected. We depend on our exclusive license from TRW for its GaAs HBT
technology. If the license is terminated or if it were determined that this
technology infringed on a third party's intellectual property rights, our
operating results would be adversely affected. TRW made no representation to us
about whether the licensed technology infringed on the intellectual property
rights of anyone else.
We Depend Heavily on Third Parties.
In addition to our purchase of GaAs HBT products from TRW, we use one
independent foundry to manufacture our silicon-based products and one
independent foundry to manufacture our GaAs MESFET products. The foundry that
supplies our GaAs MESFET products is owned and operated by one of our
competitors. Access to other foundries for GaAs products could be particularly
difficult to obtain. We will remain dependent on a small number of independent
foundries to manufacture our products on a timely basis, to achieve acceptable
manufacturing yields and to offer us competitive pricing. The inability of these
independent foundries to deliver our products on a timely basis, allocate us
sufficient manufacturing capacity, achieve acceptable yields or offer us
competitive pricing would have a material adverse effect on our operating
results. We cannot be sure that we would be able to locate other foundries to
make our products if we lost any of these sources of supply.
We use independent vendors to package all of our integrated circuits. We
have had packaging quality problems with some of these vendors, especially with
GaAs HBT products. We took a non-recurring charge in the last quarter of fiscal
1998 of about $4.6 million to cover product returns and the establishment of
inventory reserves for products with packaging-related problems. During fiscal
1998, we also discovered quality problems
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with parts packaged by a second vendor and stopped using that vendor. It is
likely that we will have more packaging problems in the future. A delay or
reduction in product shipments or unexpected product returns because of these
problems could have an adverse effect on our operating results.
We Operate in a Very Competitive Industry.
Competition in the markets for our products is intense. We compete with
several companies primarily engaged in the business of designing, manufacturing
and selling RFICs, as well as suppliers of discrete products such as
transistors, capacitors and resistors. At least one of our competitors has GaAs
HBT technology and other companies are developing GaAs HBT and new fabrication
processes. In addition, many of our existing and potential customers manufacture
or assemble wireless communications devices and have substantial in-house
technological capabilities. Any of them could develop products that compete with
or replace ours. A decision by any of our large customers to design and
manufacture integrated circuits internally could have an adverse effect on our
operating results. We expect competition to increase. This could mean lower
prices for our products, reduced demand for our products and a corresponding
reduction in our ability to recover development, engineering and manufacturing
costs. Any of these developments would have an adverse effect on our operating
results.
Many of our existing and potential competitors have entrenched market
positions, considerable internal manufacturing capacity, established
intellectual property rights and substantial technological capabilities. Many of
our existing and potential competitors, including Conexant, Fujitsu, Hitachi,
Matsushita, and Philips, have greater financial, technical, manufacturing and
marketing resources than we do. We cannot be sure that we will be able to
compete successfully with our competitors.
We Depend Heavily on Key Personnel.
Our success depends in part on keeping key technical, marketing, sales and
management personnel. We do not have employment agreements with any of our
employees. We must also continue to attract qualified personnel. The competition
for qualified personnel is intense, and the number of people with experience,
particularly in RF engineering, integrated circuit design, wafer fabrication,
wireless systems and technical marketing and support, is limited. We cannot be
sure that we will be able to attract and retain other skilled personnel in the
future.
We Are Subject to Risks from International Sales and Operations.
Sales to customers in South Korea accounted for about 18.1% of our revenue
during fiscal 2000, about 13.3% of our revenue in fiscal 1999 and about 21.3% of
our revenue in fiscal 1998. Although South Korean sales grew significantly
during fiscal 2000, they decreased from prior periods during each of the last
two quarters of the fiscal year. We believe this market remains unstable and we
cannot predict how it will perform in the future.
Sales to customers located outside the United States accounted for about
56% of our revenue in fiscal 2000, about 59% of our revenue in fiscal 1999 and
about 50% of our revenue in fiscal 1998. We expect that revenue from
international sales will continue to be a significant part of our total revenue.
International sales are subject to a variety of risks, including risks arising
from currency fluctuations and restrictions, tariffs, trade barriers, taxes and
export license requirements. Because all of our foreign sales are denominated in
U.S. dollars, our products become less price competitive in countries with
currencies that are low or are declining in value against the U.S. dollar. Also,
we cannot be sure that our international customers will continue to accept
orders denominated in U.S. dollars. If they do not, our reported revenue and
earnings will become more directly subject to foreign exchange fluctuations.
All but one of our circuit assembly vendors are located in Asia. This
subjects us to regulatory, geopolitical and other risks of conducting business
outside the United States. We do business with our foreign assemblers in U.S.
dollars. Our assembly costs increase in countries with currencies that are
increasing in value against the U.S. dollar. Also, we cannot be sure that our
international assemblers will continue to accept orders denominated in U.S.
dollars. If they do not, our costs will become more directly subject to foreign
exchange fluctuations.
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We Rely on Intellectual Property and Could Face Claims of Infringement.
Our success depends in part on our ability to obtain patents, trademarks
and copyrights, maintain trade secret protection and operate our business
without infringing on the proprietary rights of other parties. Although we do
not believe this to be the case, it could be determined in the future that TRW
or we are infringing someone's intellectual property rights. We cannot be sure
that we could obtain licenses on commercially reasonable terms or that
litigation would not occur if there were any infringement. If we were unable to
obtain necessary licenses or if litigation arose out of infringement claims, our
operating results could be adversely affected.
In addition to patent and copyright protection, we also rely on trade
secrets, technical know-how and other unpatented proprietary information
relating to our product development and manufacturing activities. We try to
protect this information with confidentiality agreements with our employees and
other parties. We cannot be sure that these agreements will not be breached,
that we would have adequate remedies for any breach or that our trade secrets
and proprietary know-how will not otherwise become known or independently
discovered by others.
During fiscal 2000, three of our new employees were named defendants in
trade secret litigation in connection with our hiring of them. The former
employers of these individuals asserted that, among other things, our hiring
would lead to disclosure of those parties' trade secrets. Some of these claims
have been dismissed, but others remain pending. We believe these claims are
without merit, and that this litigation will ultimately be resolved in a
satisfactory manner; however, we or our employees could be subject to similar
claims and litigation in the future.
We Are Subject To Stringent Environmental Regulation.
We are subject to a variety of federal, state and local requirements
governing the protection of the environment. These environmental regulations
include those related to the use, storage, handling, discharge and disposal of
toxic or otherwise hazardous materials used in our manufacturing processes.
Because the public is focusing more attention on the environmental impact of the
operations of the semiconductor industry, these requirements may become more
stringent in the future. Failure to comply with environmental laws could subject
us to substantial liability or force us to significantly change our
manufacturing operations. In addition, under some of these laws and regulations,
we could be held financially responsible for remedial measures if our properties
are contaminated, even if we did not cause the contamination.
TRW and Our Management Are Significant Shareholders.
Our directors and executive officers and their affiliates (including TRW)
beneficially own about 18.4% of RFMD's common stock. TRW, our largest
shareholder, beneficially owns about 15% of the common stock and has agreed to
maintain ownership of at least 7,941,161 shares of common stock through May 1,
2001. These shareholders thus can exercise significant influence over all
matters requiring shareholder approval, including the election of directors and
approval of significant corporate transactions. TRW has agreed to refrain until
June 6, 2002 from taking certain actions affecting control over us. If a third
party offers to acquire all of our stock, however, TRW will have 30 days to make
a counterproposal on the same or better terms and could require us to submit the
proposal to a vote by our shareholders. This right could discourage a third
party from offering to acquire all of our outstanding shares.
Our Stock Price Is Subject to Volatility.
The trading price of our common stock could be subject to wide fluctuations
in response to quarterly variations in operating results, adverse business
developments, changes in financial estimates by securities analysts,
announcements of technological innovations, new products by us or our
competitors, transactions by corporate insiders and other events and factors.
Since completion of our public offering in June 1997, our stock price has
fluctuated widely. Also, the stock market has experienced extreme price and
volume fluctuations based on factors outside our control that have particularly
affected the market prices for many high technology companies. These broad
market fluctuations may materially and adversely affect the market price of our
common stock.
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Future Sales of Shares Could Have an Adverse Effect on Market Price.
Sales of substantial amounts of common stock in the public market or the
prospect of such sales could adversely affect the market price for our common
stock and our ability to raise equity capital in the future. As of May 16, 2000,
we had outstanding a total of 80,269,779 shares of common stock. Of these
shares, approximately 70,622,284 shares are freely tradable without restriction
or further registration under the Securities Act, except for any shares acquired
by our "affiliates," as that term is defined in Rule 144 under the Securities
Act. We believe that the holders of the remaining 9,647,495 shares are
affiliates and, accordingly, that their shares may be sold without registration
only in compliance with the Securities Act (including Rule 144). As of March 31,
2000, options to purchase 7,919,888 shares of common stock were outstanding
under our stock option plans, with a weighted average exercise price of $17.22
per share and a weighted average remaining contractual life of 8.2 years. Of
these, options to purchase 1,367,836 shares were exercisable at March 31, 2000,
at a weighted average exercise price of $2.27 per share.
We May Engage in Future Acquisitions That Dilute Our Shareholders, Cause Us to
Incur Debt and Assume Contingent Liabilities.
As part of our business strategy, we expect to continue to review potential
acquisitions that could complement our current product offerings, augment our
market coverage or enhance our technical capabilities, or that may otherwise
offer growth opportunities. While we currently have no definitive agreements
providing for any such acquisitions, we may acquire businesses, products or
technologies in the future. In the event of such future acquisitions, we could
issue equity securities that would dilute our current shareholders' percentage
ownership, incur substantial debt, or assume contingent liabilities. Such
actions by us could seriously harm our results of operations or the price of our
common stock. Acquisitions also entail numerous other risks that could adversely
affect our business, results of operations and financial condition, including:
- difficulties in assimilating acquired operations, technologies or
products;
- unanticipated costs or capital expenditures associated with the
acquisition;
- acquisition-related charges and amortization of acquired technology and
other intangibles that could negatively affect our reported results of
operation;
- diversion of management's attention from our business;
- injury to existing business relationships with suppliers and customers;
and
- failure to successfully integrate these businesses, products,
technologies and personnel.
ITEM 2. PROPERTIES
Our corporate headquarters is located in a newly constructed 100,000 square
foot facility in Greensboro, North Carolina. The facility, which we have
occupied since December 1999, houses our general corporate, sales and marketing
and research and development organizations and includes 10,000 square foot of
lab space. We presently own the building and the 30.8 acres on which it is
situated; however, we are in negotiations to enter into a sale leaseback
transaction with respect to this property that we expect to complete during the
first half of fiscal 2001.
We continue to lease the facilities that formerly housed our corporate
office and test facilities. These facilities currently house general corporate
personnel and will continue to do so until our testing operations is completed.
At the completion of the testing operations, the product lines will then occupy
the premises. The lease expires in December 2013 and consists of approximately
60,000 square feet. We also lease buildings adjacent to these premises that
house our first wafer fabrication facility and the packaging and wafer dicing
operations associated with our module products. The lease for the fabrication
facility, which consists of approximately 64,000 square feet, has a term
expiring in October 2012 with two 10-year renewal options. The module facility,
which consists of approximately 77,000 square feet, is held under a lease
expiring in May 2014 with no option to renew.
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In September 1999 we began construction on a second wafer fabrication
facility, which will comprise 150,000 square feet in a building near our first
fabrication facility. The funding for the first phase of this new fabrication
facility will come primarily from a synthetic lease arrangement, which is an
asset-based financing structured to be treated as an operating lease for
accounting purposes, and a capital lease for tax purposes. At the end of the
third quarter of fiscal year 2000, this synthetic lease transaction was largely
secured by cash collateral. A modification effective December 31, 1999 resulted
in the release of the cash collateral, and the synthetic lease is now secured by
substantially all of our personal property assets. The lease has a term expiring
November 3, 2004. At the end of the term, the lease can be extended upon the
agreement of the parties or we may buy out the lease.
We lease two additional facilities in Greensboro for MBE wafer starting
material production and RFIC testing. The MBE facility, which consists of
approximately 136,000 square feet, is held under a lease expiring in August
2014. The first phase of this facility was put into operation in October 1999,
and we are in the process of retrofitting the building for a second phase
expansion. We expect to commence our expanded RFIC testing operations this
summer in a 120,000 square foot facility that we are currently in the process of
retrofitting. The lease for this building expires in February 2015 and has two
10-year renewal options.
We also lease space for our design centers in Scotts Valley, California;
Cedar Rapids, Iowa; Boston, Massachusetts; and Chandler, Arizona; and for our
sales and support center in Reading, United Kingdom. In the opinion of our
management, our properties have been well maintained, are in sound operating
condition and contain all equipment and facilities necessary to operate at
present levels.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"RFMD." The table below shows the high and low per-share sales prices of our
common stock for the periods indicated, as reported by the Nasdaq National
Market. We completed our initial public offering of 13,822,200 shares of common
stock in June 1997 at a price of $3.00 per share, and completed a secondary
offering of 9,200,000 shares of common stock in January 1999 at a price of
$15.36 per share. Our common stock split two-for-one on March 31, 1999 by means
of a 100% share dividend payable to holders of record on March 17, 1999. On
August 18, 1999, we effected a second two-for-one stock split, in the form of
100% share dividend payable to shareholders of record on August 2, 1999. All the
prices below have been adjusted to reflect this split. As of March 31, 2000,
there were 890 holders of record of our common stock.
HIGH LOW
------- ------
Year Ended March 31, 1999
First Quarter............................................. $ 4.10 $ 2.72
Second Quarter............................................ 5.55 2.63
Third Quarter............................................. 12.66 3.66
Fourth Quarter............................................ 25.94 11.16
For Fiscal Year 1999........................................ 25.94 2.63
Year Ended March 31, 2000
First Quarter............................................. $ 34.00 $19.00
Second Quarter............................................ 54.88 28.69
Third Quarter............................................. 83.00 39.63
Fourth Quarter............................................ 184.50 63.88
For Fiscal Year 2000........................................ 184.50 19.00
We have never paid dividends on our capital stock. We intend to retain
earnings for use in our business and do not anticipate paying any cash dividends
in the foreseeable future. We are prohibited from paying dividends without the
consent of our lenders.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our Consolidated Financial Statements and Notes thereto
included in this Form 10-K. The consolidated statement of operations data for
the years ended March 31, 2000, 1999 and 1998, and the consolidated balance
sheet data as of March 31, 2000 and March 31, 1999, are derived from, and are
qualified by reference to, the Consolidated Financial Statements and Notes
thereto included in this Form 10-K. The statement of operations data for the
years ended March 31, 1997 and 1996, and the balance sheet data as of March 31,
1998, March 31, 1997 and March 31, 1996 are derived from our historical
financial statements, which are not included in this Form 10-K.
YEAR ENDED MARCH 31,
--------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Product sales................................ $288,085 $152,114 $44,095 $27,852 $ 8,212
Engineering revenues......................... 875 738 1,255 950 1,303
-------- -------- ------- ------- --------
Total revenues................................. 288,960 152,852 45,350 28,802 9,515
Operating costs and expenses:
Cost of goods sold........................... 152,746 99,325 29,246 15,826 7,471
Research and development..................... 33,338 14,239 8,761 6,178 4,245
Marketing and selling........................ 20,109 10,716 6,220 3,760 1,817
General and administrative................... 9,573 4,787 2,528 1,391 1,226
-------- -------- ------- ------- --------
Total operating costs and expenses............. 215,766 129,067 46,755 27,155 14,759
-------- -------- ------- ------- --------
Income (loss) from operations.................. 73,194 23,785 (1,405) 1,647 (5,244)
Interest expense............................... (1,400) (1,244) (184) (399) (81)
Other income, net.............................. 5,274 1,911 1,066 513 137
-------- -------- ------- ------- --------
Income (loss) before income taxes.............. 77,068 24,452 (523) 1,761 (5,188)
Income tax expense............................. (26,974) (4,891) - (109) -
-------- -------- ------- ------- --------
Net income (loss).............................. $ 50,094 $ 19,561 $ (523) $ 1,652 $ (5,188)
======== ======== ======= ======= ========
Net income (loss) per share:
Basic........................................ $ 0.63 $ 0.29 $ (0.01) $ 0.15 $ (2.22)
======== ======== ======= ======= ========
Diluted...................................... $ 0.58 $ 0.27 $ (0.01) $ 0.04 $ (2.22)
======== ======== ======= ======= ========
Shares used in per share calculation:
Basic........................................ 79,364 68,472 54,036 11,112 2,340
======== ======== ======= ======= ========
Diluted...................................... 85,834 73,736 54,036 44,860 2,340
======== ======== ======= ======= ========
2000 1999 1998 1997 1996
-------- -------- ------- ------- --------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 28,956 $147,545 $16,360 $ 2,330 $ 6,638
Short-term investments......................... 33,755 - - - -
Working capital................................ 142,309 167,918 34,226 7,313 7,912
Cash restricted for capital additions.......... - 3,860 - 12,358 -
Total assets................................... 344,612 275,758 93,364 36,265 13,192
Long-term debt and capital lease obligations,
less current portion......................... 8,203 12,587 12,524 10,829 153
Redeemable convertible preferred stock......... - - - 28,257 23,325
Shareholders' equity (deficiency).............. 303,153 230,906 66,763 (9,472) (14,357)
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ITEM 7. 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 "anticipate," "believe," "plan," "estimate," "expect"
and "intend" and other similar expressions constitute forward-looking
statements. Our Company's business is subject to business and economic risks and
uncertainties, and our actual results of operations may differ materially from
those expressed or implied in the forward-looking statements. The following
discussion and the section entitled "Business--Additional Factors That May
Affect Future Results" describe some, but not all, of the factors that could
cause these differences.
OVERVIEW
We design, develop, manufacture and market proprietary RFICs for wireless
communications applications such as cellular and PCS, cordless telephony,
wireless local area networks, wireless local loop, industrial radios, wireless
security and remote meter reading. We derive revenue from the sale of standard
and custom-designed products and services. To date, a significant portion of our
revenue has been attributable to the sale of RFICs used in cellular and PCS
handsets. We offer a broad array of products -- including amplifiers, mixers and
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 using four distinct process
technologies: GaAs (gallium arsenide) HBT, GaAs MESFET, silicon bipolar
transistor and silicon germanium. Generally speaking, gallium arsenide-based
products offer better electrical performance while silicon-based products are
less expensive. Original equipment manufacturers try to maximize tradeoffs
between performance and cost. Sales of GaAs HBT products represented 89% of our
revenues in fiscal years 2000 and 1999, 81% in fiscal 1998, and 85% in 1997. We
expect to continue to rely heavily on sales of GaAs HBT products.
Until September 1998 we did not have internal manufacturing capabilities
for GaAs HBT products and thus relied exclusively on purchased wafers to meet
customer demand. In September 1998, we began commercial shipments from our GaAs
HBT wafer fabrication facility, which has enabled us to manufacture products
with lower per unit costs than products manufactured from wafers that we
purchase. Internally manufactured products accounted for 62.5% of our total
revenues for fiscal year 2000 and 31.4% of our total revenues for fiscal 1999.
We plan both to continue to increase production at our existing fabrication
facility through equipment and personnel additions during fiscal 2001 and to
bring a new facility on line by late fiscal 2001.
RESULTS OF OPERATIONS
The following table shows our consolidated statement of operations data
expressed as a percentage of total revenue for the periods indicated:
FOR THE FISCAL YEAR ENDED
MARCH 31, YEAR-TO-YEAR CHANGES
-------------------------- ---------------------
2000 1999 1998 1999-2000 1998-1999
------ ------ ------ --------- ---------
Total revenues.................................... 100.0 100.0 100.0 89.1 237.1
Operating costs and expenses:
Cost of goods sold.............................. 52.9 65.0 64.5 53.8 239.6
Research and development........................ 11.5 9.3 19.3 134.1 62.5
Marketing and selling........................... 7.0 7.0 13.7 87.7 72.3
General and administrative...................... 3.3 3.1 5.6 100.0 89.4
----- ----- ----- ----- -------
Total operating costs and expenses................ 74.7 84.4 103.1 67.2 176.0
----- ----- ----- ----- -------
Income (loss) from operations..................... 25.3 15.6 (3.1) 207.7 1,792.9
Interest expense.................................. (0.5) (0.8) (0.4) 12.5 576.1
Other income, net................................. 1.8 1.3 2.4 176.0 79.3
----- ----- ----- ----- -------
Income (loss) before income taxes................. 26.6 16.0 (1.2) 215.2 4,775.3
Income tax expense................................ (9.3) (3.2) 0.0 451.5 --
----- ----- ----- ----- -------
Net income (loss)................................. 17.3 12.8 (1.2) 156.1 3,840.2
===== ===== ===== ===== =======
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REVENUES
Our revenues increased 89.1% during fiscal 2000 versus fiscal 1999
primarily due to strong growth in both the GaAs HBT product line (a 89.5%
increase over fiscal 1999) and the silicon product line (a 80.9% increase over
fiscal 1999).
Sales to Nokia represented 59%, 73% and 44% of revenue for fiscal 2000,
fiscal 1999, and fiscal 1998, respectively. No other customer accounted for more
than 7% of our fiscal 2000 revenues. Engineering revenues were 0.3% of total
revenues for fiscal 2000 compared to 0.5% for the previous year. Revenues for
fiscal 1999 increased 237% over fiscal 1998 primarily due to strong sales growth
in GaAs HBT power amplifiers for cellular and PCS handsets.
On February 28, 2000 we announced an agreement with QUALCOMM to cooperate
on the development of module CDMA power amplifiers for inclusion in present and
future QUALCOMM CDMA chipsets. We expect that shipment of commercial quantities
of these GaAs HBT power amplifiers under this joint alliance will begin in late
fiscal 2001 and increase throughout fiscal 2002 and beyond.
International shipments accounted for $161.4 million or 55.9% of revenues
in fiscal 2000, compared to $90.4 million, or 59.1% of revenues in fiscal 1999
and $22.7 million, or 50.0% of revenues, for fiscal 1998. We believe that
international sales growth will continue into the foreseeable future and hold at
approximately current levels as a percentage of overall revenue. One sales
representative firm, Jittek, accounted for about 18% and 15% of our revenue
during fiscal 2000 and fiscal 1999, respectively. Sales to customers located in
South Korea totaled $52.2 million in fiscal 2000, or 18.1% of revenues, compared
to $20.3 million, or 13.3% of revenues in fiscal 1999 and $9.6 million, or 21.3%
of revenues in fiscal 1998. The growth in sales to our South Korean OEM
customers resulted from increased demand for CDMA handsets that they supply to
the South American and Asian markets.
Although South Korean sales grew significantly during fiscal 2000, they
decreased from prior periods during each of the last two quarters of the year,
and this market remains unstable. To date, European and other Asian sales growth
has offset declines in the South Korean market.
During fiscal 2000 products manufactured at our wafer fabrication facility
accounted for $180.5 million in sales or 62.5% of total revenues. The facility
currently has a maximum capacity of approximately 35,000 four-inch wafers per
year, and we are in the process of completing an expansion that we believe will
increase its total annual capacity to 60,000 four-inch wafers by the end of
calendar year 2000.
During the quarter ended September 30, 1999, we began construction of a
second wafer fabrication facility. The full capacity output of the first phase
of this facility is anticipated to be the equivalent of approximately 60,000
four-inch wafers and is projected to be completed and begin commencement of
production wafers in late calendar 2000. Construction for the first phase is
currently on schedule. An anticipated second phase of construction, which is
expected to be completed near the end of calendar 2001, would increase the
facility's total potential capacity to the equivalent of 210,000 four-inch
wafers per year. We will increase our facility's output according to actual
market demand. The projected cost for this facility is approximately $140
million for the first phase and $180 million for the second phase.
GROSS PROFIT
In fiscal 2000, our gross profit margins increased significantly to 47.1%
versus 35.0% and 35.5% in fiscal 1999 and fiscal 1998, respectively. Although we
continued to experience a trend of lower overall average selling prices, this
was more than offset by lower overhead costs per unit, lower overall wafer costs
due to a greater percentage of internal manufacturing and improvements in
sourcing costs and overall manufacturing efficiencies.
We expect average selling prices to continue to decline, although at a
lower rate than in fiscal 2000. We believe differences in product mix and
introductions of new products will help offset average selling price declines in
more mature products.
We also believe we may experience certain declines in manufacturing costs.
We expect cost reductions to result from the ongoing increase in internal wafer
fabrication, continuing improvements in sourcing costs, and
28
30
improving manufacturing efficiency and yields. We also believe, however, that we
will experience increased costs in late fiscal 2001 and possibly into fiscal
2002 associated with lower capacity utilization and start-up as the new
fabrication facility is brought on line.
An additional factor that we believe may adversely affect overall margins
in fiscal 2001 and into fiscal 2002 is an expected shift in product mix. In
response to OEM demands, we are developing products that combine one or more
integrated circuits with one or more passive components, such as capacitors,
inductors and resistors, into a stand-alone module package. We are using both
our in-house manufacturing capabilities and independent vendors to assemble,
package and test these products. This vertical expansion of the supply chain for
wireless applications poses a number of technical, supply and manufacturing
challenges and is requiring a significant investment of time, equipment and
personnel.
We have historically experienced fluctuations in gross profit margins,
which has caused fluctuations in our quarterly operating results and we cannot
be sure that operating results will not be similarly affected in the future. We
currently expect that our gross profit margins should improve in the near term
as an increasing percentage of our GaAs HBT products are fabricated at our wafer
fabrication facility, where production costs per wafer have to date been lower
than costs for products manufactured with purchased wafers. However, as
described above, we believe downward pressure on average selling prices and
start-up costs related to our new module products and our new facility will
adversely affect margins and offset gains we expect from these manufacturing
cost reductions.
RESEARCH AND DEVELOPMENT
Research and development expenses in fiscal 2000 increased $19.1 million
over fiscal 1999 primarily due to increased salaries and benefits and recruiting
expenses related to increased headcount and additional spending on mask sets and
outside services for both standard and custom-designed products. Research and
development expenses as a percentage of total revenues increased to 11.5% in
fiscal 2000 from 9.3% in fiscal 1999. Research and development expenses in
fiscal year 1999 compared to fiscal 1998 increased $5.5 million, primarily as a
result of the same factors as noted for the increase in fiscal 2000 over fiscal
1999. We plan to continue to make substantial investments in research and
development and we expect that such expenses will continue to increase in
absolute dollar amounts in future periods.
We currently operate four off-site RFIC design centers staffed by permanent
employees in addition to our design engineering staff in Greensboro, North
Carolina. Our off-site locations consist of a design center in Scotts Valley,
California that opened in April 1999 and is currently staffed by 16 employees; a
design center in Cedar Rapids, Iowa that opened in June 1999 and is currently
staffed by 13 employees; a design center in Boston, Massachusetts that opened in
October, 1999 and is currently staffed by 16 employees; and a design center in
Chandler, Arizona that opened in November, 1999 and is currently staffed by 8
employees. It is possible that we will open additional design centers in other
locations in fiscal 2001 and beyond and we expect to continue to increase our
engineering staffs at the existing centers and at our Greensboro headquarters.
MARKETING AND SELLING
Marketing and selling expenses in fiscal 2000 increased $9.4 million over
fiscal 1999, primarily due to increased salaries and benefits related to
increased headcount and to increased expenses associated with advertising,
travel and entertainment expenses, and commissions related to increased sales.
Marketing and selling expenses as a percentage of revenues in fiscal 2000
remained flat versus fiscal 1999 at 7.0%. Marketing and selling expenses in
fiscal year 1999 compared to fiscal 1998 increased $4.5 million primarily as a
result of the same factors noted for the increase in fiscal 2000 over fiscal
1999. We plan to continue to make substantial investments in marketing and
selling and we expect that such expenses will continue to increase in absolute
dollar amounts in future periods. In June 1999, we opened a small sales office
in the United Kingdom to enhance our ability to serve our European customers,
and in April, 2000 we established a sales and support team in Taiwan. We may
open additional sales offices in the United States or elsewhere in the future.
We expect that we will continue to see a greater proportion of our sales and
marketing efforts conducted directly by our employees, and that our reliance on
independent sales representative firms will decline over time. This will result
in an absolute
29
31
increase in marketing and selling expenses as we build our internal direct sales
force. Two unmanned sales offices located near facilities of major customers are
available to our staffs while traveling to customer locations. We opened a
location in Oulu, Finland in February 1999 and a location in Copenhagen, Denmark
in May 2000.
GENERAL AND ADMINISTRATIVE
General and administrative expenses in fiscal 2000 increased $4.8 million
over fiscal 1999 primarily due to increased salaries and benefits related to
headcount increases and associated expenses such as recruiting, relocation and
travel. In addition, we experienced increased expenses for legal and accounting
services as a result of our TRW license expansion, SAP consulting and the
creation of foreign subsidiaries. The increases in headcount generally
corresponded to the growth in sales volume. General and administrative expenses
in fiscal 1999 increased $2.3 million over fiscal 1998 primarily due to
increased salaries and benefits related to headcount increases, provision for
doubtful accounts and the amortization of our technology license with TRW.
General and administrative expenses as a percentage of revenues were 3.3%
in fiscal 2000 versus 3.1% in fiscal 1999. We believe we will continue to
experience general and administrative expenses in the range of 3% to 3.5% of
revenues, down from levels experienced in fiscal years 1998 and 1997 when they
were 5.6% and 4.8%, respectively. We believe relatively low general and
administrative expense growth is possible now that we have completed our major
SAP implementation, which we finished during fiscal 2000 with no material
negative impact on business operations during the implementation period.
OTHER INCOME (EXPENSE)
Other income (expense) net, in fiscal 2000 reflected income, net of
$3,874,000 compared to income, net of $667,000 in fiscal 1999. This increase was
attributable to a full year benefit of interest income of $5.4 million from
investments made in government bonds, which were purchased with cash from our
secondary public stock offering completed in January 1999. Offsetting this was
interest expense of $1.4 million primarily due to activity related to capital
leases. See Note 5 of Notes to Consolidated Financial Statements. Approximately
$912,000 of interest expense related to equipment under capital leases was
capitalized in fiscal 1999 in connection with the construction of the wafer
fabrication facility. This first wafer fabrication facility was fully
operational in fiscal 2000, accordingly no interest expense was capitalized. In
fiscal 1999 other income (expense), net had decreased to $667,000 versus
$882,000 in fiscal 1998 due to an increase in interest expense related to
borrowings for the wafer fabrication facility.
INCOME TAX EXPENSE
Income tax expense in fiscal 2000 was $27.0 million compared to $4.9
million in fiscal 1999 and no provision in fiscal 1998. Our effective combined
income tax rate was 35.0% in fiscal 2000, 20.0% in fiscal 1999 and 0% in fiscal
1998. The effective rate in fiscal 2000 was less than the combined federal and
state statutory rate of approximately 40% due to the benefit of tax credits. The
effective rate in fiscal 1999 was less than the combined federal and state
statutory rate of approximately 40% due to the benefit of tax credits and the
use of net operating loss carry-forwards. In fiscal 1998 we did not provide for
income taxes as a result of the loss incurred during the year.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date through sales of equity and debt
securities, bank borrowings, capital equipment leases and revenues from product
sales. We completed our initial public offering in June 1997, and raised
approximately $37.6 million, net of offering expenses. In January 1999, we
completed our secondary public offering and raised approximately $133.4 million,
net of offering expenses. As of March 31, 2000, we had working capital of
approximately $142.3 million, including $29.0 million in cash and cash
equivalents.
Operating activities generated $19.9 million in cash in fiscal 2000. This
was attributable primarily to net income of $50.1 million, depreciation and
amortization of $15.3 million and an increase in income taxes payable and
non-current deferred tax liability of $8.8 million; these were offset by
increases of $37.5 million in accounts receivable and $11.1 million in
inventories and a $3.8 million decrease in accounts payable. Cash generated by
30
32
operating activities in fiscal 1999 was $20.5 million. This amount was
attributable primarily to net income of $19.6 million and an increase in
accounts payable of $8.8 million offset by increases to accounts receivable of
$16.6 million and $2.5 million in inventories.
The $142.8 million of cash used by investing activities in fiscal 2000 was
primarily related to the purchase of $107.5 million of capital equipment and
$33.8 million net investment in U.S. Agency Medium Term Notes. These capital
purchases included the completion of our new headquarters building in
Greensboro, North Carolina, the up-fitting of a new packaging facility,
investment in test equipment, wafer fabrication expansion, and the up-fitting of
our new stand-alone MBE facility. The $25.8 million of cash used by investing
activities in fiscal 1999 was related to the purchase of $24.8 million of
capital equipment, primarily for use in our wafer fabrication facility, as well
as $1.3 million for the capitalization of wafer fabrication construction costs.
The $4.3 million of cash provided by financing activities in fiscal 2000
consisted of $4.5 million in proceeds from the issuance of common stock and the
release of $3.9 million that had been restricted for capital additions,
partially offset by $4.1 million in repayments of capital lease obligations. The
$136.5 million of cash provided by financing activities in fiscal 1999 related
primarily to the receipt of $133.4 million in proceeds from our secondary
offering completed in January 1999 and $10.0 million in proceeds from the
exercise of a warrant by TRW covering 4,000,000 shares of common stock. The
proceeds were partially offset by $4.2 million in repayments of capital lease
obligations and by the cash restricted for capital additions of $3.9 million
described above.
At March 31, 2000, we had total long-term capital commitments of $125.4
million, with $7.0 million relating to our wafer fabrication expansion, $76.7
million relating to our second wafer fabrication construction project of which
$54.9 million is covered under a synthetic lease (see Note 5 of Notes to
Consolidated Financial Statements), $21.9 million for our MBE facility
expansion, $15.2 million for test and packaging facilities and $4.5 million for
general corporate requirements. As part of the execution of the capacity
expansion efforts, we entered into an operating lease in fiscal 1999 for a new
136,000 square foot facility that we are using for our MBE process. The lease is
for 15 years with two ten year renewal options. In fiscal 2000 we also entered
into a lease for a 75,000 square foot facility that is to be used for packaging
and wafer dicing associated with our module products. The term of the lease is
also for 15 years with two ten year renewal options. Also in fiscal 2000, we
entered into a lease for a 120,000 square foot facility that is to be used for
testing our products. The term of the lease is also for 15 years with two
ten-year renewal options. The aggregate annual rent under these leases is
approximately $0.9 million.
We lease the majority of our corporate, wafer fabrication, and other
facilities through several third party operating leases. At March 31, 2000, we
had minimum future lease payments of approximately $34.7 million related to
facility operating leases and approximately $10.6 million related to equipment
operating leases.
We currently have six capital lease facilities with three equipment
financing companies under which we have financed the cost of capital equipment
and leasehold improvements associated with our first wafer fabrication facility.
We have financed an aggregate of $22.0 million of leased property under these
facilities. Lease terms range from 36 months to 60 months with effective
interest rates ranging from 8.6% to 10.7%.
In fiscal 2000 we successfully completed construction and moved into our
new corporate headquarters. The new facility houses our general corporate, sales
and marketing and research and development organizations. The building is
100,000 square feet including 10,000 square feet of lab space.
On March 9, 2000, we announced that we intended to offer, subject to market
and other conditions, $425 million of Convertible Subordinated Notes due 2005
(plus an additional amount of up to $75 million to cover any over-allotments)
through initial purchasers to qualified institutional buyers under Rule 144A of
the Securities Act of 1933, as amended. The notes would have been convertible
into our common stock at the option of the holder, at a price to be determined.
The offering was expected to close in March 2000; however, due to a decline in
the price of our common stock and other market conditions, we determined not to
proceed with this offering. Proceeds from the offering would have been used for
future operating requirements and expansion opportunities.
We believe our cash requirements will be adequately met from normal
operating results during fiscal 2001. In addition, we anticipate completing a
sale leaseback transaction of our corporate headquarters building during
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33
the first half of this fiscal year. Nevertheless, we may elect to proceed with a
sale of debt or equity securities if we perceive market conditions to be
favorable. Also, our future capital requirements may differ materially from
those currently anticipated and will depend on many factors, including, but not
limited to, market acceptance of our products, volume pricing concessions,
capital improvements to new and existing facilities, technological advances and
our relationships with suppliers and customers. In addition, we may require
increased working capital to accommodate planned growth. If existing resources
and cash from operations are not sufficient to meet our future requirements, we
may seek additional debt or equity financing or additional credit facilities. We
cannot be sure that any additional equity or debt financing will not be dilutive
to holders of our common stock. Further, there can be no assurance that
additional equity or debt financing, if required, will be available on
acceptable terms.
COMMITMENTS
The funding for the first phase of our new wafer fabrication facility will
come primarily from a synthetic lease arrangement that we entered into on August
13, 1999, as modified effective December 31, 1999. A synthetic lease is an
asset-based financing structured to be treated as an operating lease for
accounting purposes, and a capital lease for tax purposes. At the end of the
third quarter of fiscal year 2000, the synthetic lease transaction was largely
secured by cash collateral. The modification effective December 31, 1999
resulted in the release of the cash collateral and the synthetic lease is now
secured by substantially all of RFMD's personal property assets. The lease has a
term expiring November 3, 2004. At the end of the term, the lease can be
extended upon the agreement of the parties or we may buy out the lease. The
interest rates or yield rates embedded in the lease (and used to calculate lease
payments) are either:
- the Eurodollar Rate plus margins varying from 150 basis points to 300
basis points per annum (based on certain quarterly financial covenant
testing and depending on whether the underlying source of funding is in
the form of a promissory note or an equity certificate), or
- at our election and under certain other circumstances where funding based
on the Eurodollar Rate is not available, the ABR Rate plus margins
varying from zero basis points to 75 basis points per annum (based on
certain quarterly financial covenant testing and depending on whether the
underlying source of funding is in the form of a promissory note or an
equity certificate). The Eurodollar Rate is a rate of interest determined
under the lease documents by reference to one or more sources for the
London interbank offered rate, or LIBOR. The ABR Rate is a rate of
interest determined under the lease documents equal to the greater of (a)
the prime lending rate of the primary lender or its successor (as
determined under the lease documents) or (b) the federal funds effective
rate (as determined under the lease documents) plus 0.5%.
This lease is expected to provide up to $100 million in financing for our new
wafer fabrication facility, which is currently under construction. The $100
million of financing is expected to fund approximately $57 million for the
building and $43 million for equipment.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We did not have any derivative financial instruments as of March 31, 2000.
Our interest income and expense are sensitive to changes in the general level of
interest rates. In this regard, changes in interest rates can affect the
interest earned on our cash equivalents. Our capital lease obligations have
fixed interest rates and the fair value of these instruments is affected by
changes in market interest rates. To mitigate the impact of fluctuations in
interest rates, we generally enter into fixed rate investing and borrowing
arrangements. As a result, we believe that the market risk arising from holdings
of our financial instruments is not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The report of independent auditors and financial statements are set forth
below (see Item 14(a) for list of financial statements and financial statement
schedules):
32
34
RF MICRO DEVICES, INC.
AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
CONTENTS
PAGE
----
Report of Independent Auditors.............................. 34
Audited Consolidated Financial Statements
Consolidated Balance Sheets................................. 35
Consolidated Statements of Operations....................... 36
Consolidated Statements of Redeemable Convertible Preferred
Stock and Shareholders' Equity............................ 37
Consolidated Statements of Cash Flows....................... 38
Notes to Consolidated Financial Statements.................. 39
33
35
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
RF Micro Devices, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of RF Micro
Devices, Inc. and subsidiaries as of March 31, 2000 and 1999, and the related
consolidated statements of operations, income, redeemable convertible preferred
stock and shareholders' equity and cash flows for each of the three years in the
period ended March 31, 2000. Our audits also included the financial statement
schedule listed in the index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of RF Micro
Devices, Inc. and subsidiaries at March 31, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended March 31, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Raleigh, North Carolina
April 18, 2000
34
36
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31,
----------------------
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 28,956 $147,545
Short-term investments (Note 3)........................... 33,755 --
Accounts receivable, less allowance of $775 and $391 (Note
2)..................................................... 61,163 23,697
Inventories (Note 4)...................................... 38,389 27,335
Current deferred tax asset (Note 6)....................... 5,771 898
Recoverable income taxes.................................. 796 --
Prepaid expenses.......................................... 472 71
Other current assets...................................... 547 172
-------- --------
Total current assets........................................ 169,849 199,718
Property and equipment:
Land...................................................... 2,224 1,934
Buildings................................................. 11,396 --
Machinery and equipment................................... 92,335 43,463
Leasehold improvements.................................... 41,283 17,130
Furniture and fixtures.................................... 4,728 1,332
Computer equipment and software........................... 8,191 3,018
-------- --------
160,157 66,877
Less accumulated depreciation............................. (21,702) (5,952)
-------- --------
138,455 60,925
Construction in progress.................................. 21,388 6,506
-------- --------
Total property and equipment................................ 159,843 67,431
Related party technology license, net of accumulated
amortization of $338 as of March 31, 2000 (Notes 2 &
12)....................................................... 12,905 3,078
Cash restricted for capital additions....................... -- 3,860
Non-current deferred tax asset (Note 6)..................... -- 1,088
Other non-current assets.................................... 2,015 583
-------- --------
Total assets................................................ $344,612 $275,758
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 15,319 $ 19,110
Accrued liabilities....................................... 7,726 5,590
Income taxes payable...................................... -- 2,854
Current obligations under capital leases (Note 5)......... 4,495 4,246
-------- --------
Total current liabilities................................... 27,540 31,800
Non-current deferred tax liability (Note 6)................. 5,716 465
Obligations under capital leases, less current portion (Note
5)........................................................ 8,203 12,587
-------- --------
Total liabilities........................................... 41,459 44,852
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares
authorized; no shares issued and outstanding........... -- --
Common stock, no par value; 150,000,000 shares authorized;
80,104,316 and 78,753,952 shares issued and
outstanding, respectively.............................. 229,275 224,746
Additional paid-in capital................................ 26,019 --
Deferred compensation..................................... (8,560) (165)
Retained earnings......................................... 56,419 6,325
-------- --------
Total shareholders' equity.................................. 303,153 230,906
-------- --------
Total liabilities and shareholders' equity.................. $344,612 $275,758
======== ========
See accompanying notes.
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37
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31,
-------------------------------------
2000 1999 1998
---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Product sales............................................. $288,085 $152,114 $44,095
Engineering revenue....................................... 875 738 1,255
-------- -------- -------
Total revenue............................................... 288,960 152,852 45,350
Costs and expenses:
Cost of goods sold........................................ 152,746 99,325 29,246
Research and development.................................. 33,338 14,239 8,761
Marketing and selling..................................... 20,109 10,716 6,220
General and administrative................................ 9,573 4,787 2,528
-------- -------- -------
Total costs and expenses.................................... 215,766 129,067 46,755
-------- -------- -------
Income (loss) from operations............................... 73,194 23,785 (1,405)
Interest expense............................................ (1,400) (1,244) (184)
Other income, net........................................... 5,274 1,911 1,066
-------- -------- -------
Income (loss) before income taxes........................... 77,068 24,452 (523)
Income tax expense.......................................... 26,974 4,891 --
-------- -------- -------
Net income (loss)........................................... $ 50,094 $ 19,561 $ (523)
======== ======== =======
Net income (loss) per share:
Basic..................................................... $ 0.63 $ 0.29 $ (0.01)
======== ======== =======
Diluted................................................... $ 0.58 $ 0.27 $ (0.01)
======== ======== =======
Shares used in per share calculation:
Basic..................................................... 79,364 68,472 54,036
======== ======== =======
Diluted................................................... 85,834 73,736 54,036
======== ======== =======
See accompanying notes.
36
38
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
REDEEMABLE CONVERTIBLE PREFERRED STOCK SHAREHOLDERS' EQUITY
-------------------------------------------------------- ---------------------
CLASS A-1 CLASS A-2 CLASS B CLASS C ADDITIONAL
PREFERRED PREFERRED PREFERRED PREFERRED COMMON PAID-IN
STOCK STOCK STOCK STOCK TOTAL STOCK CAPITAL
--------- --------- --------- --------- -------- -------- ----------
(IN THOUSANDS) (IN THOUSANDS)
Balance, March 31, 1997................. $ 1,500 $ 1,750 $ 9,075 $ 15,932 $ 28,257 $ 2,960 $ 550
Conversion of preferred stock......... (1,500) (1,750) (9,075) (15,932) (28,257) 28,257 --
Conversion of note payable............ -- -- -- -- -- 10,401 --
Initial public offering of common
stock............................... -- -- -- -- -- 38,172 (550)
Exercise of stock options and
warrants............................ -- -- -- -- -- 286 --
Issuance of common stock.............. -- -- -- -- -- 148 --
Amortization of deferred
compensation........................ -- -- -- -- -- -- --
Net loss.............................. -- -- -- -- -- -- --
------- ------- ------- -------- -------- -------- -------
Balance, March 31, 1998................. -- -- -- -- -- 80,224 --
Secondary offering of common stock.... -- -- -- -- -- 133,381 --
Exercise of warrant................... -- -- -- -- -- 10,000 --
Issuance of common stock.............. -- -- -- -- -- 456 --
Exercise of stock options............. -- -- -- -- -- 685 --
Amortization of deferred
compensation........................ -- -- -- -- -- -- --
Net income............................ -- -- -- -- -- -- --
------- ------- ------- -------- -------- -------- -------
Balance, March 31, 1999................. -- -- -- -- -- 224,746 --
Issuance of warrants for related party
technology license.................. -- -- -- -- -- -- 10,041
Issuance of restricted stock awards... -- -- -- -- -- -- 8,775
Exercise of stock options............. -- -- -- -- -- 3,221 --
Issuance of common stock.............. -- -- -- -- -- 1,308 --
Tax benefit from the exercise of
non-qualified stock options......... -- -- -- -- -- -- 7,203
Amortization of deferred
compensation........................ -- -- -- -- -- -- --
Net income............................ -- -- -- -- -- -- --
------- ------- ------- -------- -------- -------- -------
Balance, March 31, 2000................. $ -- $ -- $ -- $ -- $ -- $229,275 $26,019
======= ======= ======= ======== ======== ======== =======
SHAREHOLDERS' EQUITY
--------------------------------------
(ACCUMULATED
DEFICIT)
DEFERRED RETAINED
COMPENSATION EARNINGS TOTAL
------------ ------------ --------
(IN THOUSANDS)
Balance, March 31, 1997................. $ (269) $(12,713) $ (9,472)
Conversion of preferred stock......... -- -- 28,257
Conversion of note payable............ -- -- 10,401
Initial public offering of common
stock............................... -- -- 37,622
Exercise of stock options and
warrants............................ -- -- 286
Issuance of common stock.............. -- -- 148
Amortization of deferred
compensation........................ 44 -- 44
Net loss.............................. -- (523) (523)
------- -------- --------
Balance, March 31, 1998................. (225) (13,236) 66,763
Secondary offering of common stock.... -- -- 133,381
Exercise of warrant................... -- -- 10,000
Issuance of common stock.............. -- -- 456
Exercise of stock options............. -- -- 685
Amortization of deferred
compensation........................ 60 -- 60
Net income............................ -- 19,561 19,561
------- -------- --------
Balance, March 31, 1999................. (165) 6,325 230,906
Issuance of warrants for related party
technology license.................. -- -- 10,041
Issuance of restricted stock awards... (8,775) -- --
Exercise of stock options............. -- -- 3,221
Issuance of common stock.............. -- -- 1,308
Tax benefit from the exercise of
non-qualified stock options......... -- -- 7,203
Amortization of deferred
compensation........................ 380 -- 380
Net income............................ -- 50,094 50,094
------- -------- --------
Balance, March 31, 2000................. $(8,560) $ 56,419 $303,153
======= ======== ========
See accompanying notes.
37
39
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED MARCH 31,
-------------------------------
2000 1999 1998
--------- -------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss)........................................... $ 50,094 $ 19,561 $ (523)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation.............................................. 15,082 4,875 935
Amortization.............................................. 53 -- --
Loss (gain) on disposal of equipment...................... -- 109 (11)
Amortization of related party TRW technology license...... 214 124 --
Amortization of deferred compensation..................... 380 60 44
Changes in operating assets and liabilities:
Accounts receivable..................................... (37,466) (16,566) (4,592)
Inventories............................................. (11,054) (2,466) (15,653)
Current deferred tax asset.............................. (4,873) (898) --
Non-current deferred tax asset.......................... 1,088 (1,088) --
Prepaid expenses and other current and non-current
assets................................................. (760) (194) (100)
Accounts payable........................................ (3,791) 8,837 5,165
Accrued liabilities..................................... 2,136 4,836 155
Income taxes payable/recoverable........................ 3,553 2,854 (49)
Non-current deferred tax liability...................... 5,251 465 --
--------- -------- --------
Net cash provided by (used in) operating activities......... 19,907 20,509 (14,629)
INVESTING ACTIVITIES:
Purchase of short-term investments.......................... (47,069) -- --
Proceeds from sale of short-term investments................ 13,314 -- --
Purchase of property and equipment.......................... (107,495) (26,137) (20,020)
Proceeds from sale of equipment............................. -- 341 126
Purchase of technology license.............................. (1,500) -- --
--------- -------- --------
Net cash used in investing activities....................... (142,750) (25,796) (19,894)
FINANCING ACTIVITIES:
Net proceeds from initial public offering (1998) and
secondary offering (1999)................................. -- 133,381 37,622
Proceeds from exercise of options, warrants and employee
stock purchases........................................... 4,529 11,141 434
Repayment on capital lease obligations...................... (4,135) (4,190) (1,215)
Decrease in line of credit.................................. -- -- (350)
Decrease (increase) in cash restricted for capital
additions................................................. 3,860 (3,860) 12,357
Repayments of long-term debt................................ -- -- (295)
--------- -------- --------
Net cash provided by financing activities................... 4,254 136,472 48,553
Net (decrease) increase in cash and cash equivalents........ (118,589) 131,185 14,030
Cash and cash equivalents at beginning of year.............. 147,545 16,360 2,330
--------- -------- --------
Cash and cash equivalents at end of year.................... $ 28,956 $147,545 $ 16,360
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest...................... $ 1,400 $ 2,157 $ 441
========= ======== ========
Cash paid during the year for income taxes.................. $ 21,953 $ 3,502 $ 61
========= ======== ========
NON CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred for new equipment........ $ -- $ 5,449 $ 14,064
Issuance of stock warrants for technology license........... $ 10,041 $ -- $ --
Issuance of restricted stock as deferred compensation....... $ 8,775 $ -- $ --
See accompanying notes.
38
40
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
1. COMPANY INFORMATION
RF Micro Devices, Inc. (the "Company") designs, develops, manufactures and
markets proprietary radio frequency and intermediate frequency integrated
circuits ("RFICs") for wireless applications such as cellular and PCS, cordless
telephony, wireless local area networks, wireless local loop, industrial radios,
wireless security and remote meter reading. The Company derives revenue from the
sale of standard and custom-designed products and services. To date, a
significant portion of the Company's revenue has been attributable to the sale
of RFICs used in cellular and PCS handsets. The Company offers a broad array of
products -- including amplifiers, mixers and modulators/demodulators and single
chip transmitters, receivers and transceivers -- that represent a substantial
majority of the RFICs required in wireless subscriber equipment.
The Company addresses the various wireless markets by a product delivery
strategy called Optimum Technology Matching(R). This product delivery strategy
utilizes four distinct semiconductor process technologies: gallium arsenide
heterojunction bipolar transistor ("GaAs HBT"), silicon bipolar transistor,
silicon germanium, and gallium arsenide metal semiconductor field effect
transistor ("GaAs MESFET"). In June 1996, the Company and TRW Inc. ("TRW")
entered into a license arrangement whereby the Company was granted a worldwide,
perpetual, royalty-free license for GaAs HBT commercial wireless applications
operating at frequencies less than 10 GHz. In November 1999, the Company and TRW
expanded the existing license agreement to include commercial coaxial and
non-fiber wire applications.
The Company has built a high volume GaAs HBT manufacturing facility to
address the various markets for this technology. Commercial production from this
facility began in September 1998. The Company began the construction of its
second wafer fabrication facility in September 1999. This facility will be
completed in two phases, the first of which is expected to be complete near the
end of calendar 2000. Once both phases of this facility are complete, the
Company expects to have a total manufacturing capacity of approximately 270,000
four-inch wafer equivalents per year.
In June 1997, the Company completed an initial public offering of its no
par value common stock (the "Initial Offering"). The Initial Offering consisted
of 13,822,200 shares offered by the Company and 148,000 shares offered by
selling shareholders. The Initial Offering price was $3 per share, resulting in
net offering proceeds of approximately $37,600,000. Simultaneously with the
Initial Offering, the redeemable convertible preferred stock and a $10 million
subordinated convertible note payable to a shareholder of the Company were
automatically converted into 31,817,280 and 4,444,444 shares of common stock,
respectively.
In January 1999, the Company completed a secondary offering of common stock
(the "Secondary Offering"). The Secondary Offering consisted of 9,200,000 shares
offered by the Company and 1,150,000 shares offered by TRW. The Secondary
Offering price was $15.36 per share resulting in net offering proceeds to the
Company of approximately $133,381,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, RF Micro Devices UK Ltd. and RF Micro Devices
International, Inc. All significant intercompany accounts and transactions have
been eliminated in consolidation.
On March 31, 1999, the Company effected a two-for-one stock split in the
form of a 100% share dividend payable to shareholders of record on March 17,
1999. On August 18, 1999, the Company effected a second two-for-one stock split,
in the form of a 100% share dividend payable to shareholders of record on August
2, 1999. All earnings per share and share count information have been restated
retroactively to reflect the impact of these stock splits.
39
41
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATIONS
Certain amounts in the March 31, 1999 financial statements have been
reclassified to conform to the March 31, 2000 presentation. These
reclassifications had no effect on net income or shareholders' equity as
previously reported.
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.
SHORT-TERM INVESTMENTS
Short-term investments consist of debt securities comprised entirely of
U.S. Agency Medium Term Notes. The investments have original maturities of less
than a year when purchased. Management determines the appropriate classification
of debt securities at the time of purchase and reevaluates such designation as
of each balance sheet date. Debt securities are classified as held-to-maturity
when the Company has the positive intent and ability to hold the securities to
maturity. All debt securities are classified as held-to-maturity at March 31,
2000. Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accumulation of discounts to maturity. Such
amortization is included in interest income. Interest on securities classified
as held-to-maturity is also included in interest income.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is provided using the straight-line method over the estimated useful
lives of the assets, ranging from 3 to 20 years.
The Company has capitalized the costs of bringing its first wafer
fabrication facility to an operational state. The capitalized expenses are
included in "machinery and equipment" and "leasehold improvements" in the
accompanying balance sheets as of March 31, 2000 and 1999. These capitalized
expenses are being amortized over a fifteen-year period. Equipment used in the
wafer fabrication facilities is being depreciated over 6 and 10 year lives.
INVENTORIES
Inventories are stated at the lower of cost or market determined using the
average cost method. The Company's business is subject to the risk of
technological and design changes. The Company provides for potentially obsolete
or slow moving inventory based on management's analysis of inventory levels and
future sales forecasts at the end of each accounting period.
ACCOUNTING PERIODS
The Company uses a 52 or 53-week fiscal year ending on the Saturday closest
to March 31 of each year. The years ended March 25, 2000, March 27, 1999 and
March 28, 1998 were 52-week years. For purposes of financial statement
presentation, each fiscal year is described as having ended on March 31.
REVENUE RECOGNITION
Revenue from product sales is recognized when products are shipped. The
Company also enters into engineering agreements with certain customers relating
to the development of customer specific applications. Revenue is recognized for
engineering contracts when contract milestones are met.
40
42
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's products generally carry a one- or two-year warranty against
defects depending on the specific type of product. The Company provides for
estimated warranty costs in the period the related sales are made.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. The Company recognized
advertising expense of $726,000, $427,000, and $287,000 for the years ended
March 31, 2000, 1999 and 1998, respectively.
RISKS AND UNCERTAINTIES
Pursuant to the strategic alliance with TRW (Note 12), TRW has granted to
the Company certain licenses to produce certain GaAs HBT products. The Company
constructed a wafer fabrication facility and is manufacturing its own GaAs HBT
products covered by such licenses. These licenses may be made non-exclusive by
TRW if the Company does not meet certain revenue goals. A decision by TRW to
make them non-exclusive would have a material adverse effect on the Company's
operations. Currently, the Company expects to fulfill the requirements of the
license agreements.
The Company currently purchases GaAs HBT products from TRW to supplement
its own capacity. Sales of GaAs HBT products represented 89%, 89%, and 81% of
the Company's total revenue in the years ended March 31, 2000, 1999 and 1998,
respectively. Failure by TRW to continue to supply adequate quantities of these
products would have a material adverse effect on the Company.
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, 2000 and 1999.
INTANGIBLES
TRW has granted to the Company a worldwide right and license to make, have
made, use and sell the products manufactured in the Company's wafer fabrication
facility. This right and license will become exclusive and perpetual upon
completion of the condition discussed below. An intangible asset was recorded on
the Company's balance sheet as a related party technology license with an
aggregate value of $3,202,000, which represents the cost of the Company's right
to use the technology. Amortization of this intangible asset is being provided
on a straight-line basis over a fifteen year estimated useful life, commencing
September 1998 with resulting amortization expense of $214,000 and $124,000 for
the years ended March 31, 2000 and 1999, respectively. At the option of TRW, the
license will become non-exclusive if the Company fails to meet the following
revenue goals, as measured in accordance with generally accepted accounting
principles, following June 15, 1998; during the first year, $30 million; during
the second year, $65 million; and during the third year, $125 million. TRW and
the Company expanded the license agreement in November 1999 to permit the
Company to use TRW's patented GaAs HBT technology to manufacture products for
commercial coaxial and other non-fiber wire applications, including the
broadband wired market. Products serving this market include cable television
distribution amplifiers, cable modems, digital television converters and
television tuners, both analog and digital. The related party technology license
intangible asset recorded on the Company's balance sheet was increased by an
aggregate value of $10,041,000, which represents the cost of the Company's
additional rights to use the technology. Amortization of this portion of the
intangible asset will be provided on a straight-line basis over the remaining
useful life of the technology (estimated at 13.5 years). Should the technology
license be made non-exclusive under the circumstances described above, a
resulting charge to income would be recorded to recognize impairment, if any, of
its value.
41
43
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During fiscal year 2000, International Business Machines Corporation
("IBM") and the Company agreed to jointly develop radio frequency integrated
circuits (RFICs) based on IBM's silicon germanium process technology. The
companies intend to design highly integrated RFICs for next-generation cell
phones. An intangible asset was recorded on the Company's balance sheet in other
non-current assets with an aggregate value of $1,500,000, which represents the
cost of the Company's right to use the technology. Amortization of this
intangible asset is being provided on a straight-line basis over a fifteen year
estimated useful life, commencing September 1999 with resulting amortization
expense of $52,934 for the year ended March 31, 2000.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. The Company makes estimates for the allowance for doubtful
accounts, inventory reserves, warranty reserves, and other financial statement
amounts. Actual results could differ materially from those estimates.
SALES AND ACCOUNTS RECEIVABLE
The Company operates in a single industry segment and is 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,
----------------------------
2000 1999 1998
---- ---- ----
Customer 1.............................................. 59% 73% 42%
Customer 2.............................................. -- -- 13%
Additionally, 57% and 91% of the Company's accounts receivable were due from
Customer 1 at March 31, 2000 and 1999, respectively.
Sales to customers by geographic region are summarized as follows:
YEAR ENDED MARCH 31,
----------------------------
2000 1999 1998
---- ---- ----
USA..................................................... 44% 41% 50%
Asia.................................................... 24% 31% 24%
Canada.................................................. <1% 1% 3%
Europe.................................................. 32% 27% 23%
The Company's principal financial instrument subject to potential concentration
of credit risk is accounts receivable, which are unsecured. The Company provides
an allowance for doubtful accounts equal to estimated losses expected to be
incurred in the collection of accounts receivable.
RESEARCH AND DEVELOPMENT
The Company charges all research and development costs to expense as
incurred.
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.
42
44
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for employee stock options and employee restricted
stock in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"). Under APB 25, no compensation expense
is recognized for stock options or restricted stock issued to employees with
exercise prices or share prices at or above quoted market value. For stock
options or restricted shares granted at prices below quoted market value, the
Company records deferred compensation expense for the difference between the
price of the shares and the market value. Deferred compensation expense is
amortized ratably over the vesting period of the related options.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), provides an alternative to APB 25 in
accounting for stock-based compensation issued to employees. SFAS 123 provides
for a fair value based method of accounting for employee stock options and
similar equity instruments. However, companies that continue to account for
stock-based compensation arrangements under APB 25 are required by SFAS 123 to
disclose the pro forma effect on net income (loss) and income (loss) per share
as if the fair value based method prescribed by SFAS 123 had been applied. The
Company has continued to account for stock-based compensation using the
provisions of APB 25 and presents the pro forma disclosure requirements of SFAS
123 (see Note 10).
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which is effective for years beginning
after June 15, 2000. SFAS 133 establishes a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities. The Company will adopt SFAS 133 for fiscal 2001, which may result in
additional disclosures. The application of the new rules is not expected to have
a significant impact on the Company's financial position, results of operations
or cash flows.
3. SHORT-TERM INVESTMENTS
The following is a summary of held-to-maturity securities at March 31, 2000
(in thousands):
HELD-TO-MATURITY SECURITIES
---------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ---------- ---------- ---------
U.S. Agency Medium Term Notes.................. $33,755 $3 $22 $33,736
During the year ended March 31, 2000, debt securities classified as
held-to-maturity with a fair value at the date of sale of $13.3 million were
sold near maturity. The gross realized loss on such sales totaled $27,000. The
estimated fair value of held-to-maturity securities is based on the prevailing
market values at March 31, 2000.
43
45
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,
-----------------------
2000 1999
-------- -------
Raw materials............................................... $ 7,851 $ 6,628
Work in process............................................. 26,560 18,118
Finished goods.............................................. 15,092 6,975
-------- -------
49,503 31,721
Inventory allowances........................................ (11,114) (4,386)
-------- -------
Total inventories................................. $ 38,389 $27,335
======== =======
5. LEASES
The Company leases certain equipment and facilities under capital and
non-cancelable operating leases. The table below summarizes capitalized leased
equipment balances included in property and equipment (in thousands):
MARCH 31,
----------------------
2000 1999
------- -------
Machinery and equipment..................................... $22,043 $23,219
Accumulated amortization.................................... (5,261) (2,307)
------- -------
$16,782 $20,912
======= =======
The Company currently has entered into six capital lease facilities with
three equipment-financing companies under which it has financed the cost of
capital equipment and leasehold improvements associated with its wafer
fabrication facility. Lease terms range from 36 months to 60 months with
effective interest rates ranging from 8.6% to 10.7%. At March 31, 2000, the
minimum future lease payments under these capital leases (excluding interest)
totaled $12.7 million. The Company has financed an aggregate of $22.0 million of
leased property under these facilities. Capital lease amortization totaling
approximately $3.6 million, $2.1 million and $163,000 is included in
depreciation expense for the years ended March 31, 2000, 1999, and 1998,
respectively. Additionally, approximately $912,000 and $315,000 of interest
expense related to this equipment under capital leases was capitalized in fiscal
1999 and 1998, respectively in connection with the construction of the wafer
fabrication facility. No interest expense was capitalized in fiscal 2000.
The Company leases the majority of its corporate, wafer fabrication, and
other facilities from several third party real estate developers. The terms of
these operating leases range from 5 to 15 years and several have renewal options
up to two 10-year periods. The Company also leases various machinery and
equipment and office equipment under non-cancelable operating leases. The terms
of these leases range from 1 to 5 years. As of March 31, 2000, total future
minimum lease payments of approximately $34.7 million related to facility
operating leases and approximately $10.6 million related to equipment operating
leases.
In connection with the construction of the Company's first wafer
fabrication facility, the developer provided partial construction financing for
the facility. For the remainder of the construction costs, the Company deposited
cash with an escrow agent to secure its lease payments to the developer. The
deposited amounts were released to the Company in December 1999 as a result of
the Company meeting specified financial coverage ratios.
In 1997, in connection with a financing commitment related to the
construction of the Company's first wafer fabrication facility, the Company
issued a warrant to purchase 165,288 shares of its common stock at an exercise
price of $2.25 per share to an equipment financing company. On February 4, 1999,
Finova Technology Finance,
44
46
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inc., the warrant holder, exercised the warrant through a "cashless" exercise,
as permitted by the terms of the warrant agreement, by relinquishing the right
to purchase 20,652 shares in return for 144,636 shares.
Minimum future lease payments under non-cancelable capital and operating
leases as of March 31 are as follows (in thousands):
CAPITAL OPERATING
------- ---------
2001........................................................ $ 5,506 $ 7,411
2002........................................................ 5,501 6,027
2003........................................................ 3,266 4,950
2004........................................................ 134 4,354
2005........................................................ -- 3,343
Thereafter.................................................. -- 19,265
------- -------
Total minimum payments...................................... 14,407 $45,350
=======
Less amounts representing interest.......................... (1,709)
-------
Present value of net minimum payments....................... 12,698
Less current portion........................................ (4,495)
-------
Long-term portion........................................... $ 8,203
=======
Rent expense under operating leases, including facilities and equipment, was
approximately $7,724,000, $4,689,000 and $2,233,000 for the years ended March
31, 2000, 1999 and 1998, respectively.
SYNTHETIC LEASE
On August 13, 1999, as modified effective December 31, 1999, the Company
entered into a synthetic lease with a financial institution. A synthetic lease
is an asset-based financing structured to be treated as an operating lease for
accounting purposes, but as a capital lease for tax purposes. At the end of the
third quarter of fiscal year 2000, cash collateral largely secured the synthetic
lease transaction. The modification effective December 31, 1999 resulted in the
release of the cash collateral and the synthetic lease is now secured by
substantially all of the personal property assets of the Company. The lease has
a term expiring November 3, 2004. At the end of the term, the lease can be
extended upon the agreement of the parties or the Company may buy out the lease.
The interest rates or yield rates embedded in the lease (and used to calculate
lease payments) are either:
- The Eurodollar Rate plus margins varying from 150 basis points to 300
basis points per annum (based on certain quarterly financial covenant
testing and depending on whether the underlying source of funding is in
the form of a promissory note or an equity certificate), or
- At the Company's election and under certain other circumstances where
funding based on the Eurodollar Rate is not available, the ABR Rate plus
margins varying from zero basis points to 75 basis points per annum
(based on certain quarterly financial covenant testing and depending on
whether the underlying source of funding is in the form of a promissory
note or an equity certificate). The Eurodollar Rate is a rate of interest
determined under the lease documents by reference to one or more sources
for the London inter-bank offered rate, or LIBOR. The ABR Rate is a rate
of interest determined under the lease documents equal to the greater of
(a) the prime lending rate of the primary lender or its successor (as
determined under the lease documents) or (b) the federal funds effective
rate (as determined under the lease documents) plus 0.5%
This lease is expected to provide up to $100 million in financing for a new
wafer fabrication facility currently under construction. The $100 million of
financing is expected to fund approximately $57 million for the building and $43
million of equipment.
45
47
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the terms of the synthetic lease, the Company is required to comply
with certain financial covenants which among other things, require the
maintenance of minimum levels of tangible net worth, liquidity and debt service
coverage and prohibit the payment of dividends.
6. INCOME TAXES
Deferred income tax assets and liabilities are determined based upon
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
The components of the income tax provision are as follows (in thousands):
YEAR ENDED MARCH 31,
-----------------------------
2000 1999 1998
------- ------- -------
Current:
Federal............................................. $24,939 $ 5,825 $ --
State............................................... 3,501 587 --
Deferred benefit...................................... (1,466) (1,521) --
------- ------- -------
Total................................................. $26,974 $ 4,891 $ --
======= ======= =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred income taxes are as follows (in thousands):
MARCH 31,
-----------------
2000 1999
------ -------
Deferred tax liabilities:
Accumulated depreciation.................................. $6,212 $ 465
Deferred tax assets:
Research and development costs............................ 351 904
Allowance for bad debts................................... 304 151
Software costs............................................ 145 184
Warranty reserve.......................................... 160 202
Inventory................................................. 4,363 1,882
Other..................................................... 944 416
------ -------
Total deferred tax assets................................... 6,267 3,739
Deferred tax asset valuation allowance.................... - (1,753)
------ -------
Net deferred tax assets..................................... 6,267 1,986
------ -------
Net deferred taxes.......................................... $ 55 $ 1,521
====== =======
46
48
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the provision for income taxes to income tax expense
computed by applying the statutory federal income tax rate to pre-tax income
(loss) for the years ended March 31, 2000, 1999, and 1998 is as follows (in
thousands):
YEAR ENDED MARCH 31,
-----------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- -------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------- ---------- ------- ---------- ------ ----------
Income tax expense at statutory federal
rate................................. $26,974 35% $ 8,559 35% $(177) (34)%
Increase (decrease) resulting from:
State tax, net of federal benefit.... 2,245 2.91 872 3.5 -- --
Research and development credits..... (544) (0.71) (482) (1.5) -- --
Change in reserve for deferred tax
assets............................ (1,753) (2.27) (4,058) (17) 177 34
Other................................ 52 0.07 -- -- -- --
------- ----- ------- ---- ----- ----
$26,974 35% $ 4,891 20% $ -- --%
======= ===== ======= ==== ===== ====
7. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except per share data):
YEAR ENDED MARCH 31,
---------------------------
2000 1999 1998
------- ------- -------
Numerator for basic and diluted net income (loss) per
share:
Net income (loss).................................... $50,094 $19,561 $ (523)
Denominator:
Denominator for basic net income (loss) per share --
Weighted average shares.............................. 79,364 68,472 54,036
Effect of dilutive securities:
Employee stock options............................... 6,470 5,264 --
Denominator for diluted net income (loss) per
share -- adjusted weighted average shares and assumed
conversions............................................. 85,834 73,736 54,036
Basic net income (loss) per share......................... $ 0.63 $ 0.29 $ (0.01)
Diluted net income (loss) per share....................... $ 0.58 $ 0.27 $ (0.01)
Options to purchase 103,125 and 151,000 shares of common stock were
outstanding during fiscal 2000 and 1999, respectively, but were not included in
the computation of diluted earnings per share for the years ended March 31, 2000
and 1999, respectively, because the exercise price of the options was greater
than the average market price of the common shares and, therefore, the effect
would be anti-dilutive.
8. 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 5 continuous years of service. The Company contributed $511,000, $265,000 and
$98,000 to the plan during 2000, 1999 and 1998, respectively.
9. 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
47
49
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
2,000,000 shares of common stock have been reserved for offering under the ESPP
and are available for purchase there under, 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 2000, 1999 and 1998, respectively, 47,660,
130,492, and 47,888 shares were purchased under the ESPP.
10. STOCK-BASED AWARDS
1992 STOCK OPTION PLAN
The Company's 1992 Stock Option Plan (the "1992 Option Plan") was adopted
by the shareholders of the Company in February 1992. The 1992 Option Plan
provided for the granting of both incentive and nonqualified options to purchase
common stock to key employees, non-employee directors and advisors and
consultants in the service of the Company. The 1992 Option Plan was terminated
following the Initial Offering, at which time options to purchase 4,366,464
shares had been granted.
1997 KEY EMPLOYEES' STOCK OPTION PLAN
In April 1997, the Company adopted the 1997 Key Employees' Stock Option
Plan (the "1997 Option Plan"), which provides for the granting of options to
purchase common stock to key employees and independent contractors in the
service of the Company. The 1997 Option Plan permits the granting of both
incentive options and 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 5,200,000 shares, subject to adjustment in the event
of certain events affecting the Company's capitalization.
DIRECTORS' OPTION PLAN
In April 1997, the Company adopted the Non-employee Directors' Stock Option
Plan. Under the terms of this plan, directors who are not employees of the
Company are entitled to receive options to acquire shares of common stock. An
aggregate of 800,000 shares of common stock have been reserved for issuance
under this plan, subject to adjustment for certain events affecting the
Company's capitalization. In 2000 and 1999, respectively, the Company issued
60,000 and 80,000 options to eligible participants under the plan. In addition,
during October 1998, the Company granted 60,000 options to certain directors
outside of the Non-employee Directors' Stock Option Plan.
1999 STOCK INCENTIVE PLAN
The 1999 Stock Incentive Plan ("Stock Plan"), which the Company's
shareholders approved at the 1999 annual meeting of shareholders, provides for
the issuance of a maximum of 8,000,000 shares of common stock pursuant to awards
granted under the Stock Plan. Awards that may be granted under the Stock Plan
include incentive stock options and nonqualified stock options totaling
7,000,000 shares. The remaining 1,000,000 shares reserved under the plan are for
stock appreciation rights, and restricted stock awards and restricted units. The
number of shares reserved for issuance under the 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 Stock Plan after June 30,
2009. The Company recorded $8.8 million in November 1999 of deferred
compensation associated with the awarding of 200,000 non-vested restricted
stocks to key employees at no cost under the Stock Plan. This deferred
compensation is being amortized to expense over the vesting periods of such
restricted stock awards, up to four years.
48
50
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock-based awards. The Company has recorded
deferred compensation expense of $300,000 for the difference between the grant
price and the deemed fair value of certain of the Company's common stock options
granted in 1997. Pro forma information regarding net income (loss) and net
income (loss) per share is required by SFAS 123, and has been determined as if
the Company accounted for its employee stock options using the fair value method
of SFAS 123. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following assumptions for
the years ended March 31, 2000, 1999 and 1998, respectively: risk-free interest
rate of 6.5%, 5.5% and 5.7%, no expected dividends, a volatility factor of .892,
.801 and .877 and a weighted average expected life of the options of 5 years.
The weighted average fair value of options granted during 2000, 1999 and 1998
was $33.43, $4.54 and $2.54, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
awards is amortized to expense over the awards' vesting periods. The Company's
pro forma information follows (in thousands, except for per share information):
YEAR ENDED MARCH 31,
--------------------------
2000 1999 1998
------- ------- ------
Net income (loss), as reported.............................. $50,094 $19,561 $ (523)
Pro forma net income (loss)................................. $32,113 $18,191 $ (876)
Basic net income (loss) per share, as reported.............. $ 0.63 $ 0.29 $(0.01)
Diluted net income (loss) per share, as reported............ $ 0.58 $ 0.27 $(0.01)
Pro forma basic net income (loss) per share................. $ 0.41 $ 0.27 $(0.02)
Pro forma diluted net income (loss) per share............... $ 0.37 $ 0.25 $(0.02)
A summary of activity of the Company's employee stock option plans follows:
NUMBER OF SHARES OPTION PRICES
---------------------------- ---------------
AVAILABLE FOR OPTIONS
GRANT OUTSTANDING PER SHARE RANGE
------------- ----------- ---------------
March 31, 1997.............................. 1,506,336 4,125,344 $ 0.04-$2.26
Reserved.................................. 3,862,464 -- --
Granted................................... (1,174,300) 1,174,300 $ 2.58-$5.80
Exercised................................. -- (952,208) $ 0.04-$1.52
Canceled.................................. 58,880 (58,880) $ 0.04-$4.73
---------- ---------- --------------
March 31, 1998.............................. 4,253,380 4,288,556 $ 0.04-$5.79
Reserved.................................. -- -- --
Granted................................... (3,114,700) 3,114,700 $ 2.78-$23.78
Exercised................................. -- (718,980) $ 0.04-$5.78
Canceled.................................. 73,172 (73,172) $ 0.04-$22.44
---------- ---------- --------------
March 31, 1999.............................. 1,211,852 6,611,104 $ 0.04-$23.78
Reserved.................................. 7,000,000 -- --
Granted................................... (2,592,825) 2,592,825 $20.06-$175.00
Exercised................................. -- (1,224,729) $ 0.04-$23.78
Canceled.................................. 59,312 (59,312) $ 0.07-$89.56
---------- ---------- --------------
March 31, 2000.............................. 5,678,339 7,919,888 $ 0.04-$175.00
========== ========== ==============
Exercise prices for options outstanding as of March 31, 2000, ranged from
$0.04 to $175.00. The weighted average remaining contractual life of outstanding
options is 8.2 years. The weighted average exercise price of outstanding options
at March 31, 2000 is $17.22. At March 31, 2000 and 1999, options to purchase
1,367,836 and 583,762 shares of common stock were exercisable, respectively.
49
51
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes in more detail information regarding the
Company's stock options outstanding at March 31, 2000:
WEIGHTED
AVERAGE
OPTIONS REMAINING OPTIONS
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- -------------- ----------- ---------------- -----------
$0.04- 17.50................................. 5,238,763 7.5 years 1,351,136
17.50- 35.00................................. 1,051,325 9.1 years 16,700
35.00- 52.50................................. 1,191,250 9.5 years --
52.50- 70.00................................. 190,250 9.7 years --
70.00- 87.50................................. 98,000 9.8 years --
87.50-105.00................................. 47,175 9.9 years --
105.00-122.50................................. 25,875 9.9 years --
122.50-140.00................................. 15,000 10.0 years --
140.00-157.50................................. 22,500 10.0 years --
157.50-175.00................................. 39,750 9.9 years
--------- ---------- ---------
7,919,888 8.2 years 1,367,836
========= ========== =========
11. COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At March 31, 2000, the Company had reserved a total of 17,837,187 of its
authorized 150,000,000 shares of common stock for future issuance as follows:
Outstanding stock options under employee stock options
plans..................................................... 7,919,888
Possible future issuance under employee stock option
plans..................................................... 5,678,339
Outstanding options under non-employee directors' option
plan...................................................... 161,667
Possible future issuance under non-employee directors'
option plan............................................... 500,000
Outstanding directors' options outside of non-employee
directors' option plan.................................... 53,333
Employee stock purchase plan................................ 1,773,960
Restricted Stock-based awards granted....................... 200,000
Possible future issuance of restricted stock-based awards... 800,000
TRW Warrants................................................ 750,000
----------
Total shares reserved....................................... 17,837,187
==========
12. RELATED PARTY TRANSACTIONS
In connection with a bridge financing in 1996, which was subsequently
converted to preferred stock, the Company issued to a shareholder warrants that
entitled the holder to purchase 267,784 shares of common stock at exercise
prices ranging from $0.6875 to $1.5125 per share. These warrants were exercised
in March 1999.
In connection with the technology licensing agreement discussed previously,
the Company issued a warrant to TRW to purchase up to 4,000,000 shares of the
Company's common stock at an exercise price of $2.50 per share. The TRW warrant
first became exercisable on June 15, 1998, the date that the Company's wafer
facility became operational, and was exercised on September 14, 1998. A value of
$250,000 was recorded for this warrant.
The Company has agreed to purchase from TRW, through the year 2000, certain
minimum quantities of wafers and wafer starting material used in its production
of RFICs. The estimated minimum annual purchase in calendar year 2000 is $29
million.
50
52
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, the Company granted TRW two warrants for
the purchase of shares of common stock. The first warrant is for 250,000 shares
of common stock and is exercisable after December 31, 2000 and expires on June
30, 2001. The second warrant is for 500,000 shares of common stock and is
exercisable after December 31, 2000 and expires on December 31, 2001, but will
become null and void if the Company fails to achieve certain annualized sales
milestones. The exercise price established for these warrants will be the
average of the closing prices of the Company's common stock for ten trading days
immediately preceding December 31, 2000 multiplied by 0.75. The value of these
warrants was estimated using an option pricing model to be $10.0 million, which
represents the cost of the Company's right to use TRW's technology for these new
applications. Accordingly, the related intangible asset was increased on the
Company's balance sheet. Amortization of this portion of the intangible asset is
being provided on a straight-line basis over the remaining estimated useful life
of the technology, approximately 13.5 years.
51
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item is contained in our definitive proxy
statement relating to our Annual Meeting of Shareholders to be held on July 25,
2000 under the captions "Executive Officers," "Proposal 1 -- Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance," which
are incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is contained in our definitive proxy
statement relating to our Annual Meeting of Shareholders to be held on July 25,
2000 under the caption "Management Compensation," which is incorporated by
reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is contained in our definitive proxy
statement relating to our Annual Meeting of Shareholders to be held on July 25,
2000 under the caption "Security Ownership," which is incorporated by reference
herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is contained in our definitive proxy
statement relating to our Annual Meeting of Shareholders to be held on July 25,
2000 under the caption "Certain Transactions," which is incorporated by
reference herein.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following consolidated financial statements of RF Micro Devices, Inc.
included in this Annual Report on Form 10-K are included in Item 8:
i. Consolidated Balance Sheets as of March 31, 2000 and 1999.
ii. Consolidated Statements of Operations for the years ended
March 31, 2000, 1999 and 1998.
iii. Consolidated Statements of Redeemable Convertible Preferred
Stock and Shareholders' Equity for the years ended March 31,
2000, 1999 and 1998.
iv. Consolidated Statements of Cash Flows for the years ended
March 31, 2000, 1999 and 1998.
v. Notes to Consolidated Financial Statements for the years
ended March 31, 2000, 1999 and 1998.
(a)(2) Schedule II; Valuation and Qualifying Accounts -- see additional
section of this Report.
No other financial statement schedules are to be filed with this Annual
Report on Form 10-K due to the absence of the conditions under which they are
required or because the required information is included within the consolidated
financial statements or the notes thereto included herein.
52
54
(a)(3) Exhibits
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1 Amended and Restated Articles of Incorporation of RF Micro
Devices, Inc. (1)
3.2 Bylaws of RF Micro Devices, Inc. (2)
4.1 Specimen Certificate of Common Stock (2)
4.2 Warrant No. 99-1, dated November 15, 1999, for the purchase
of up to 250,000 shares of common stock (3)
4.3 Warrant No. 99-2, dated November 15, 1999, for the purchase
of up to 500,000 shares of common stock (3)
The registrant hereby undertakes to furnish to the
Securities and Exchange Commission, upon its request, a copy
of any instrument defining the rights of holders of
long-term debt of the registrant not filed herewith pursuant
to Item 601(b)(4)(iii) of Regulation S-K.
10.1 1992 Stock Option Plan of RF Micro Devices, Inc. (2)*
10.2 Form of Stock Option Agreement (1992 Stock Option Plan) (2)*
10.3 1997 Key Employees Stock Option Plan of RF Micro Devices,
Inc., as amended (3)*
10.4 Form of Stock Option Agreement (1997 Key Employees' Stock
Option Plan) (2)*
10.5 Amended and Restated Nonemployee Directors' Stock Option
Plan of RF Micro Devices, Inc. (4)*
10.6 Form of Stock Option Agreement (Directors' Stock Option
Plan) (4)*
10.7 1999 Stock Incentive Plan of RF Micro Devices, Inc., as
amended (3)*
10.8 Stock Option Agreement, dated October 27, 1998, between RF
Micro Devices, Inc. and Walter H. Wilkinson, Jr., as amended
(3)*
10.9 Stock Option Agreement, dated October 27, 1998, between RF
Micro Devices, Inc. and Albert E. Paladino, as amended (3)*
10.10 Stock Option Agreement dated October 27, 1998, between RF
Micro Devices, Inc. and Erik H. van der Kaay, as amended
(3)*
10.11 Securities Purchase Agreement, dated June 6, 1996, between
RF Micro Devices, Inc. and TRW Inc. (2)
10.12 License and Technical Assistance Agreement, dated June 6,
1996, between RF Micro Devices, Inc. and the Electronic
Systems & Technology Division of the Space and Electronics
Group of TRW Inc. (2)
10.13 Supply Agreement, dated June 6, 1996, between RF Micro
Devices, Inc. and TRW Inc. (2)
10.14 Amendment to the Supply Agreement, dated June 6, 1996,
between RF Micro Devices, Inc. and TRW Inc. (5)
10.15 Second Amended and Restated Registration Rights Agreement,
dated June 6, 1996, between RF Micro Devices, Inc. and
certain shareholders, as amended (2)
10.16 Lease Agreement, dated October 31, 1995, between RF Micro
Devices, Inc. and Piedmont Land Company, as amended (2)
10.17 Lease Agreement, dated October 9, 1996, between RF Micro
Devices, Inc. and Highwoods/Forsyth Limited Partnership, as
amended (2)
10.18 Master Equipment Lease Agreement, dated as of December 2,
1996, between Finova Technology Finance, Inc. and RF Micro
Devices, Inc. (2)
10.19 Lease Agreement, dated February 12, 1999, between Highwoods
Realty Limited Partnership and RF Micro Devices, Inc. (4)
10.20 Lease dated May 25, 1999, between RF Micro Devices, Inc. and
CK Deep River, LLC (3)
10.21 Lease Agreement, dated November 5, 1999, between Highwoods
Realty Limited Partnership and RF Micro Devices, Inc. (3)
10.22 License Agreement, dated November 15, 1999, between TRW Inc.
and RF Micro Devices, Inc. (3)
53
55
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.23 Cooperation Agreement, dated November 15, 1999, between TRW
Inc. and RF Micro Devices, Inc. (3)
10.24 Amended, Restated and Replacement Participation Agreement,
dated as of December 31, 1999, among RF Micro Devices, Inc.,
as the Construction Agent and as the Lessee; First Security
Bank, National Association, not individually, except as
expressly stated therein, but solely as the Owner Trustee
under the RFMD Real Estate Trust 1999-1; the Various Banks
and Other Lending Institutions Which Are Parties Thereto
from Time to Time, as the Holders; the Various Banks and
Other Lending Institutions Which Are Parties Thereto from
Time to Time, as the Lenders; and First Union National Bank,
as the Agent for the Lenders and respecting the Security
Documents, as the Agent for the Lenders and the Holders, to
the extent of their interests (3)
10.25 Amended, Restated and Replacement Lease Agreement, dated as
of December 31, 1999, between First Security Bank, National
Association, not individually, but solely as the Owner
Trustee under the RFMD Real Estate Trust 1999-1, as Lessor,
and RF Micro Devices, Inc., as Lessee (3)
10.26 Amended, Restated and Replacement Credit Agreement, dated as
of December 31, 1999, among First Security Bank, National
Association, not individually, except as expressly stated
therein, but solely as the Owner Trustee under the RFMD Real
Estate Trust 1999-1, as the Borrower; the Several Lenders
from Time to Time Parties thereto; and First Union National
Bank, as the Agent (3)
10.27 RF Micro Devices, Inc. FY 2000 Executive Bonus Plan*
21 Subsidiaries of RF Micro Devices, Inc.
23 Consent of Ernst & Young LLP
27.1 Financial Data Schedule--Year ended March 31, 2000**
27.2 Restated Financial Data Schedule--Three months ended June
30, 1999**
27.3 Restated Financial Data Schedule--Year ended March 31,
1999**
27.4 Restated Financial Data Schedule--Nine months ended December
31, 1998**
27.5 Restated Financial Data Schedule--Six months ended September
30, 1998**
27.6 Restated Financial Data Schedule--Three months ended June
30, 1998**
27.7 Restated Financial Data Schedule--Year ended March 31,
1998**
27.8 Restated Financial Data Schedule--Nine months ended December
31, 1997**
27.9 Restated Financial Data Schedule--Six months ended September
30, 1997**
27.10 Restated Financial Data Schedule--Three months ended June
30, 1997**
- ---------------
(1) Incorporated by reference to the exhibit filed with our Quarterly Report on
Form 10-Q for the quarterly period ended June 26, 1999
(2) Incorporated by reference to the exhibit filed with our Registration
Statement on Form S-1 (File No. 333-22625)
(3) Incorporated by reference to the exhibit filed with our Quarterly Report on
Form 10-Q for the quarterly period ended December 25, 1999
(4) Incorporated by reference to the exhibit filed with our Annual Report on
Form 10-K for the fiscal year ended March 27, 1999
(5) Incorporated by reference to the exhibit filed with our Annual Report on
Form 10-K for the fiscal year ended March 28, 1998
* Executive compensation plan or agreement
** Filed in electronic format only
54
56
(b) Reports on Form 8-K filed in the 4th quarter of fiscal 2000:
We filed a Current Report on Form 8-K on March 10, 2000 to disclose that on
March 9, 2000 we announced that we intended to offer, subject to market and
other conditions, $425 million of Convertible Subordinated Notes due 2005 (plus
an additional amount of up to $75 million to cover over-allotments, if any)
through initial purchasers to qualified institutional buyers under Rule 144A of
the Securities Act. Due to market conditions, we subsequently determined not to
proceed with this offering.
(c) Exhibits
The exhibits required by Item 601 of Regulation S-K are filed herewith and
incorporated by reference herein. The response to this portion of Item 14 is
submitted under Item 14(a)(3).
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted under Item 14(a)(2).
55
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: June 23, 2000
By: /s/ DAVID A. NORBURY
------------------------------------
David A. Norbury
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on June 23, 2000.
/s/ DAVID A. NORBURY
- ------------------------------------------------------
Name: David A. Norbury
Title: President, Chief Executive Officer And Director
(principal executive officer)
/s/ WILLIAM A. PRIDDY, JR.
- ------------------------------------------------------
Name: William A. Priddy, Jr.
Title: Chief Financial Officer and Vice President of Administration
(principal financial officer)
/s/ BARRY D. CHURCH
- ------------------------------------------------------
Name: Barry D. Church
Title: Controller
(principal accounting officer)
/s/ ERIK H. VAN DER KAAY
- ------------------------------------------------------
Name: Erik H. van der Kaay
Title: Director
/s/ DR. ALBERT E. PALADINO
- ------------------------------------------------------
Name: Dr. Albert E. Paladino
Title: Director
/s/ WILLIAM J. PRATT
- ------------------------------------------------------
Name: William J. Pratt
Title: Director
/s/ WALTER H. WILKINSON, JR.
- ------------------------------------------------------
Name: Walter H. Wilkinson, Jr.
Title: Director
/s/ TERRI D. ZINKIEWICZ
- ------------------------------------------------------
Name: Terri D. Zinkiewicz
Title: Director
56
58
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO COSTS DEDUCTIONS BALANCE AT END
PERIOD AND EXPENSES FROM RESERVE OF PERIOD
------------ ---------------- ------------ --------------
Year ended March 31, 2000
Allowance for doubtful accounts......... $ 391,424 $ 384,931 $ 1,166 $ 775,189
Inventory reserve....................... 4,386,440 9,638,430 2,911,145 11,113,725
Warranty reserve........................ 523,676 352,430 468,229 407,877
Year ended March 31, 1999
Allowance for doubtful accounts......... $ 489,200 $ 244,569 $ 342,345 $ 391,424
Inventory reserve....................... 2,713,136 5,844,670 4,171,366 4,386,440
Warranty reserve........................ 220,189 434,213 130,726 523,676
Year ended March 31, 1998
Allowance for doubtful accounts......... $ 510,131 $ 519,774 $ 540,705 $ 489,200
Inventory reserve....................... 846,855 2,316,281 450,000 2,713,136
Warranty reserve........................ 137,580 245,500 162,891 220,189