SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
of
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 26, 1998
Commission File Number 0-22660
TRIQUINT SEMICONDUCTOR, INC.
(Registrant)
Incorporated in the State of Delaware
I.R.S. Employer Identification Number 95-3654013
2300 NE Brookwood Parkway, Hillsboro, OR 97124
Telephone: (503) 615-9000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of September 26, 1998, there were 9,468,311 shares of the registrant's common
stock outstanding.
TRIQUINT SEMICONDUCTOR, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
- ----------------------------------------------------------------------------------------------------
Item 1. Financial Statements
Consolidated Condensed Statements of Operations -- Three months and nine months
ended September 30, 1998 and 1997 3
Consolidated Condensed Balance Sheets -- September 30, 1998 and December 31, 4
1997
Consolidated Condensed Statements of Cash Flows -- Nine months ended September 30,
1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
PART II. OTHER INFORMATION
- ----------------------------------------------------------------------------------------------------
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES
27
2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
TRIQUINT SEMICONDUCTOR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
Total revenues $ 29,112 $ 17,569 $ 80,667 $ 52,913
Operating costs and expenses:
Cost of goods sold 17,933 10,242 53,884 28,931
Research, development and engineering 4,568 2,668 14,067 8,468
Selling, general and administrative 4,288 3,856 11,308 10,614
Special charges - - 8,820 -
Settlement of lawsuit - - 1,400 -
------------- ------------- ------------- -------------
Total operating costs and expenses 26,789 16,766 89,479 48,013
------------- ------------- ------------- -------------
Income (loss) from operations 2,323 803 (8,812) 4,900
------------- ------------- ------------- -------------
Other income (expense):
Interest income 825 906 2,434 2,593
Interest expense (360) (395) (1,108) (1,102)
Other, net 102 - 156 68
------------- ------------- ------------- -------------
Total other income, net 567 511 1,482 1,559
------------- ------------- ------------- -------------
Income (loss) before income taxes 2,890 1,314 (7,330) 6,459
Income tax expense 29 - 94 1,112
------------- ------------- ------------- -------------
Net income (loss) $ 2,861 $ 1,314 $ (7,424) $ 5,347
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Per share data:
Basic $ 0.30 $ 0.16 $ (0.79) $ 0.64
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average common shares 9,453 8,425 9,365 8,332
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Diluted $ 0.29 $ 0.14 $ (0.79) $ 0.59
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average common and
common equivalent shares 9,802 9,231 9,365 9,126
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
See notes to Consolidated Condensed Financial Statements.
3
TRIQUINT SEMICONDUCTOR, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997 (1)
------------- -------------
Current assets:
Cash and cash equivalents $ 15,799 $ 18,734
Investments 9,268 5,729
Accounts receivable, net 23,577 15,986
Inventories, net 20,080 12,288
Prepaid expenses and other assets 1,928 1,273
------------- -------------
Total current assets 70,652 54,010
------------- -------------
Property, plant and equipment, net 29,717 27,235
Restricted investments 40,163 40,162
Other non-current assets 2,277 11
------------- -------------
Total assets $ 142,809 $ 121,418
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of capital lease
and installment note obligations $ 5,024 $ 5,045
Accounts payable and accrued expenses 24,104 13,785
------------- -------------
Total current liabilities 29,128 18,830
Capital lease obligations and installment
note obligations, less current installments 10,648 12,550
------------- -------------
Total liabilities 39,776 31,380
------------- -------------
Shareholders' equity:
Common stock 132,866 112,060
Accumulated deficit (29,833) (22,022)
------------- -------------
Total shareholders' equity 103,033 90,038
------------- -------------
Total liabilities and shareholders' equity $ 142,809 $ 121,418
------------- -------------
------------- -------------
(1) The information in this column was derived from the Company's audited
financial statements as of December 31, 1997.
See notes to Consolidated Condensed Financial Statements.
4
TRIQUINT SEMICONDUCTOR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
---------------------------------
September 30, September 30,
1998 1997
------------- -------------
Cash flows from operating activities:
Net income (loss) (7,424) 5,347
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 4,202 3,172
Special charges 8,820 --
(Gain) loss on disposal of assets (140) (14)
Change in assets and liabilities (net of assets acquired
and liabilities assumed)
(Increase) decrease in:
Accounts receivable (1,618) (3,171)
Inventories (3,169) (3,473)
Prepaid expense and other assets (173) 247
Increase (decrease) in:
Accounts payable and accrued expenses 6,577 (238)
Other current liabilities -- (61)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,075 1,809
Cash flows from investing activities:
Purchase of investments (70,569) (35,162)
Sale/Maturity of investments 67,029 36,344
Capital expenditures (3,397) (1,037)
Proceeds from sale of assets 149 200
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (6,788) 345
Cash flows from financing activities:
Principal payments under capital lease obligations (4,138) (3,055)
Issuance of common stock, net 916 2,370
------------- -------------
NET CASH USED BY FINANCING ACTIVITIES (3,222) (685)
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,935) 1,469
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 18,734 13,411
------------- -------------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 15,799 $ 14,880
------------- -------------
------------- -------------
See notes to Consolidated Condensed Financial Statements.
5
TRIQUINT SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements have been
prepared in conformity with generally accepted accounting principles.
However, certain information or footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed, or omitted, pursuant to the
rules and regulations of the Securities and Exchange Commission. In the
opinion of management, the statements include all adjustments necessary
(which are of a normal and recurring nature) for the fair presentation
of the results of the interim periods presented. These consolidated
financial statements should be read in conjunction with the Company's
audited financial statements for the year ended December 31, 1997, as
included in the Company's 1997 Annual Report to Shareholders.
The Company's quarters end on the Saturday nearest the end of the calendar
quarter. For convenience, the Company has indicated that its third quarter
ended on September 30. The Company's fiscal year ends on December 31.
2. NET INCOME PER SHARE
Earnings per share is presented as basic and diluted net income per share.
Basic net income per share is net income available to common shareholders
divided by the weighted-average number of common shares outstanding.
Diluted net income per share is similar to basic except that the
denominator includes potential common shares that, had they been issued,
would have had a dilutive effect.
The following is a reconciliation of the basic and diluted earnings per
share:
Three Months Ended September 30, 1998
-------------------------------------
Per Share
Income Shares Amount
------ ------ -------
Basic earnings per share:
Income available to shareholders $2,861 9,453 $ 0.30
-------
Effect of dilutive securities:
Stock options and warrants - 349
------ ------
Diluted earnings per share:
Income available to shareholders $2,861 9,802 $ 0.29
------ ------ ------
6
Nine Months Ended September 30, 1998
------------------------------------
Income Per Share
(Loss) Shares Amount
--------- --------- ---------
Basic earnings (loss) per share:
Income (loss) available to $ (7,424) 9,365 $ (0.79)
shareholders ---------
---------
Effect of dilutive securities:
Stock options and warrants - -
Diluted earnings (loss) per share:
Income (loss) available to $ (7,424) 9,365 $ (0.79)
shareholders --------- --------- ---------
--------- --------- ---------
Three Months Ended September 30, 1997
-------------------------------------
Per Share
Income Shares Amount
--------- --------- ---------
Basic earnings per share:
Income available to shareholders $ 1,314 8,425 $ 0.16
---------
---------
Effect of dilutive securities:
Stock options and warrants - 806
--------- ---------
Diluted earnings per share:
Income available to shareholders $ 1,314 9,231 $ 0.14
--------- --------- ---------
--------- --------- ---------
Nine Months Ended September 30, 1997
------------------------------------
Per Share
Income Shares Amount
--------- --------- ---------
Basic earnings per share:
Income available to shareholders $ 5,347 8,332 $ 0.64
---------
Effect of dilutive securities:
Stock options and warrants - 794
--------- ---------
Diluted earnings per share:
Income available to shareholders $ 5,347 9,126 $ 0.59
--------- --------- ---------
--------- --------- ---------
The dilutive effect of common equivalent shares outstanding for the
purchase of approximately 421 shares for the nine months ended September
30, 1998 were not included in the net income (loss) per share calculations,
because to do so would have been antidilutive.
3. RESEARCH AND DEVELOPMENT COSTS
The Company charges all research and development costs associated with the
development of new products to expense when incurred. Engineering and
design costs related to revenues on non-recurring engineering services
billed to customers are classified as research, development and engineering
expense. Additionally, certain related contract engineering costs are also
included in research, development and engineering expense.
4. INCOME TAXES
The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
7
The provision for income taxes has been recorded based on the current
estimate of the Company's annual effective tax rate. For periods of
income, this rate differs from the federal statutory rate primarily because
of the utilization of net operating loss carryforwards.
5. INVENTORIES
Inventories, net of reserves of $1,970 and $1,324 as of September 30, 1998
and December 31, 1997, respectively, stated at the lower of cost or market,
consist of:
September 30, December 31,
1998 1997
------------- -------------
Raw Material $ 5,030 $ 2,776
Work in Progress 12,047 7,708
Finished Goods 3,003 1,804
------------- ------------
Total Inventories $20,080 $12,288
------------- ------------
6. SHAREHOLDERS' EQUITY
Components of shareholders' equity:
September 30, December 31,
1998 1997
------------- - ------------
Preferred stock, no par value,
5,000,000 shares authorized - -
Common stock, $.001 par value,
25,000,000 shares authorized,
9,468,311 and 8,494,232 at
September 30, 1998 and
December 31, 1997, respectively 9 8
Additional paid-in capital 132,857 112,052
7. SUPPLEMENTAL CASH FLOW INFORMATION
Nine Months Ended
-----------------
September 30, September 30,
1998 1997
------------- - ------------
Cash Transactions:
Cash paid for interest $ 1,088 $ 1,092
Cash paid for income taxes 0 74
Non-Cash Transactions:
Purchase of assets through
capital leases 2,215 5,847
8
8. ACQUISITION
Pursuant to an Asset Purchase Agreement (the Agreement) with RTIS, the
Company acquired the MMIC Business for approximately $19.5 million in
cash and 844,613 shares of TriQuint Common Stock (the Shares) valued at
approximately $19.5 million for a total purchase consideration of
approximately $39 million. The Shares were redeemable at the Company's
option. The Company elected not to renew the option effective September
14, 1998. The Company paid a total of $390,000 for this option, which
was recorded as a charge to shareholders' equity. The cash portion of
the purchase price was financed through an operating lease arrangement
involving certain assets pursuant to the Agreement.
As part of the acquisition, TriQuint recorded approximately $8.8
million in special charges associated with the write-off of the
fair value of in-process research and development.
9. LITIGATION
See Part II, Item 1, of this Quarterly Report on Form 10-Q for a
description of legal proceedings.
10. COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income", which established requirements for
disclosure of comprehensive income. The objective of SFAS No. 130 is to
report all changes in equity that result from transactions and economic
events other than transactions with owners. Comprehensive income is the
total of net income and all other non-owner changes in equity. There is
no difference between net income (loss) and comprehensive income (loss)
for each period presented.
9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT ON FORM 10-Q (REPORT)
AND IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN, CERTAIN STATEMENTS IN THE
FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (MD&A) ARE FORWARD LOOKING STATEMENTS. WHEN USED IN THIS
REPORT, THE WORD "EXPECTS," "ANTICIPATES," "ESTIMATES," AND SIMILAR EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT
TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE PROJECTED. SUCH RISKS AND UNCERTAINTIES ARE SET FORTH BELOW UNDER
"FACTORS AFFECTING FUTURE RESULTS."
INTRODUCTION
TriQuint Semiconductor, Inc. (TriQuint or the Company) designs, develops,
manufactures and markets a broad range of high performance analog and mixed
signal integrated circuits for the communications markets. The Company utilizes
its proprietary gallium arsenide (GaAs) technology to enable its products to
overcome the performance barriers of silicon devices in a variety of
applications. The Company sells its products on a worldwide basis and its end
user customers include Alcatel, Cellnet Data Systems, Ericsson, Hughes, Lucent
Technologies, Motorola, Nokia, Northern Telecom, Qualcomm, and Raytheon TI
Systems.
On January 13, 1998, the Company acquired substantially all of the assets
of the Monolithic Microwave Integrated Circuit (MMIC) operations of the former
Texas Instruments' Defense Systems & Electronics Group from Raytheon TI Systems,
Inc. (RTIS), a Delaware corporation and a wholly owned subsidiary of Raytheon
Company (Raytheon). The MMIC operations include the GaAs foundry and MMIC
business of the R/F Microwave Business Unit that RTIS acquired on July 11, 1997
from Texas Instruments Incorporated (TI) which MMIC business includes without
limitation, TI's GaAs Operations Group, TI's Microwave GaAs Products Business
Unit, the MMIC component of TI's Microwave GaAs Products Business Unit, the MMIC
component of TI's Microwave Integrated Circuits Center of Excellence and the
MMIC research and development component of TI's Systems Component Research
Laboratory (collectively, the MMIC Business).
The MMIC Business designs, develops, produces and sells advanced GaAs MMIC
products which are used in defense and commercial applications. In the area of
defense applications, the MMIC Business supplies military contractors with MMIC
products and services for applications such as high power amplifiers, low noise
amplifiers, switches and attenuators for active array radar, missiles,
electronic warfare systems and space communications systems. In commercial
applications, the MMIC Business provides products and services for wireless and
space-based communications.
Pursuant to an Asset Purchase Agreement (the Agreement) with RTIS, the
Company acquired the MMIC Business for approximately $19.5 million in cash
and 844,613 shares of TriQuint Common Stock (the Shares) valued at
approximately $19.5 million for a total purchase consideration of
approximately $39 million. The Shares were redeemable at the Company's
option. The Company elected not to renew the option effective September 14,
1998. The Company paid a total of $390,000 for this option, which was
recorded as a charge to shareholders' equity. The cash portion of the
purchase price was financed through an operating lease arrangement involving
certain assets pursuant to the Agreement.
10
RESULTS OF OPERATIONS
The following table sets forth the consolidated statement of operations
data of the Company expressed as a percentage of total revenues for the periods
indicated.
Three Months Ended Nine Months Ended
----------------------- -----------------------
September September September September
30, 30, 30, 30,
1998 1997 1998 1997
--------- --------- ---------- ---------
Total revenues 100.0 % 100.0 % 100.0 % 100.0 %
Operating costs and expenses:
Cost of goods sold 61.6 58.3 66.8 54.7
Research, development and engineering 15.7 15.2 17.4 16.0
Selling, general and administrative 14.7 21.9 14.0 20.1
Special charges 0.0 0.0 10.9 0.0
Settlement of lawsuit 0.0 0.0 1.8 0.0
--------- --------- ---------- ---------
Total operating costs and expenses 92.0 95.4 110.9 90.7
--------- --------- ---------- ---------
Income (loss) from operations 8.0 4.6 (10.9) 9.3
Other income, net 1.9 2.9 1.8 2.9
--------- --------- ---------- ---------
Income (loss) before income taxes 9.9 7.5 (9.1) 12.2
Income tax expense 0.1 0.0 0.1 2.1
--------- --------- ---------- ---------
Net income (loss) 9.8 % 7.5 % (9.2) % 10.1 %
--------- --------- ---------- ---------
--------- --------- ---------- ---------
TOTAL REVENUES
The Company derives revenues from the sale of standard and
customer-specific products and services. The Company's revenues also include
non-recurring engineering (NRE) revenues relating to the development of
customer-specific products.
Total revenues for the three and nine months ended September 30, 1998
increased 65.7% and 52.5%, respectively, to $29.1 million and $80.7 million from
$17.6 million and $52.9 million, respectively, for the comparable three and nine
months ended September 30, 1997. The increases in total revenues in the three
and nine months ended September 30, 1998 primarily reflects the inclusion of
revenues from the newly acquired MMIC business since the date of acquisition in
addition to strong demand for wireless communication products. Domestic
revenues for the three and nine months ended September 30, 1998 increased to
$22.9 and $61.3 million, respectively, from $12.1 and $34.9 million,
respectively, for the three and nine months ended September 30, 1997.
International revenues increased to $6.2 and $19.3 million for the three and
nine months ended September 30, 1998, respectively, from $5.5 and $18.0 million,
respectively, for the three and nine months ended September 30, 1997.
COST OF GOODS SOLD
Cost of goods sold includes all direct material, labor and overhead
expenses and certain production costs related to NRE revenues. In general,
gross profit generated from the sale of customer-specific products and from NRE
revenues is typically higher than gross profit generated from the sale of
standard products. The factors affecting product mix include the relative
demand in the various markets
11
incorporating the Company's customer-specific products and standard products, as
well as the number of NRE contracts which result in volume requirements for
customer-specific products.
Cost of goods sold increased to $17.9 million for the three months ended
September 30, 1998 from $10.2 million for the three months ended September
30, 1997. Cost of goods sold as a percentage of total revenues for the three
months ended September 30, 1998 increased to 61.6% from 58.3% for the three
months ended September 30, 1997. For the nine months ended September 30,
1998, cost of goods sold increased to $53.9 million from $28.9 million in the
comparable period a year earlier. As a percentage of total revenues, cost of
goods sold for the nine months ended September 30, 1998 increased to 66.8%
from 54.7% for the nine months ended September 30, 1997. The increase in
absolute dollar value of cost of goods sold was primarily attributable to the
related increase in sales volume. As a percentage of total revenues, the
increase in cost of goods sold from the three months ended September 30, 1997
was attributable to a higher proportion of lower-margin products in the mix
of products sold and to higher fixed costs associated with the newer
Hillsboro manufacturing facility. The increase in cost of goods sold from the
nine months ended September 30, 1997, as a percentage of total revenues, was
due to the continuing, though improved, impact of certain manufacturing
issues identified in the preceding two quarters, such as: lower than expected
yields on the initial products manufactured in the new facility, lower than
expected yields on products built in the old fabrication facility immediately
prior to shipment, equipment downtime on certain equipment following transfer
to the new facility, and an increase in lower-margin products in the mix of
products sold. Sequentially, over the last two quarters, cost of goods sold
continued to improve as a percentage of revenue due to improvements in the
performance issues described here associated with the Company's transition to
its new Hillsboro facility as well as to increases in economies of scale from
higher production volumes.
The Company has at various times in the past experienced lower than
expected production yields which have delayed shipments of a given product and
adversely affected gross margins. There can be no assurance that the Company
will be able to maintain acceptable production yields in the future and, to the
extent that it does not achieve acceptable production yields, its operating
results would be materially adversely affected. The Company's operation of its
own leased wafer fabrication facilities entails a high degree of fixed costs and
requires an adequate volume of production and sales to be profitable. During
periods of decreased demand, high fixed wafer fabrication costs would have a
material adverse effect on the Company's operating results.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering (RD&E) expenses include the costs
incurred in the design of products associated with NRE revenues, as well as
ongoing product development and research and development expenses. The
Company's RD&E expenses for the three and nine months ended September 30, 1998
increased to $4.6 and $14.1 million, respectively, from $2.7 and $8.5 million,
respectively for the three and nine months ended September 30, 1997. RD&E
expenses as a percentage of total revenues for the three and nine months ended
September 30, 1998 increased to 15.7% and 17.4%, respectively, from 15.2% and
16.0%, respectively, for the three and nine months ended September 30, 1997.
The increase in RD&E expenses in both absolute dollar amount and as a percentage
of total revenues primarily reflects the inclusion of RD&E expenses related to
the newly acquired MMIC business and increases in product development activities
and NRE expenses. The Company is committed to substantial investments in RD&E
and expects such expenses will continue to increase in absolute dollar amount in
the future.
12
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative (SG&A) expenses for the three and nine
months ended September 30, 1998 increased to $4.3 and $11.3 million,
respectively, from $3.9 and $10.6 million, respectively, for the three and nine
months ended September 30, 1997. SG&A expenses as a percentage of total
revenues for the three and nine months ended September 30, 1998 decreased to
14.7% and 14.0%, respectively, from 21.9% and 20.1%, respectively, for the three
and nine months ended September 30, 1997. The increase in absolute dollar value
in SG&A from the three and nine months ended September 30, 1997 is primarily
attributable to the inclusion of SG&A expenses related to the newly acquired
MMIC business and increased selling expenses associated with increased sales
volume. As a percentage of total revenues, SG&A expenses have decreased from
both the three and nine month periods ended September 30, 1997 due to revenues
increasing at a faster rate than SG&A expenses.
SPECIAL CHARGES
During the nine months ended September 30, 1998, special charges of $8.8
million were recorded. These are one time charges associated with the Company's
acquisition of the MMIC business from Raytheon TI Systems, Inc. and involve the
write-off of the fair value of in-process research and development.
SETTLEMENT OF LAWSUIT
On July 12, 1994, a stockholder class action lawsuit was filed against the
Company, its underwriters, and certain of its officers, directors and investors
in the United States District Court for the Northern District of California. The
suit alleged that the Company, its underwriters, and certain of its officers,
directors and investors intentionally misled the investing public regarding the
financial prospects of the Company. Following the filing of the complaint, the
plaintiffs dismissed without prejudice a director defendant, the principal
stockholder defendant, the underwriter defendants and certain analyst
defendants. On June 21, 1996, the Court granted the Company's motion to transfer
the litigation to the District of Oregon. The pretrial discovery phase of the
lawsuit ended July 1, 1997. The court had established a January 1999 trial date
for this action.
During the nine months ended September 30, 1998, the Company settled this
action and recorded a one time charge of $1.4 million associated with the
settlement of this lawsuit and related legal expenses, net of accruals.
OTHER INCOME (EXPENSE), NET
Other income (expense), net for the three months ended September 30,
1998 increased to $567,000 from $511,000 for the three months ended June 30,
1997. This increase resulted primarily from lower interest expense, gain on
sale of assets and other miscellaneous receipts, partially offset by lower
interest income. Other income (expense), net for the nine months ended
September 30, 1998 decreased to $1.5 million from $1.6 million for the nine
months ended September 30, 1997. This decrease was attributable to slightly
lower interest income, partially offset by gain on sale of assets and other
miscellaneous receipts.
13
INCOME TAX EXPENSE
Income tax expense for both the three and nine month periods ended
September 30, 1998 was $29,000 and $94,000, respectively. Income tax expense
for the three and nine months ended September 30, 1997 was $0 and $1,112,000,
respectively. The decrease in income tax expense for the nine months ended
September 30, 1998 from the comparable period of the prior year is attributable
to the Company's operating loss for the nine months ended September 30, 1998.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information". SFAS 131 requires public
companies to report certain information about their operating segments in a
complete set of financial statements to shareholders. It also requires
reporting of certain enterprise-wide information about the Company's products
and services, its activities in different geographic areas, and its reliance
on major customers. The basis for determining the Company's operating
segments is the manner in which management operates the business. SFAS No.
131 is effective for fiscal years beginning after December 15, 1997. The
Company does not expect implementation to have a significant impact on the
disclosure to financial statements.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities", ("SOP 98-5"), which is effective for
financial statements for fiscal years beginning after December 15, 1998. SOP
98-5 broadly defines start-up activities and requires costs of start-up
activities and organization costs to be expensed as incurred. The Company does
not expect implementation to have a significant impact on its consolidated
financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 also requires that changes in the derivative's fair value be
recognized currently in results of operations unless specific hedge accounting
criteria are met. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. The Company does not expect SFAS No. 133 to have a significant
impact on its consolidated financial statements.
FACTORS AFFECTING FUTURE RESULTS
VARIABILITY OF OPERATING RESULTS AND CYCLICALITY OF SEMICONDUCTOR INDUSTRY
- - The Company's quarterly and annual results of operations have varied in the
past and may vary significantly in the future due to a number of factors,
including cancellation or delay of customer orders or shipments; market
acceptance of the Company's or its customers' products; the Company's success in
achieving design wins; variations in manufacturing yields; timing of
announcement and introduction of new products by the Company and its
competitors; changes in revenue and product mix; competitive factors; changes in
manufacturing capacity and variations in the utilization of such capacity;
variations in average selling prices; variations in operating expenses; the long
sales cycles associated with the Company's customer specific products; the
timing and level of product and process development costs; the cyclicality of
the semiconductor industry; the timing and level of nonrecurring engineering
("NRE") revenues and expenses relating to customer specific products; changes in
inventory levels; and general economic conditions. Any unfavorable changes in
these or other factors could have a material adverse effect on the Company's
results of operations. For example, in June 1994, Northern Telecom, then the
Company's largest customer,
14
requested that the Company delay shipment of certain of its telecommunications
devices to Northern Telecom. This decision, together with a general softness of
orders in the telecommunications market, materially adversely affected the
Company's revenues and results of operations in the second quarter of 1994 and
for the balance of that year. The Company expects that its operating results
will continue to fluctuate in the future as a result of these and other factors.
The Company's expense levels are based, in part, on its expectations as to
future revenue and, as a result, net income would be disproportionately and
adversely affected by a reduction in revenue. Due to potential quarterly
fluctuations in operating results, the Company believes that quarter-to-quarter
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indicators of future performance. Furthermore, it
is likely that in some future quarter the Company's net sales or operating
results will be below the expectations of public market securities analysts or
investors. In such event, the market price of the Company's Common Stock would
likely be materially adversely affected.
TRANSITION OF MANUFACTURING OPERATIONS TO A NEW FACILITY - In the fourth
quarter of 1997, the Company completed the move of its wafer fabrication
operation to its new Hillsboro facility. The Company's administrative,
engineering, sales and marketing offices and test operations moved into this new
facility during the first quarter of 1997. The Company's lease and operation of
its own wafer fabrication and manufacturing facilities entails a high level of
fixed costs. Such fixed costs consist primarily of occupancy costs for the
Hillsboro facility, investment in manufacturing equipment, repair, maintenance
and depreciation costs related to equipment and fixed labor costs related to
manufacturing and process engineering. The Company's manufacturing yields vary
significantly among its products, depending on a given product's complexity and
the Company's experience in manufacturing such product. The Company has
experienced in the past, and may experience in the future, substantial delays in
product shipments due to lower than expected production yields. The Company's
transition of manufacturing operations to the higher capacity Hillsboro facility
will result in a significant increase in fixed and operating expenses. If
revenue levels do not increase sufficiently to offset these additional expense
levels, the Company's results of operations will be materially adversely
affected in future periods. In addition, during periods of low demand, high
fixed wafer fabrication costs could have a material adverse effect on the
Company's business, financial condition and results of operations.
INTEGRATION OF ACQUISITIONS - Company management frequently evaluates the
strategic opportunities available to it and may in the near-term or long-term
future pursue acquisitions of complementary products, technologies or
businesses. For example, on January 13, 1998, the Company acquired
substantially all of the assets of the MMIC operations of the former Texas
Instruments' Defense Systems & Electronics Group from RTIS. Acquisition
transactions are accompanied by a number of risks, including, among other
things, the difficulty of assimilating the operations and personnel of the
acquired companies; the potential disruption of the Company's ongoing business;
the inability of management to maximize the financial and strategic position of
the Company through the successful incorporation of acquired technology and
rights into the Company's products; expenses associated with the transactions;
expenses associated with acquired in-process research and development;
additional operating expenses; the maintenance of uniform standards, controls,
procedures and policies; the impairment of relationships with employees and
customers as a result of any integration of new management personnel; and the
potential unknown liabilities associated with acquired businesses. There can be
no assurance that the Company will be successful in overcoming these risks or
any other problems encountered in connection with its acquisition of the MMIC
Business or any other future acquisitions. In addition, future acquisitions by
the Company have the potential to result in dilutive issuances of equity
securities, the incurrence of additional debt, and amortization expenses related
to goodwill and other intangible assets that may materially adversely affect the
Company's results of operations.
15
MANUFACTURING RISKS - The fabrication of integrated circuits, particularly
GaAs devices such as those sold by the Company, is a highly complex and precise
process. Minute impurities, difficulties in the fabrication process, defects in
the masks used to print circuits on a wafer, wafer breakage or other factors can
cause a substantial percentage of wafers to be rejected or numerous die on each
wafer to be nonfunctional. As compared to silicon technology, the less mature
stage of GaAs technology leads to somewhat greater difficulty in circuit design
and in controlling parametric variations, thereby potentially yielding fewer
good die per wafer. In addition, the more brittle nature of GaAs wafers can
result in higher processing losses than those experienced with silicon wafers.
The Company has in the past experienced lower than expected production yields,
which have delayed product shipments and materially adversely affected the
Company's results of operations. There can be no assurance that the Company
will be able to maintain acceptable production yields in the future. Because the
majority of the Company's costs of manufacturing are relatively fixed, the
number of shippable die per wafer for a given product is critical to the
Company's results of operations. To the extent the Company does not achieve
acceptable manufacturing yields or experiences product shipment delays, its
results of operations could be materially adversely affected. In addition, the
Company leases and operates its own wafer fabrication facilities, which entails
a high level of fixed costs and which requires an adequate volume of production
and sales to be profitable. During periods of decreased demand, high fixed wafer
fabrication costs could have a material adverse effect on the Company's results
of operations.
PRODUCT QUALITY, PERFORMANCE AND RELIABILITY - The Company expects that its
customers will continue to establish demanding specifications for quality,
performance and reliability that must be met by the Company's products. GaAs
integrated circuits as complex as those offered by the Company often encounter
development delays and may contain undetected defects or failures when first
introduced or after commencement of commercial shipments. As has occurred with
most other semiconductor manufacturers, the Company has from time to time
experienced product quality, performance or reliability problems, although no
such problems have had a material adverse effect on the Company's operating
results. There can be no assurance, however, that defects or failures will not
occur in the future relating to the Company's product quality, performance and
reliability that may have a material adverse effect on the Company's results of
operations. If such failures or defects occur, the Company could experience
lost revenue, increased costs (including warranty expense and costs associated
with customer support), delays in or cancellations or rescheduling of orders or
shipments and product returns or discounts, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
RELIANCE ON SIGNIFICANT CUSTOMERS; CUSTOMER CONCENTRATION -
A significant portion of the Company's revenues in each fiscal period has
historically been concentrated among a limited number of customers. In recent
periods, although the Company's customer base has grown, certain major
customers are still important to the Company's success. In the nine months
ended September 30, 1998, RTIS accounted for approximately 10% of total
revenues. In 1997, Northern Telecom accounted for approximately 12% of total
revenues. The Company expects that sales to a limited number of customers
will continue to account for a substantial portion of its total revenues in
future periods. The Company generally does not have long-term agreements with
any of its customers. Customers generally purchase the Company's products
pursuant to cancelable short-term purchase orders. The Company's business,
financial condition and results of operations have been materially adversely
affected in the past by the failure of anticipated orders to materialize and
by deferrals or cancellations of orders. If the Company were to lose a major
customer or if orders by or shipments to a major customer were to otherwise
decrease or be delayed, the Company's business, financial condition and
results of operations could be materially adversely affected.
DEPENDENCE ON CUSTOMER SPECIFIC PRODUCTS - A substantial portion of the
Company's products are designed to address the needs of individual customers.
Frequent product introductions by systems manufacturers make the Company's
future success dependent on its ability to select customer specific
16
development projects which will result in sufficient production volume to enable
the Company to achieve manufacturing efficiencies. Because customer specific
products are developed for unique applications, the Company expects that some of
its current and future customer specific products may never be produced in
volume. In addition, in the event of delays in completing designs or the
Company's failure to obtain development contracts from customers whose systems
achieve and sustain commercial market success, the Company's business, financial
condition and results of operations could be materially adversely affected.
DEPENDENCE ON NEW PRODUCTS AND PROCESSES - The Company's future success
depends on its ability to develop and introduce in a timely manner new products
and processes which compete effectively on the basis of price and performance
and which adequately address customer requirements. The success of new product
and process introductions is dependent on several factors, including proper
selection of such products and processes, the ability to adapt to technological
changes and to support emerging and established industry standards, successful
and timely completion of product and process development and commercialization,
market acceptance of the Company's or its customers' new products, achievement
of acceptable manufacturing yields and the Company's ability to offer new
products at competitive prices. No assurance can be given that the Company's
product and process development efforts will be successful or that its new
products or processes will achieve market acceptance. In addition, as is
characteristic of the semiconductor industry, the average selling prices of the
Company's products have historically decreased over the products' lives and are
expected to continue to do so. To offset such decreases, the Company relies
primarily on achieving yield improvements and corresponding cost reductions in
the manufacture of existing products and on introducing new products which
incorporate advanced features and which therefore can be sold at higher average
selling prices. To the extent that such cost reductions and new product or
process introductions do not occur in a timely manner or the Company's or its
customers' products do not achieve market acceptance, the Company's business,
financial condition and results of operations could be materially adversely
affected.
PRODUCT AND PROCESS DEVELOPMENT AND TECHNOLOGICAL CHANGE - The market for
the Company's products is characterized by frequent new product introductions,
evolving industry standards and rapid changes in product and process
technologies. Because of continual improvements in these technologies, including
those in high performance silicon where substantially more resources are
invested than in GaAs technologies, the Company believes that its future success
will depend, in part, on its ability to continue to improve its product and
process technologies and to develop in a timely manner new technologies in order
to remain competitive. In addition, the Company must adapt its products and
processes to technological changes and to support emerging and established
industry standards. There can be no assurance that the Company will be able to
improve its existing products and process technologies, develop in a timely
manner new technologies or effectively support industry standards. The failure
of the Company to improve its products and process technologies, develop new
technologies and support industry standards could have a material adverse effect
on the Company's business, financial condition and results of operations.
EVOLVING INDUSTRY STANDARDS - The markets in which the Company and its
customers compete are characterized by rapidly changing technology, evolving
industry standards and continuous improvements in products and services. If
technologies or standards supported by the Company's or its customers' products
become obsolete or fail to gain widespread commercial acceptance, the Company's
business, financial condition and results of operations could be materially
adversely affected. In addition, the increasing demand for wireless
communications has exerted pressure on regulatory bodies worldwide to adopt new
standards for such products, generally following extensive investigation of and
deliberation over competing technologies. The delays inherent in the regulatory
approval process may in the future cause the cancellation, postponement or
rescheduling of the installation of communications systems by the Company's
customers. These delays have in the past had and may in the future have a
material adverse
17
effect on the sale of products by the Company and on its business, financial
condition and results of operations.
COMPETITION - The semiconductor industry is intensely competitive and
is characterized by rapid technological change, rapid product obsolescence
and price erosion. Currently, the Company competes primarily with
manufacturers of high performance silicon semiconductors such as AMCC,
Motorola and Philips and with manufacturers of GaAs semiconductors such as
Vitesse, Anadigics and RF Microdevices. The Company expects increased
competition both from existing competitors and from a number of companies
which may enter the GaAs integrated circuit market, as well as future
competition from companies which may offer new or emerging technologies such
as silicon germanium. Most of the Company's current and potential competitors
have significantly greater financial, technical, manufacturing and marketing
resources than the Company. Additionally, manufacturers of high performance
silicon semiconductors have achieved greater market acceptance of their
existing products and technologies in certain applications. There can be no
assurance that the Company will not face increased competition or that the
Company will be able to compete successfully in the future. The failure of
the Company to successfully compete in its markets could have a material
adverse effect on the Company's business, financial condition and results of
operations.
ADOPTION OF GAAS COMPONENTS BY SYSTEMS MANUFACTURERS - Silicon
semiconductor technologies are the dominant process technologies for integrated
circuits and these technologies continue to improve in performance. TriQuint's
prospective customers are frequently systems designers and manufacturers who are
utilizing such silicon technologies in their existing systems and who are
evaluating GaAs integrated circuits for use in their next generation high
performance systems. Customers may be reluctant to adopt TriQuint's products
because of perceived risks relating to GaAs technology generally. Such perceived
risks include the unfamiliarity of designing systems with GaAs products as
compared with silicon products, concerns related to manufacturing costs and
yields, novel design and unfamiliar manufacturing processes and uncertainties
about the relative cost effectiveness of the Company's products compared to high
performance silicon integrated circuits. In addition, customers may be reluctant
to rely on a smaller company such as TriQuint for critical components. There can
be no assurance that additional systems manufacturers will design the Company's
products into their respective systems, that the companies that have utilized
the Company's products will continue to do so in the future or that GaAs
technology will achieve widespread market acceptance. Should the Company's GaAs
products fail to achieve market acceptance or be utilized in manufacturers'
systems, the Company's business, financial condition and results of operations
could be materially adversely affected.
GAAS COMPONENTS MORE COSTLY TO PRODUCE - The production of GaAs integrated
circuits has been and continues to be more costly than the production of silicon
devices. This cost differential relates primarily to higher costs of the raw
wafer material, lower production yields associated with the relatively immature
GaAs technology and higher unit costs associated with lower production volumes.
Although the Company has reduced unit production costs by increasing wafer
fabrication yields, by achieving higher volumes and by obtaining lower raw wafer
costs, there can be no assurance that the Company will be able to continue to
decrease production costs. In addition, the Company believes that its costs of
producing GaAs integrated circuits will continue to exceed the costs associated
with the production of silicon devices. As a result, the Company must offer
devices which provide superior performance to that of silicon-based devices such
that the perceived price/performance of its products is competitive. There can
be no assurance that the Company can continue to identify markets which require
performance superior to that offered by silicon solutions, or that the Company
will continue to offer products which provide sufficiently superior performance
to offset the cost differential.
18
MANAGEMENT OF GROWTH - The growth in the Company's business has placed, and
is expected to continue to place, a significant strain on the Company's
personnel, management and other resources. The Company's ability to manage any
future growth effectively will require it to attract, train, motivate, manage
and retain new employees successfully, to integrate new employees into its
overall operations and in particular its manufacturing operations, and to
continue to improve its operational, financial and management information
systems.
DEPENDENCE ON KEY PERSONNEL - The Company's future success depends in large
part on the continued service of its key technical, marketing and management
personnel and on its ability to continue to identify, attract and retain
qualified technical and management personnel, particularly highly skilled
design, process and test engineers involved in the manufacture of existing
products and the development of new products and processes. Furthermore, there
may be only a limited number of persons in the Company's geographic area with
the requisite skills to serve in these positions. Several companies have built
wafer fabrication plants in the Company's geographic area and it may become
increasingly difficult for the Company to attract and retain such personnel. The
competition for such personnel is intense, and the loss of key employees could
have a material adverse effect on the Company.
SOLE SOURCES OF MATERIALS AND SERVICES - The Company currently procures
certain components and services for its products from single sources, such as
ceramic packages from Kyocera. The Company purchases these components and
services on a purchase order basis, does not carry significant inventories of
these components and does not have any long-term supply contracts with its sole
source vendors. If the Company were to change any of its sole source vendors,
the Company would be required to requalify the components with each new vendor.
Requalification could prevent or delay product shipments which could materially
adversely affect the Company's results of operations. In addition, the Company's
reliance on sole source vendors involves several risks, including reduced
control over the price, timely delivery, reliability and quality of the
components. Any inability of the Company to obtain timely deliveries of
components of acceptable quality in required quantities or any increases in the
prices of components for which the Company does not have alternative sources
could materially adversely affect the Company's business, financial condition
and results of operations.
CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY - The semiconductor industry has
historically been characterized by wide fluctuations in product supply and
demand. From time to time, the industry has also experienced significant
downturns, often in connection with, or in anticipation of, major additions of
wafer fabrication capacity, maturing product cycles or declines in general
economic conditions. These downturns have been characterized by diminished
product demand, production overcapacity and subsequent accelerated price
erosion, and in some cases have lasted for extended periods of time. The
Company's business has in the past been and could in the future be materially
adversely affected by industry-wide fluctuations. The Company's continued
success will depend in large part on the continued growth of the semiconductor
industry in general and its customers' markets in particular. No assurance can
be given that the Company's business, financial condition and results of
operations will not be materially adversely affected in the future by cyclical
conditions in the semiconductor industry or in any of the markets served by the
Company's products.
PROPRIETARY TECHNOLOGY - The Company's ability to compete is affected by
its ability to protect its proprietary information. The Company relies on a
combination of patents, trademarks, copyrights, trade secret laws,
confidentiality procedures and licensing arrangements to protect its
intellectual property rights. The Company currently has patents granted and
pending in the United States and in foreign countries and intends to seek
further international and United States patents on its technology. There can be
no assurance that patents will issue from any of the Company's pending
applications or applications in preparation or that
19
patents will be issued in all countries where the Company's products can be sold
or that any claims allowed from pending applications or applications in
preparation will be of sufficient scope or strength to provide meaningful
protection or any commercial advantage to the Company. Also, competitors of the
Company may be able to design around the Company's patents. The laws of certain
foreign countries in which the Company's products are or may be developed,
manufactured or sold, including various countries in Asia, may not protect the
Company's products or intellectual property rights to the same extent as do the
laws of the United States, increasing the possibility of piracy of the Company's
technology and products. Although the Company intends to vigorously defend its
intellectual property rights, there can be no assurance that the steps taken by
the Company to protect its proprietary information will be adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technology.
RISK OF THIRD PARTY CLAIMS OF INFRINGEMENT - The semiconductor industry is
characterized by vigorous protection and pursuit of intellectual property rights
or positions, which have resulted in significant and often protracted and
expensive litigation. Although there is currently no pending intellectual
property litigation against the Company, the Company or its suppliers may from
time to time be notified of claims that the Company may be infringing upon
patents or other intellectual property rights owned by third parties. If it is
necessary or desirable, the Company may seek licenses under such patents or
other intellectual property rights. However, there can be no assurance that
licenses will be offered or that the terms of any offered licenses will be
acceptable to the Company. The failure to obtain a license from a third party
for technology used by the Company could cause the Company to incur substantial
liabilities and to suspend the manufacture of products. Furthermore, the Company
may initiate claims or litigation against third parties for infringement of the
Company's proprietary rights or to establish the validity of the Company's
proprietary rights. Litigation by or against the Company could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not such litigation results in a
favorable determination for the Company. In the event of an adverse result in
any such litigation, the Company could be required to pay substantial damages,
indemnify its customers, cease the manufacture, use and sale of infringing
products, expend significant resources to develop non-infringing technology,
discontinue the use of certain processes or obtain licenses to the infringing
technology. There can be no assurance that the Company would be successful in
such development or that such licenses would be available on reasonable terms,
or at all, and any such development or license could require expenditures of
substantial time and other resources by the Company. In the event that any third
party makes a successful claim against the Company or its customers and a
license is not made available to the Company on commercially reasonable terms,
the Company's business, financial condition and results of operations could be
materially adversely affected.
ENVIRONMENTAL REGULATIONS - The Company is subject to a variety of
federal, state and local laws, rules and regulations related to the discharge or
disposal of toxic, volatile or other hazardous chemicals used in its
manufacturing process. The failure to comply with present or future regulations
could result in fines being imposed on the Company, suspension of production or
a cessation of operations. Such regulations could require the Company to acquire
significant equipment or to incur substantial other expenses to comply with
environmental regulations. Any failure by the Company, or by TI with respect to
the Company's MMIC Facility, to control the use of, or to adequately restrict
the discharge of hazardous substances could subject the Company to future
liabilities or could cause its manufacturing operations to be suspended,
resulting in a material adverse effect on the Company's business, financial
condition and results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL SALES - Sales outside of the United
States were $14.8 million, $18.1 million, $24.3 million and $19.3 million in
1995, 1996, 1997, and the nine months ended
20
September 30, 1998, respectively. These sales involve a number of inherent
risks, including imposition of government controls, currency exchange
fluctuations, potential insolvency of international distributors and
representatives, reduced protection for intellectual property rights in some
countries, the impact of recessionary environments in economies outside the
United States, political instability and generally longer receivables collection
periods, as well as tariffs and other trade barriers. In addition, due to the
technological advantage provided by GaAs in many military applications, all of
the Company's sales outside of North America must be licensed by the Office of
Export Administration of the U.S. Department of Commerce. Although the Company
has not experienced significant difficulty in obtaining these licenses, failure
to obtain such licenses or delays in obtaining such licenses in the future could
have a material adverse effect on the Company's results of operations.
Furthermore, because substantially all of the Company's foreign sales are
denominated in U.S. dollars, increases in the value of the dollar would increase
the price in local currencies of the Company's products in foreign markets and
make the Company's products less price competitive. There can be no assurance
that these factors will not have a material adverse effect on the Company's
future international sales and, consequently, on the Company's business,
financial condition and results of operations.
DEPENDENCE ON ASSEMBLY CONTRACTORS - The Company's finished GaAs wafers
are assembled and packaged by ten independent subcontractors, six of which are
located outside of the United States. Any prolonged work stoppages or other
failure of these contractors to supply finished products would have a material
adverse effect on the Company's business, financial condition and results of
operations.
ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CERTAIN CHARTER AND BYLAWS
PROVISIONS ON PRICE OF COMMON STOCK - Certain provisions of the Company's
Certificate of Incorporation and Bylaws such as cumulative voting for directors,
the inability of stockholders to act by written consent, the inability of
stockholders to call special meetings without the consent of the Board of
Directors and advance notice requirements for stockholder meeting proposals or
director nominations may have the effect of making it more difficult for a third
party to acquire, or discouraging a third party from attempting to acquire,
control of the Company. Such provisions could limit the price certain investors
may be willing to pay in the future for shares of the Company's Common Stock.
Certain provisions of Delaware law applicable to the Company could also delay or
make more difficult a merger, tender offer or proxy contest involving the
Company, including Section 203 of the Delaware General Corporation Law, which
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholder for a period of three years unless certain conditions
are met. These provisions could also limit the price that investors might be
willing to pay in the future for shares of the Company's Common Stock.
ISSUANCE OF PREFERRED STOCK - The Board of Directors has the authority to
issue up to 5,000,000 shares of undesignated Preferred Stock and to determine
the powers, preferences and rights and the qualifications, limitations or
restrictions granted to or imposed upon any wholly unissued shares of
undesignated Preferred Stock and to fix the number of shares constituting any
series and the designation of such series, without any further vote or action by
the Company's stockholders. The Preferred Stock could be issued with voting,
liquidation, dividend and other rights superior to those of the holders of
Common Stock. The issuance of Preferred Stock under certain circumstances could
have the effect of delaying, deferring or preventing a change in control of the
Company.
21
VOLATILITY OF STOCK PRICE - The market price of the shares of Common Stock
has been and is likely to continue to be highly volatile and significantly
affected by factors such as fluctuations in the Company's operating results,
announcements of technological innovations or new products by the Company or its
competitors, changes in analysts' expectations, governmental regulatory action,
developments with respect to patents or proprietary rights, general market
conditions and other factors. In addition, the stock market has from time to
time experienced significant price and volume fluctuations that are unrelated to
the operating performance of particular companies.
YEAR 2000 RISKS - Many information technology hardware and software
systems, as well as other equipment using microprocessors, can accept only
two digit entries in the date code field. To operate using dates after
December 31, 1999, the date code fields will need to accept four digit
entries to distinguish twenty-first century dates from twentieth century
dates. This is commonly referred to as the "Year 2000" or "Y2K" issue. STATE
OF READINESS - The Company has commenced a program to identify, remediate,
test and develop a plan for the Y2K issue. Significant issues are expected to
be identified by January of 1999. All phases of the plan are expected to be
completed prior to October of 1999. The Company's plan includes a review of
information and other technnology systems used in the Company's
internal business and third party vendors, manufacturers and suppliers. An
assessment has been made of the key internal systems and the Company believes
that systems that are not already Y2K compliant will be modified, upgraded or
replaced. The Company is currently assessing its products and is working with
third party vendors, manufacturers and suppliers to identify and resolve Y2K
issues. COSTS - The Company does not believe that the historical or
anticipated costs of remediation have had, or will have, a material effect on
the Company's financial condition or results of operations. RISKS - Because
of the existence of numerous systems and related components within the
Company and the interdependency of these systems, it is possible that certain
systems at the Company, or systems at entities that provide services or goods
for the Company, may fail to operate in the Year 2000. Although it is not
currently anticipated, the inability of the Company to become Y2K compliant
on a timely basis or the failure of a system at the Comapny or at an entity
that provides services or goods to the Company may have a material impact on
future operating results or finanical condition. The Company is continuing to
evaluate the risks to the Company of failure to be Y2K compliant and to
develop a contingency plan. CONTINGENCY PLAN - The Company has not yet
developed a Y2K-specific contingency plan. If Y2K compliance issues are
discovered, the Company will then evaluate the need for contingency plans
relating to such issues.
22
LIQUIDITY AND CAPITAL RESOURCES
In December 1993 and January 1994, the Company completed its initial public
offering raising approximately $16.7 million, net of offering expenses. The
Company completed a follow-on public offering in September 1995 raising
approximately $48.1 million, net of offering expenses. In addition, the Company
has funded its operations to date through other sales of equity, bank borrowing,
equipment and facilities leases, and cash flow from operations. As of September
30, 1998, the Company had working capital of approximately $41.5 million,
including $25.1 million in cash, cash equivalents, and unrestricted investments.
The Company has a $10.0 million unsecured revolving line of credit with a
financial institution. Restrictive covenants included in the line of credit
require the Company to maintain (i) a total liability to tangible net worth
ratio of not more than 0.75 to 1.00, (ii) a current ratio of not less than 1.75
to 1.00 and (iii) minimum tangible net worth greater than $76.3 million and (iv)
cash and investments, including restricted investments, greater than $45.0
million. As of September 30, 1998 the Company was in compliance with the
restrictive covenants contained in this line of credit. However, there can be
no assurance that the Company will continue to be in compliance with these
covenants as of any subsequent date.
In May 1996, the Company entered into a five year synthetic lease through a
Participation Agreement (the "Agreement") with Wolverine Leasing Corp.
("Wolverine"), Matisse Holding Company ("Matisse") and United States National
Bank of Oregon ("USNB"). The lease provides for the construction and occupancy
of the Company's Hillsboro facility under an operating lease from Wolverine and
provides the Company with an option to purchase the property or renew its lease
for an additional five years. Pursuant to the terms of the Agreement, USNB and
Matisse made loans to Wolverine who in turn advanced the funds to the Company
for the construction of the Hillsboro facility and other costs and expenses
associated therewith. The loan from USNB is collateralized by investment
securities pledged by the Company. Such investment securities are classified on
the Company's balance sheet as restricted investments. In addition, restrictive
covenants in the Agreement require the Company to maintain (i) a total liability
to tangible net worth ratio of not more than 0.75 to 1.00, (ii) minimum
tangible net worth greater than $50.0 million and (iii) cash and liquid
investment securities, including restricted securities, greater than $45.0
million. As of September 30, 1998, the Company was in compliance with the
covenants described above. However, there can be no assurance that the Company
will continue to be in compliance with these covenants as of any subsequent
date.
In November 1997, the Company entered into a $1.5 million lease agreement
for additional land adjacent to its Hillsboro facility. Pursuant to the terms
of that agreement, USNB provided loans to Matisse to purchase the land, who in
turn leased it to the Company under a renewable one year lease agreement. The
loan from USNB is partially collateralized by a guarantee from the Company. The
agreement contains restrictive covenants substantially the same as those
contained in the Company's line of credit. As of September 30, 1998 the Company
was in compliance with the terms of the agreement. However, there can be no
assurance that the Company will continue to be in compliance with these terms as
of any subsequent date.
In January 1998, the Company acquired the MMIC operations of the former
Texas Instruments' Defense Systems & Electronics Group from RTIS. Pursuant to
an Asset Purchase Agreement (the Agreement) with RTIS, the Company acquired
the MMIC Business for approximately $19.5 million in cash and 844,613 shares
of TriQuint Common Stock (the Shares) valued at approximately $19.5 million
for a total purchase consideration of approximately $39 million. The Shares
were redeemable at the Company's option. The Company elected not to renew the
option effective September 14, 1998. The Company paid a total of $390,000 for
this option, which was recorded as a charge to shareholders' equity. The cash
portion of
23
the purchase price was financed through an operating lease arrangement involving
certain assets pursuant to the Agreement.
The following table presents a summary of the Company's cash flows (IN
THOUSANDS):
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
Net cash and cash equivalents provided
(used) by operating activities $ 7,075 $ 1,809
Net cash and cash equivalents provided
(used) by investing activities (6,788) 345
Net cash and cash equivalents provided
(used) by financing activities (3,222) (685)
--------- ----------
Net increase (decrease) in cash and cash equivalents $ (2,935) $ 1,469
--------- ----------
--------- ----------
The cash provided by operating activities for the nine months ended
September 30, 1998, $7.1 million, related primarily to a combined increase in
accounts payable and accrued expenses of $6.6 million and depreciation and
amortization of $4.2 million. This was offset by increases in accounts
receivable of $1.6 million, inventories of $3.2 million and a net loss of $7.4
million. Cash provided by operating activities also included $8.8 million
related to the special charges associated with the acquisition of the MMIC
business as an offset to the net changes in assets and liabilities. The cash
provided by operating activities for the nine months ended September 30, 1997,
$1.8 million, related to an increase in cash generated by net income of $5.3 and
depreciation and amortization of $3.2 million, offset in part by growth of $3.2
million and $3.5 million in accounts receivable and inventory, respectively.
The cash used by investing activities for the nine months ended September
30, 1998, $6.8 million, related to the purchase of $70.6 million of investments
and capital expenditures of $3.4 million, offset in part by the sale/maturity of
$67.0 million of investments. The cash provided by investing activities for the
nine months ended September 30, 1997, $345,000, related primarily to the net
sale/maturity of investments of $36.3 million, offset in part by the purchase of
investments of $35.2 million and capital expenditures of $1.0 million.
The cash used by financing activities for the nine months ended September
30, 1998, $3.2 million, related primarily to the payment of principal on capital
leases of $4.1 million and was offset in part by the issuance of common stock of
approximately $916,000 upon option exercises. The cash used by financing
activities for the nine months ended September 30, 1997, $685,000, also related
primarily to the payment of principal on capital leases and was offset in part
by the issuance of common stock upon option exercises.
Cash used for capital expenditures for the nine months ended September 30,
1998 was $3.4 million. In this period, the Company also established
approximately $2.2 million in new capital leases. The Company anticipates that
its capital equipment needs, including manufacturing and test equipment and
computer hardware and software, will require additional expenditures of
approximately $4.0 million during the remainder of 1998.
24
The Company believes that its current cash and cash equivalent balances,
together with cash anticipated to be generated from operations and anticipated
financing arrangements, will satisfy the Company's projected working capital and
capital expenditure requirements for the next twelve months. However, the
Company may be required to finance any additional requirements through
additional equity, debt financings, or credit facilities. There can be no
assurance that such additional financings or credit facilities will be
available, or if available, that they will be on satisfactory terms.
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PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS.
On July 12, 1994, a stockholder class action lawsuit was filed against the
Company, its underwriters, and certain of its officers, directors and investors
in the United States District Court for the Northern District of California. The
suit alleged that the Company, its underwriters, and certain of its officers,
directors and investors intentionally misled the investing public regarding the
financial prospects of the Company. Following the filing of the complaint, the
plaintiffs dismissed without prejudice a director defendant, the principal
stockholder defendant, the underwriter defendants and certain analyst
defendants. On June 21, 1996, the Court granted the Company's motion to transfer
the litigation to the District of Oregon. The pretrial discovery phase of the
lawsuit ended July 1, 1997. The court had established a January 1999 trial date
for this action.
During the nine months ended September 30, 1998, the Company settled this
action and recorded a one time charge of $1.4 million associated with the
settlement of this lawsuit and related legal expenses, net of accruals.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Registration Statement on Form 8-K (File No.
000-22660) with the Securities and Exchange Commission on January 27,
1998, amended as of March 27, 1998, to report the acquisition of
certain assets pursuant to that certain Asset Purchase Agreement,
dated as of January 8, 1998, by and between Raytheon TI Systems, Inc.
and the Company.
26
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TriQuint Semiconductor, Inc.
Dated: November 10, 1998 /s/ Steven J. Sharp
---------------------------------------
STEVEN J. SHARP
President, Chief Executive Officer and
Chairman (Principal Executive Officer)
Dated: November 10, 1998 /s/ Edward C.V. Winn
---------------------------------------
EDWARD C.V. WINN
Executive Vice President, Finance and
Administration,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
27
TRIQUINT SEMICONDUCTOR, INC.
INDEX TO EXHIBITS
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ------------ --------
27.1 Financial Data Schedule
28