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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 28, 1998
Commission file number 0-22511
RF Micro Devices, Inc.
(Exact name of registrant as specified in its charter)
56-1733461
(I.R.S. Employer Identification No.)
North Carolina
(State or other jurisdiction of incorporation or organization)
7625 Thorndike Road
Greensboro, North Carolina 27409-9421
(Address of principal executive offices) (Zip code)
(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 $107,366,479 as of June 15,
1998. 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 16,141,141 shares of
registrant's common stock outstanding as of June 15, 1998.
Documents Incorporated by Reference
Certain portions of the registrant's proxy statement with respect to the 1998
annual meeting of shareholders of the registrant have been incorporated by
reference herein.
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Item 1 of this Form 10-K, entitled "Business," and Item 7 of this Form
10-K, entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations," contain "forward-looking statements," within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, that relate to the Company's future plans, objectives,
estimates and goals. Forward-looking statements are inherently uncertain and
actual results could differ materially from those expressed or implied by the
forward-looking statements. These forward-looking statements should be
considered in the context of the business risks set forth below in Item 1 of
this report.
The Company uses a 52 or 53 week fiscal year ending on the Saturday
closest to March 31 of each year. Each of the 1996, 1997 and 1998 fiscal years
was a 52 week year. The Company's other fiscal quarters end on the Saturday
closest to June 30, September 30 and December 31 of each year. For purposes of
this Form 10-K (including the Financial Statements and Notes thereto), each
fiscal year is described 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.
Part I
Item 1. Business
Introduction
RF Micro Devices, Inc. (the "Company" or "RFMD") designs, develops,
manufactures and markets proprietary radio frequency integrated circuits
("RFICs") for wireless communications applications such as cellular and personal
communication services ("PCS"), cordless telephony, wireless local area networks
("WLANs"), wireless local loop ("WLL"), industrial radios, wireless security and
remote meter reading. The Company offers a broad array of products, including
amplifiers, mixers, modulators/demodulators and single chip transceivers that
represent a substantial majority of the RFICs required in wireless subscriber
equipment. The Company designs products using three distinct process
technologies: gallium arsenide heterojunction bipolar transistor ("GaAs HBT"),
silicon bipolar transistor and, to a lesser extent, gallium arsenide metal
semiconductor field effect transistor ("GaAs MESFET").
TRW Inc. ("TRW"), which is the Company's largest shareholder,
manufactured all of the Company's GaAs HBT products until June 1998 and has
granted the Company a license to use its GaAs HBT process to design and
manufacture products for commercial wireless applications. The Company has
recently begun manufacturing its own GaAs HBT products under this license at its
new wafer fabrication facility. The Company's GaAs HBT power amplifiers and
small signal devices have been designed into advanced subscriber equipment
manufactured by leading original equipment manufacturers ("OEMs") such as Nokia
Mobile Phones Ltd. ("Nokia"), Hyundai Electronics Industries Co. Ltd.
("Hyundai"), Phillips Consumer Communications, L.P. ("Phillips"), Motorola, Inc.
("Motorola") and LG Information and Communications, Ltd. ("LGIC"). The Company
also offers silicon and GaAs MESFET components through a delivery strategy
called Optimum Technology Matching(R) to complement its GaAs HBT products.
Optimum Technology Matching(R) allows the Company to offer RFIC solutions, on a
component-by-component basis, that best fulfill OEMs' performance, cost and
time-to-market requirements.
Industry Background
The wireless communications industry has grown rapidly over the past
decade as cellular, paging, PCS and other emerging wireless communications
services have become widely available and increasingly affordable. Technological
advances, changes in telecommunications regulations and the allocation and
licensing of additional radio spectrum have helped fuel this growth worldwide
and have led not only to the development of competing wireless communications
services, but also to the development of new and emerging wireless applications,
including second generation digital cordless telephony, wireless LANs, WLL,
wireless security and remote meter reading. As wireless usage grows, wireless
service providers continue to improve the quality and functionality of the
services they offer and seek to offer greater bandwidth for increased capacity.
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To expand capacity from first generation cellular communications
networks, certain national governments have made available less congested
frequency bands for new wireless communications services. In the United States,
the Federal Communications Commission (the "FCC") has 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 improved signal quality,
facilitate 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 translate into higher quality signals.
The wireless communications markets are characterized by a
proliferation of different air interface signal transmission standards in
different parts of the world, including analog standards, such as Advanced
Mobile Phone Service ("AMPS") and Total Access Communications Systems ("TACS"),
digital standards, such as Time Division Multiple Access ("TDMA") and Code
Division Multiple Access ("CDMA"), 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.
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 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.
In early generations of 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. The use of silicon integrated circuits in high frequency
wireless technologies, however, has been limited because of decreased operating
performance generally at frequencies higher than approximately 1 GHz. In
particular, at high frequencies silicon integrated circuits consume more power,
have relatively high 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). It is difficult for GaAs MESFET devices to meet 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. Moreover, the lateral structure
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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, has emerged recently in commercial RF applications.
The Company's 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, Hyundai, Phillips, Motorola and
LGIC. The Company believes that GaAs HBT components offer benefits over GaAs
MESFET devices in comparable applications in a number of ways, including speed,
efficiency, the ability to operate at high frequencies, lack of signal
distortion, complexity and size.
Strategy
The Company's objective is to be the leading worldwide supplier of
RFICs for a broad range of commercial wireless applications. To meet this
objective, the Company has developed a focused strategy, the key elements of
which include:
Focus on Wireless Markets. Since the Company's formation in
1991, it has focused its efforts almost exclusively on the design,
development and sale of RFICs to participants in the commercial
wireless markets. The Company has 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.
Offer a Wide Range of RF Products. The Company offers 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, the Company offers
products addressing virtually all of the analog and digital air
interface standards. The Company's design engineering staff has
developed proprietary design and fabrication modeling techniques and
tools to enable the Company to deliver state-of-the-art integrated
circuit designs that meet its customers' stringent technical
specifications. In response to interest expressed by certain of the
Company's customers, the Company also intends to offer certain RFICs in
a "modular" package that, in addition to the Company-designed
integrated circuit, includes passive components, such as filters and
resistors, that are commonly incorporated into end-user devices.
Leverage GaAs HBT Capabilities. The Company believes that its
GaAs HBT expertise allows it to deliver high efficiency, high
performance components such as linear power amplifiers and low noise
amplifiers to the wireless communications markets. As the Company
improves its design and manufacturing of GaAs HBT components, it will
seek to incorporate GaAs HBT technology in other RF components in an
effort to improve the price performance characteristics of its
products.
Expand Manufacturing Capacity. In June 1996, the Company
entered into a strategic relationship with TRW in order to provide GaAs
HBT components. As a part of this relationship, TRW has expanded its
GaAs HBT manufacturing capacity. In addition, the Company recently
completed construction of an approximately 64,000 square foot
fabrication facility and has begun fabricating its own GaAs HBT wafers
using TRW's proprietary GaAs HBT and related wafer fabrication
technologies. This facility become operational in June 1998, and the
Company is in the process of qualifying products manufactured there
with its customers. See "-- Business Risks -- Operation of Fabrication
Facility" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources." The Company believes that operating its own GaAs HBT wafer
fabrication facility will improve its ability to respond to customer
demand for GaAs HBT products and will provide it with greater
opportunities to enhance product and process quality and reliability.
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Maintain Diversification in Process Technologies. While
attempting to leverage its GaAs HBT capabilities, the Company also
intends to expand its line of silicon-based RFICs and to increase
substantially the portion of overall revenues represented by sales of
silicon products. As a part of this strategy, in March 1998, the
Company entered a multi-year agreement with International Business
Machines Corporation ("IBM") that provides for expanded development,
manufacture and sale of custom RFICs by the Company using IBM's
advanced Blue Logic silicon process technology. The Company has
developed more than 50 RFICs using this technology, and in May 1998
released the RFMD Silicon Innovations Designer's Handbook, a catalog
featuring this new generation of silicon-based RFICs. These products
cover three major application groups: CDMA telephones (both 800 MHz and
PCS applications), transceivers for ISM bands up to 2.5 GHz and general
purpose amplifiers.
Maintain Balanced Product Mix. The Company strives 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 a negotiated period of time. Once
exclusivity periods expire, the Company attempts to migrate custom
products rapidly into the standard product category in order to broaden
its customer base and leverage its design and product development
expenditures.
Markets
The Company designs, develops and markets its 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 hand held
subscriber devices by establishing a connection with a base station via RF
channels. While the initial PCS services are comparable to cellular telephony,
as PCS becomes more widely deployed, 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 are moving from first generation analog phones
operating at low (46-49 MHz) frequencies to digital cordless phones operating at
higher frequencies. In the United States, new phones operating in the 902-928
MHz frequency range use spread spectrum modulation to provide improved range and
voice quality, less interference and greater security. In Western Europe, the
Digital European Cordless Telephone, which operates in the 1880-1900 MHz
frequency range, has been successfully introduced, and in Japan the Personal
HandyPhone System ("PHS") was introduced in July 1995. PHS operates at the
1895-1907 MHz frequency range and acts as a cordless telephone while at home, a
wireless PBX extension at the office, and a low mobility cellular-like phone
elsewhere.
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.
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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 Markets
The Company also supplies custom components for other applications in
wireless markets, such as wireless security systems and wireless utility meter
reading systems, and is pursuing other emerging wireless markets, including
enhanced two-way paging, wireless environmental monitoring devices, interactive
toys and wireless handheld devices used for point-of-sale, bar coding and other
applications. The Company also pursues opportunities to leverage the
technological advantages of its RF components by identifying applications in
other markets. For example, the Company has applied its RF power amplifier
design expertise to develop high performance power line amplifiers for the cable
television ("CATV") market and markets various GaAs HBT and MESFET components
for satellite and microwave communications applications. In addition, certain of
its components, such as gain blocks and attenuators, are used for instruments
and in other non-wireless applications.
Products and Applications
The Company offers 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, the Company attempts to
convert custom products into standard products to broaden its customer base and
leverage its design and product expenditures. At March 31, 1998, the Company
offered 129 products, and 80 additional products were in various stages of
development. Set forth below is a list of the Company's current products by
category, the number of products in each category, the semiconductor process
technology used to fabricate such products and the types of OEM devices into
which such products are incorporated.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------
No. of
Product Category Products Fabrication Technology End User Devices
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Power Amplifiers 38 HBT; Silicon Cellular Handset, Wireless Local
Loop, Basestations, Wireless
Local Area Networks
- - --------------------------------------------------------------------------------------------------------
Quadrature 16 HBT; Silicon Cellular Handsets, Basestations,
Modulators/Demodulators Point-to-Point Links, Military
Radios
- - --------------------------------------------------------------------------------------------------------
Low Noise Amplifiers/Mixers 19 HBT; Silicon Cellular Handsets; Wireless
Microphones
- - --------------------------------------------------------------------------------------------------------
IF Components 10 Silicon Cellular Handsets, Wireless
Meter Reading Systems
- - --------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gain Blocks 23 HBT; Silicon Point-to-Point Links; Wireless
Local Loop
- - --------------------------------------------------------------------------------------------------------
Transceivers 18 Silicon; MESFET Wireless Security; Cordless
Telephones; Wireless Meter
Reading; Misc. Consumer Products
- - --------------------------------------------------------------------------------------------------------
Attenuators/VCA 5 Silicon; MESFET Cellular Basestations;
Point-to-Point Links
- - --------------------------------------------------------------------------------------------------------
</TABLE>
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. The Company's GaAs HBT power amplifiers offer low distortion,
small size, high efficiency and improved linearity, and they are able to operate
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. The Company believes its GaAs HBT process
technology produces quadrature modulators/demodulators with superior amplitude
and phase balance.
Low Noise Amplifiers/Mixers
A low noise amplifier (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 such 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. RFMD's 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.
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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.
Transceivers
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. RFMD's 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.
Customers
The following table identifies, by market, customers of the Company
that have generated revenues for the Company of greater than $50,000 during
fiscal 1998. Such customers are listed in alphabetical order.
Cellular Handsets
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LG Information and Communications, Ltd.
Hyundai Electronics Industries Co. Ltd.
Maxon Electronics, Ltd.
Nokia Mobile Phones, Ltd.
Pantech Co., Ltd.
Phillips Consumer Communications, L.P.
Samsung Electronics Co., Ltd.
Wireless Data
- - -------------
Lucent Technologies Inc.
Research in Motion Ltd.
Base Stations
- - -------------
Motorola, Inc.
Powerwave Technologies, Inc.
SCI Systems, Inc.
Spectrian Corporation
Other Wireless Applications
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Digital Security Controls, Ltd. (wireless security systems)
Lucent Technologies Inc. (cordless telephones)
Motorola, Inc. (CATV; industrial radios)
Northern Telecom Limited (WLL handsets)
Shure Brothers Inc. (wireless microphones)
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For information with respect to export sales by geographic area, see
Note 2 of Notes to Financial Statements.
The Company, TRW and Nokia have agreed in principle to cooperate to
develop and supply Nokia with RFICs that are manufactured using TRW's GaAs HBT
processes. The arrangement contemplates that the Company and Nokia will
negotiate separate agreements to address the development and supply of each
component. Pursuant to the arrangement, the Company has agreed to provide Nokia
with access to certain RFIC technologies and to its GaAs HBT wafer fabrication
facility, and Nokia has agreed to provide the Company with rights to bid for and
supply Nokia's requirements for certain RFICs.
Pursuant to this arrangement and separate agreements, the Company has
developed a number of RFICs and supplied them to Nokia in commercial quantities.
For the year ended March 31, 1998, sales to Nokia were approximately $19
million, representing approximately 42% of the Company's revenues.
The agreement in principle among the Company, 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 the
Company, and there can be no assurance that Nokia will remain a significant
customer of the Company or that this relationship will continue. See "--
Business Risks -- Relationship with Nokia."
Sales and Marketing
The Company sells its products worldwide directly to customers as well
as through a network of 10 domestic sales representative firms and 17 foreign
sales representative firms. The Company selects its 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. The
Company provides ongoing training to its representatives to keep them
knowledgeable of the Company's products. The Company maintains an internal
marketing organization that is responsible for 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.
The Company believes that maintaining a close relationship with
customers and providing customers with ongoing technical support is essential to
customer satisfaction in the wireless communications industry. The Company's
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. The Company assigns to its 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. The Company believes that maintaining close contact with customers
improves their level of satisfaction and enables the Company to anticipate their
future product needs.
Manufacturing, Packaging and Testing
The Company's manufacturing cycle consists of semiconductor wafer
fabrication, assembly and packaging and final product testing. The Company
recently began manufacturing GaAs HBT products at its new wafer fabrication
facility and also uses independent foundries located in the United States to
manufacture its products. The Company currently uses two independent foundries
to supply its silicon-based product requirements and one independent foundry to
supply its GaAs MESFET devices. The Company purchases a significant portion of
its GaAs HBT wafers from TRW. See "-- Strategic Relationship with TRW." Although
the Company's new wafer fabrication facility recently became operational, the
Company will continue to rely on independent foundries for the manufacturing of
a substantial portion of its 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. See "-- Business Risks
- - --Dependence on TRW" and "-- Dependence on Third Parties."
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In June 1998, the Company completed the first phase of an approximately 64,000
square foot fabrication facility adjacent to its primary facility in Greensboro,
North Carolina to fabricate four-inch diameter GaAs HBT wafers using
technologies licensed from TRW. This first phase, at a cost of approximately $40
million, involved construction of the building shell, installation and
certification of an approximately 10,300 square foot clean room and the purchase
or lease and installation of the required fabrication equipment. The Company has
completed the transfer of TRW's manufacturing process and begun commercial wafer
production, and is in the process of qualifying RFICs manufactured at the
facility with its customers. Production at the facility is expected to increase
throughout fiscal 1999 as additional customers qualify the Company's fabrication
and additional components are manufactured. The second phase, currently under
construction involves completion of the transfer of TRW's molecular beam
epitaxial ("MBE") process for producing wafer start material and expansion of
wafer fabrication capacity. This phase is budgeted at approximately $30 million
and includes an approximately 6,000 square foot expansion to the clean room and
the purchase or lease and installation of additional production equipment. The
commencement and completion of the second phase of the fabrication facility are
dependent on a number of factors, including the availability of necessary
capital and the ability of the Company to complete successfully the transfer of
TRW's MBE processes, as well as other factors both within and outside the
control of the Company. See "-- Business Risks -- Operation of Fabrication
Facility," "-- Adoption of GaAs HBT Components," "-- Need for Additional
Capital" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
The Company maintains an inventory of certain standard products based
on its internal forecasts of expected demand for such products. For
custom-designed products, designs of the Company's products are verified by both
the Company and the customer before orders for production wafers are placed.
Upon receipt of orders from an OEM, the Company schedules production based on
order size, customer delivery requirements, production schedules and other
production considerations. The Company's GaAs HBT products are subject to supply
constraints as discussed under "-- Business Risks -- GaAs HBT Capacity
Constraints" and "-- Dependence on TRW."
The Company currently uses five vendors located in Asia and one vendor
located in the United States to package and assemble its products. All of such
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. The
Company qualifies and monitors assembly contractors based on cost and quality.
Such contractors typically provide the Company with per-unit pricing. The
Company has encountered packaging quality problems with certain of such vendors,
particularly with regard to GaAs products, which generally are more brittle than
silicon-based products and therefore more susceptible to breakage.
In particular, the Company took non-recurring charges in the fourth
fiscal quarter ending March 31, 1998 of approximately $4,550,000 to cover
product returns and the establishment of inventory reserves for products with
packaging-related problems. The packaging problem was confined to sales to one
of the Company's significant customers during a clearly identified assembly
timeframe and, based on the Company's failure analyses, was an unexpected result
of process changes intended to improve assembly yields that were initiated by
the packaging vendor. Improvements subsequently coordinated with the Company and
implemented by the vendor have resolved the problem and the parts have been
requalified to the satisfaction of the Company and its customer. In addition,
the Company experienced quality problems with parts packaged by a second vendor
during fiscal 1998 and has since ceased to use such vendor's services. The
Company has taken steps to improve the reliability of packaging quality,
including the recent hiring of a Vice President of Quality, the expansion of its
in-house package testing and qualification line and the employment of additional
packaging engineers to engage in both package testing and the development of new
packaging designs; however, there can be no assurance that the Company will not
experience additional packaging quality problems in the future. The Company
believes that it will have to continue to monitor closely its vendors as
production volumes increase. See "-- Business Risks -- Variability in Production
Yields," "-- Dependence on Third Parties" and "-- International Sales and
Operations."
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Strategic Relationship with TRW
In June 1996, the Company and TRW entered into a broad strategic
relationship based on several agreements that evidence an investment by TRW in
RFMD, a technology license from TRW to the Company (the "License Agreement") and
a supply arrangement between the parties (the "Supply Agreement"). As a part of
such alliance, TRW provided the Company with $15 million of equity and debt
financing and became a significant shareholder in the Company. The key goal of
the Company in entering into this alliance was to enable the Company to
construct a four-inch wafer fabrication facility to manufacture products using
GaAs HBT technologies developed by TRW and licensed to the Company.
Pursuant to the License Agreement, TRW has granted to the Company 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, in
each case with accompanying know-how and technical information, to design,
develop, manufacture, market, service and repair certain existing products of
the Company and any GaAs HBT product in which the emitter of the GaAs HBT has a
width of one to three microns, in either case provided such products are 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 Company and TRW as the point at which the
Company's wafer fabrication facility became operational. Subject to TRW's right
to use the licensed technology to fulfill existing contractual obligations and
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 the Company fails to meet certain revenue
goals. See "-- Business Risks -- Dependence on TRW."
TRW also granted non-exclusive licenses to the Company to use certain
of its existing GaAs HBT rights and MBE rights for the development and sale of
certain of the Company's existing products for applications other than
commercial wireless communications or that operate on signals having a frequency
of 10 GHz or more. The License Agreement provides that TRW will offer to the
Company, 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 the Company's wafer fabrication
facility became operational. The Company has agreed to share with TRW any
modifications or improvements that it makes in the technology or the products
developed therefrom, and to grant TRW a non-exclusive, royalty-free license to
use such modifications or improvements in applications outside the Company's
field of use. The licenses granted pursuant to 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 the default of
the Company or otherwise, the Company's rights to TRW's technologies would
cease. See "-- Business Risks -- Dependence on TRW."
Under the terms of the Supply Agreement, the Company has agreed to
purchase from TRW, and TRW has agreed to sell to the Company, certain minimum
quantities of three-inch GaAs HBT processed wafers and four-inch GaAs epitaxial
wafer starting material until December 31, 2000. The Company currently is
purchasing from TRW quantities of wafers in excess of the minimum number
required to be delivered by TRW to the Company under the Supply Agreement, and
the Company believes that it will continue to seek to purchase from TRW
quantities of wafers in excess of the amounts required to be supplied under such
contract. See "-- Business Risks --Dependence on TRW."
In connection with TRW's investment in the Company, the Company issued
to TRW a warrant that provides for the purchase of up to 1,000,000 shares of the
Company's common stock at a price of $10.00 per share. This warrant became
exercisable on June 15, 1998, which was the date on which the Company's wafer
fabrication facility became "operational" for purposes of the agreements between
the Company and TRW, and under its terms must be exercised before September 14,
1998. Assuming the warrant is exercised, the Company intends to use the proceeds
to finance in part the second phase of its wafer fabrication facility.
Research and Development
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<PAGE> 12
The Company's research and development efforts are focused primarily on
the development of new integrated circuit products. At March 31, 1998, there
were 62 persons in the Company's research and development organization. The
Company's research and development efforts also are directed at improving
manufacturing processes and yields. In fiscal 1996, 1997 and 1998, the Company
incurred approximately $4.2 million, $6.2 million and $8.8 million,
respectively, of research and development expenses. The Company does not
separately account for Company-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, the Company
believes that its future success depends in part on its ability to design RFICs
under emerging wafer fabrication technologies that meet the cost and performance
parameters of its customers.
Competition
Competition in the markets for the Company's products is intense. The
Company faces competition from several companies primarily engaged in the
business of designing, manufacturing and selling silicon and GaAs MESFET RFICs,
as well as suppliers of discrete products such as transistors, capacitors and
resistors. The Company may face future competition from companies that have or
may develop GaAs HBT or other fabrication processes. In addition, the Company's
current and potential competitors include OEMs that have or may develop the
ability to produce RFICs or discrete products internally for their requirements.
The Company's primary competitors include ANADIGICS, Inc. ("ANADIGICS"), Fujitsu
Limited ("Fujitsu"), Hewlett-Packard Company ("Hewlett-Packard"), Hitachi, Ltd.
("Hitachi"), Motorola Inc. ("Motorola"), NEC Corp. ("NEC"), Philips N.V.
("Philips"), Raytheon Company ("Raytheon"), Rockwell International Corp.
("Rockwell"), Siemens A.G. ("Siemens") and TriQuint Semiconductor, Inc.
("TriQuint").
The Company believes that competition within the markets for its
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 the Company's current and potential competitors have entrenched
market positions, established patents, copyrights, trade names, trademarks and
intellectual property rights and substantial technological capabilities.
Further, most of the Company's current and potential competitors have
significantly greater financial, technical, manufacturing and marketing
resources than the Company. Increased competition could adversely affect the
Company's revenue and profitability by causing it to reduce prices or by
reducing demand for the Company's products. See "-- Business Risks --
Competition."
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<PAGE> 13
Intellectual Property
It is the Company's practice to seek U.S. patent and copyright
protection on its products and developments, where appropriate, and to protect
its proprietary technology under U.S. and foreign laws affording protection for
trade secrets and for integrated circuit designs. The Company owns two U.S.
patents for GaAs HBT power amplifiers, both of which were issued in 1997 and
will expire in 2015.
The Company relies primarily upon trade secrets, technical know-how and
other unpatented proprietary information relating to its product development and
manufacturing activities. To protect its trade secrets, technical know-how and
other proprietary information, the Company's employees are required to enter
into agreements providing for maintenance of confidentiality and the assignment
of rights to inventions made by them while in the employ of the Company. The
Company also has entered into non-disclosure agreements to protect its
confidential information delivered to third parties in conjunction with possible
corporate collaborations and for other purposes. However, there can be no
assurance that these types of agreements will effectively prevent unauthorized
disclosure of the Company's confidential information, that these agreements will
not be breached, that the Company would have adequate remedies for any breach or
that the Company's trade secrets and proprietary know-how will not otherwise
become known or independently discovered by others. See "-- Business Risks
- - --Intellectual Property Claims."
While the Company has not been involved in any patent or other
intellectual property rights litigation, there can be no assurance that third
parties will not assert claims against the Company with respect to existing and
future products. In the event of litigation to determine the validity of any
third party's claims, such litigation 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 is determined in favor of the Company.
The wireless industry is subject to frequent litigation regarding patent and
other intellectual property rights. Leading 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 such litigation,
the Company 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. There can be no assurance that the Company would be
successful in such development or that any such license would be available on
commercially reasonable terms.
Backlog
At March 31, 1998, the Company's backlog was approximately $42.75
million, compared to approximately $19.2 million at the end of fiscal 1997. The
Company includes in its backlog all accepted product purchase orders for which
delivery has been specified within one year. Product orders in the Company's
backlog are subject to changes in delivery schedules or to cancellation at the
option of the purchaser without significant penalty. The Company's 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, 1998, the Company had 230 full-time employees. The Company
believes that its future prospects will depend, in part, on its 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, software design and
marketing, is limited. None of the Company's employees is represented by a labor
union, and the Company has never experienced any work stoppage. The Company
believes that its employee relations are good. See "-- Business Risks --
Management of Growth" and "--Dependence Upon Key Personnel."
Environmental Matters
By virtue of operating its wafer fabrication facility, the Company is
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
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<PAGE> 14
to comply with such requirements currently in effect or subsequently adopted
could result in the imposition of fines on the Company, the suspension of
production or a cessation of operations. In addition, such requirements could
restrict the Company's ability to expand its facilities or require the Company
to acquire costly equipment or incur other significant expenses to comply with
environmental regulations or clean up discharges. The Company believes that
costs arising from existing environmental laws will not have a material adverse
effect on the Company's 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 the Company will not incur significant costs in
the future in order to comply with such laws.
Business Risks
Variability of Operating Results
The Company has experienced and expects to continue to experience
significant variability of its operating results. Future variability of
operating results may be caused by a variety of factors, including, but not
limited to: the ability of the Company to manufacture and deliver products in a
timely and cost-effective manner at acceptable yields and in volumes sufficient
to satisfy customer demands; unexpected variations in manufacturing, assembly
and test yields; the ability of the Company to expand production of GaAs HBT
wafers at its fabrication facility in order to achieve economies of scale; the
demand for wireless subscriber equipment; the rate at which the Company's GaAs
HBT and other products are adopted by customers; the timing of significant
orders; the mix of products sold; changes in pricing by the Company and its
competitors, customers or suppliers; the length of sales cycles for the
Company's products; market acceptance of customers' products; the pattern of
end-user or customer purchasing cycles; the introduction of new products,
processes and technologies by the Company and its competitors; and general
industry and global economic conditions.
Due to the foregoing factors, many of which are described in more
detail below, as well as other unanticipated factors, it is likely that in some
future quarter the Company's operating results will be below the expectations of
public market analysts or investors. In such event, the price of the Company's
common stock would be materially adversely affected.
Variability in Production Yields
The Company's manufacturing and assembly yields vary significantly
among products, depending on the complexity of a particular integrated circuit's
design, the novelty of the package used and the experience of the party
manufacturing or assembling the RFIC. The fabrication of RFICs, and GaAs HBT
products in particular, involves precise processes that are highly complex and
unique, that require advanced and costly equipment and that are being adjusted
continually in an effort to improve yields and product performance. 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. Defects in masks, minute impurities in materials used, contamination
of the manufacturing environment, equipment failure, human error and small
imperfections in the fabrication process can cause a substantial percentage of
wafers to be rejected or numerous die on each wafer to be nonfunctional. In
addition, the more brittle nature of GaAs wafers can result in higher processing
losses due to breakage relative to traditional silicon-based semiconductor
processes.
Historically, the Company has experienced difficulties in achieving
acceptable yields on certain new products, which has adversely affected gross
margins. During the fourth quarter of fiscal 1998, the Company took
non-recurring charges of approximately $4,550,000 to cover product returns and
the establishment of inventory reserves for products with packaging-related
problems for sale to one of the Company's significant customers. Also, in late
calendar 1995 and early calendar 1996, the Company's operating results
fluctuated substantially due to high material scrap caused by low manufacturing,
assembly and test yields related to the Company's development of a CDMA chipset
for a significant
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<PAGE> 15
customer. There can be no assurance that the Company will not experience similar
problems while developing future products.
Because average selling prices tend to decline over time and a large
portion of the Company's manufacturing costs are relatively fixed, improvements
in production yields and increases in the volume of wafers produced are critical
to maintaining and improving the Company's results of operations. Yield
decreases can result in substantially higher unit costs, which could materially
and adversely affect operating results. There can be no assurance that the
Company will be able to improve its yields in the future or that the Company
will not suffer periodic yield problems such as those experienced by the Company
in the past. In either case, the Company's operating results could be materially
and adversely affected. See "-- Operation of Fabrication Facility" and
"Dependence on Third Parties."
Dependence on a Limited Number of Customers
A substantial portion of the Company's revenues is attributable to
custom-designed products that are designed and manufactured for specific
customers. Custom products are often manufactured on an exclusive basis for the
originating customer for a negotiated period of time. A relatively limited
number of customers have historically accounted for a significant portion of the
Company's revenues, and the identity of those customers has varied significantly
from period to period. In fiscal 1998, sales to Nokia and LGIC accounted for 42%
and 13% of the Company's revenues, respectively, and sales to the Company's five
most significant customers in the aggregate accounted for 70% of revenues. In
fiscal 1997, sales to QUALCOMM Incorporated ("QUALCOMM") and Samsung accounted
for 32.1% and 23.4%, respectively, of the Company's revenues, and sales to the
Company's five most significant customers in the aggregate accounted for 73.0%
of revenues. In fiscal 1996, sales to QUALCOMM and Cincinnati Microwave, Inc.
accounted for 31.3% and 11.9%, respectively, of the Company's revenues, and
sales to the Company's five most significant customers in the aggregate
accounted for 60.7% of revenues. The Company expects that sales of its products
to a limited number of customers will continue to account for a high percentage
of its revenues in future periods. The Company also believes that some of its
key customers in future periods may be different from its key customers in prior
periods, and there can be no assurance that the Company will be able to replace
revenues generated by former key customers in prior periods with revenues
generated from existing or new customers in future periods.
Operation of Fabrication Facility
The Company completed the first phase of an approximately 64,000 square
foot wafer fabrication facility in June 1998 and has begun fabricating four-inch
GaAs HBT wafers using technologies licensed from TRW. The Company expects to be
able to manufacture GaAs HBT products at a cost that is less than the price paid
by the Company to TRW for such products; however, there is no assurance that the
Company will be able to do so. The Company is in the process of qualifying RFICs
manufactured at the new facility with its customers, which is required for all
products including those previously qualified by TRW at its facility. The
Company expects that production levels will increase gradually throughout fiscal
1999, and it will be critical for it to manage the expansion of production while
maintaining and improving line yields (the percentage of usable wafers) and
product yields (the percentage of usable parts from usable wafers). Although the
Company is encouraged by its progress to date, there can be no assurance that
the Company will attain the necessary customer product qualifications or be able
successfully to produce GaAs HBT wafers in a manner that achieves acceptable
manufacturing yields or allows the Company to offer its GaAs HBT products at
competitive prices. The failure or any delay by the Company to secure customer
qualification of its products or to fabricate GaAs HBT wafers at acceptable
manufacturing yields, costs and quality and in volumes sufficient to satisfy
customer demands would have a material adverse effect on the Company's business,
financial condition and results of operations.
The operation of a wafer fabrication facility requires significant
fixed costs, consisting primarily of occupancy costs, investments in
manufacturing equipment, repair, maintenance and depreciation costs related to
such equipment
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<PAGE> 16
and labor costs related to manufacturing and process engineering. There can be
no assurance that the Company will have revenue to offset such cost increases.
The wafer fabrication facility's second phase, currently scheduled to
begin in September 1998, involves completion of the transfer of TRW's MBE
process for producing wafer start material and expansion of wafer fabrication
capacity. This phase is budgeted at approximately $30 million and includes an
approximately 6,000 square foot expansion to the clean room and the purchase or
lease and installation of additional production equipment. The commencement and
completion of the second phase of the fabrication facility are dependent on a
number of factors, including the availability of necessary capital and
equipment, the ability of the Company to complete successfully the transfer of
TRW's MBE processes, the demand for GaAs HBT products, as well as a number of
other factors both within and outside the control of the Company, and there can
be no assurance that the Company will be able to complete this phase in a timely
manner and on an affordable basis.
GaAs HBT Capacity Constraints
The Company has in the past lost customers for its GaAs HBT products as
a result of its inability to meet requested delivery times and quantity
requirements, and the Company believes that certain prospective OEM customers
have been reluctant to use the Company's GaAs HBT products in their devices due
to the Company's capacity constraints with respect to such products. Because TRW
has completed an expansion of its manufacturing capacity and the Company has
begun operating its own GaAs HBT wafer fabrication facility, the Company
anticipates that it will no longer remain subject to capacity constraints with
respect to GaAs HBT products. However, there can be no assurance that other
customers will not seek alternate sources for certain high volume requirements.
The Company has significantly increased its expense levels to support
its recent growth and intends to continue to make significant investments in
research and development, capital equipment and customer service and support
capabilities worldwide, especially as it begins to operate its own wafer
fabrication facility. These investments will make it difficult for the Company
to reduce its operating expenses in a particular period if the Company's revenue
goals for that period are not met. There can be no assurance that the Company
will achieve a rate of growth or level of sales in any future period
commensurate with its increased level of operating expenses and the failure to
do so would have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on TRW
The Company believes TRW is one of only two suppliers of commercial
quantities of GaAs HBT wafers. Before commencement of production at the
Company's wafer fabrication facility in June 1998, all of the Company's GaAs HBT
products were fabricated by TRW using TRW's proprietary technologies. For the
year ended March 31, 1998, sales of GaAs HBT products constituted approximately
81% of the Company's revenues. The Company has entered into the Supply Agreement
with TRW, pursuant to which TRW is required to deliver to the Company certain
minimum quantities of GaAs HBT wafers until December 31, 2000. The Company
currently is purchasing from TRW quantities of wafers in excess of the minimum
number required to be delivered by TRW to the Company under the Supply
Agreement, and the Company believes that it will continue to seek to purchase
from TRW quantities of wafers in excess of the amounts required to be supplied
under such contract. Although TRW has to date allocated to the Company a
substantial portion of TRW's commercial GaAs HBT wafer production, the Company
nevertheless has experienced significant difficulty obtaining sufficient
production capacity to meet demand for certain of its GaAs HBT products.
Further, although the Company has begun fabricating its own GaAs HBT wafers
using technologies licensed from TRW, the Company expects to remain dependent
upon TRW as a source of GaAs HBT wafers in the future. The fabrication of GaAs
HBT wafers involves highly complex and unique processes, and a failure by TRW to
manufacture and deliver wafers on a timely basis, to maintain acceptable
manufacturing yields, to continue to allocate to the Company a substantial
portion of TRW's commercial wafer production or to successfully defend against
any claim that its GaAs HBT process infringes on third parties' intellectual
property rights would have a material adverse effect on the Company's business,
financial condition and results of operations.
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<PAGE> 17
Pursuant to the License Agreement between TRW and the Company, TRW has
granted to the Company certain licenses to TRW's GaAs HBT and MBE processes used
to produce certain GaAs HBT products for commercial wireless communications
applications that operate on signals having a frequency of less than 10 GHz. The
Company recently began manufacturing its own GaAs HBT products in commercial
quantities at its wafer fabrication facility using processes covered by such
licenses. Such licenses are granted without representation or warranty as to
validity or noninfringement. Also, certain exclusive licenses for GaAs HBT
processes that may be used to produce products for wireless communications
applications may be made entirely non-exclusive by TRW if the Company fails to
meet certain revenue goals. A decision by TRW to make the rights granted therein
non-exclusive or a determination that its GaAs HBT processes infringe a third
party's intellectual property rights would have a material adverse effect on the
Company's business, financial condition and results of operations.
Adoption of GaAs HBT Components
Commercial applications of GaAs HBT technologies are relatively new,
and certain current and potential customers of the Company may be reluctant to
design wireless systems that incorporate GaAs HBT products because of perceived
risks relating to GaAs HBT technology generally. Such perceived risks include
product reliability, the unfamiliarity of designing systems with GaAs HBT
components as compared with silicon or GaAs MESFET components, novel design
requirements, unfamiliar manufacturing processes and uncertainties about the
relative cost effectiveness of GaAs HBT products compared to high performance
silicon-based or GaAs MESFET integrated circuits. Certain customers may be
reluctant to rely on a comparatively small company such as RFMD as a sole
supplier of large quantities of critical GaAs HBT components. For the year ended
March 31, 1998, approximately 81% of the Company's revenues was attributable to
the sale of GaAs HBT products, and the Company expects that it will remain
dependent upon GaAs HBT products to generate a substantial portion of future
revenues. Although the Company believes that GaAs HBT products are gaining
industry acceptance, there can be no assurance that additional OEMs will design
the Company's GaAs HBT products into their respective systems, that the
companies that have utilized the Company's GaAs HBT products will continue to do
so in the future or that GaAs HBT integrated circuit technology will achieve
widespread market acceptance. Failure of GaAs HBT to become widely adopted would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Management of Growth
The Company currently is experiencing a period of significant growth
that has placed and will continue to place a significant strain on the Company's
resources. The Company has grown from 131 employees on March 31, 1997 to 230
employees on March 31, 1998. The Company's ability to manage its growth
effectively will require it to implement and improve operational and financial
systems and to expand, train and manage its employee base. In particular, the
Company's prospects depend upon its ability to attract qualified persons with
experience in RF engineering, integrated circuit design, wafer fabrication,
wireless systems and technical marketing and support. Competition for such
persons is intense, and the number of persons with such experience is limited.
The Company also will be required to manage multiple relationships with various
customers, business partners and other third parties, such as its foundry and
assembly partners. Moreover, the Company will incur significant expenses
associated with its rapid growth and may incur additional unexpected costs
relating to its anticipated expansion. The Company's systems, procedures or
controls may not be adequate to support the Company's operations and Company
management may not be able to achieve the rapid expansion necessary to exploit
potential market opportunities for the Company's products. The Company's future
operating results will also depend on its ability to expand its sales and
marketing and research and development organizations, and expand its
administrative support organization. If the Company is unable to attract
qualified persons or manage growth effectively, the Company's business,
financial condition and results of operations would be materially adversely
affected.
Relationship with Nokia
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<PAGE> 18
The Company, TRW and Nokia have agreed in principle to cooperate to
develop and supply Nokia with RFICs that are manufactured using TRW's GaAs HBT
processes. The arrangement contemplates that the Company and Nokia will
negotiate separate agreements to address the development and supply of each
component. Pursuant to the arrangement, the Company has agreed to provide Nokia
with access to certain RFIC technologies and to its GaAs HBT wafer fabrication
facility, and Nokia has agreed to provide the Company with rights to bid for and
supply Nokia's requirements for certain RFICs.
Pursuant to this arrangement and separate agreements, the Company has
developed a number of RFICs and supplied them to Nokia in commercial quantities.
For the year ended March 31, 1998, sales to Nokia were approximately $19
million, representing approximately 42% of the Company's revenues.
The agreement in principle among the Company, 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 the
Company, and there can be no assurance that Nokia will remain a significant
customer of the Company or that this relationship will continue.
Limited Operating History and Operating Losses
The Company was incorporated in 1991 and was in the development stage
prior to the year ended March 31, 1995. The Company had net losses totaling
approximately $14.4 million from the period of inception to March 31, 1996,
profits of approximately $1.65 million for the year ended March 31, 1997 and a
net loss of approximately $523,000 for the year ended March 31, 1998. The
Company expects to incur substantial additional costs to continue the
development of its fabrication facility and expansion of its operations and to
design and develop new products. There can be no assurance, due to the Company's
history of annual and quarterly operating losses, its planned expansion of
manufacturing capacity, its dependence on third parties and the difficulty of
predicting the demand for its products, among other factors, that the Company
will be able to reach or sustain profitability. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Dependence on Third Parties
Prior to June 1998, all of the Company's products were manufactured by
independent third parties, and the Company expects to continue to rely heavily
on independent third parties in the future. The Company purchases a significant
portion of its GaAs HBT products from TRW, which the Company believes is
currently one of only two suppliers of commercial quantities of GaAs HBT wafers.
In addition, the Company currently uses two independent foundries to manufacture
its silicon-based products and one independent foundry to manufacture its GaAs
MESFET products. The foundry that supplies the Company's GaAs MESFET
requirements is owned and operated by TriQuint, which is a competitor of the
Company. Revenues generated during fiscal 1998 from the sale of GaAs MESFET
products represented approximately 5% of revenues for such period. The Company
relies exclusively on TriQuint for the Company's GaAs MESFET requirements, and
foundry capacity for GaAs products has been difficult to obtain at times in the
past. The Company is and will remain dependent on a small number of independent
foundries to manufacture and deliver its products on a timely basis, to achieve
acceptable manufacturing yields and to offer competitive pricing to the Company.
Accordingly, the failure of such independent foundries to manufacture and
deliver the Company's products on a timely basis, to allocate to the Company
sufficient capacity to meet the Company's requirements, to achieve acceptable
manufacturing yields or to offer competitive pricing to the Company would have a
material adverse effect on the Company's business, financial condition and
results of operations. Further, no assurance can be given that the Company would
be able to locate other foundries to fabricate its products in the event of a
loss of any other source of supply.
The Company uses independent vendors to package all of its integrated
circuits. The Company has encountered packaging quality problems with certain of
such vendors, especially with regard to GaAs products. In particular, the
Company took non-recurring charges in the fourth fiscal quarter ending March 31,
1998 of approximately
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<PAGE> 19
$4,550,000 to cover product returns and the establishment of inventory reserves
for products with packaging-related problems. In addition, the Company
experienced quality problems with parts packaged by a second vendor during
fiscal 1998 and has since ceased to use such vendor's services. There can be no
assurance that the Company will not experience packaging problems in the future.
A delay or reduction in product shipment or reduced assembly yields would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "-- Variability in Production Yields" and "--
International Sales and Operations."
Competition
Competition in the markets for the Company's products is intense. The
Company faces competition from several companies primarily engaged in the
business of designing, manufacturing and selling silicon and GaAs MESFET RFICs,
as well as suppliers of discrete products such as transistors, capacitors and
resistors. The Company also faces competition from companies that have or may
develop GaAs HBT or other new fabrication processes. In addition, many of the
Company's existing and potential OEM customers manufacture or assemble wireless
communications devices and have substantial in-house technological capabilities.
Such OEMs currently may be developing, or may develop in the future, products
that compete directly with the Company's products. A decision by one or more
large OEM customers of the Company to design and manufacture integrated circuits
internally would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company expects competition
in the future to increase. Increased competition could result in decreased
prices for the Company's products, reduced demand for the Company's products and
a reduction in the Company's ability to recover development engineering costs.
Any of these developments would have a material adverse effect on the Company's
business, financial condition and results of operations.
Many of the Company's current and potential customers have entrenched
market positions, substantial internal manufacturing capacity, established
patents, copyrights, trade names, trademarks and intellectual property rights
and substantial technological capabilities. Most of the Company's current and
potential competitors, including ANADIGICS, Fujitsu, Hewlett-Packard, Hitachi,
Motorola, NEC, Philips, Raytheon, Rockwell, Siemens and TriQuint, have
significantly greater financial, technical, manufacturing and marketing
resources than the Company. There can be no assurance that the Company will be
able to compete successfully with its existing or new competitors.
Rapid Technological Change; Dependence on Development and Growth of
Wireless Markets
The Company's prospects depend upon continued development and growth of
markets for wireless communications products and services, including cellular
telephony, PCS handsets, wireless LANs, wireless security systems and other
wireless applications. No assurance can be given regarding the rate at which the
markets for such products will develop or the Company's ability to produce
competitive products for such markets as they develop.
The Company supplies RFICs almost exclusively for wireless
applications. The wireless markets currently 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. Consequently, the Company has
experienced a degree of product design obsolescence. Because the demand of OEMs
for improvements in product performance is expected to increase, the Company
believes that its future success will depend in part upon its ability to
continue to improve its product designs and to develop new products based on
emerging wafer fabrication technologies. If a competing process technology
emerges that permits the fabrication of integrated circuits that are superior to
the RFICs fabricated under the existing processes available to the Company, and
if the Company is unable to design successfully products under such technology
or to develop competitive or alternative products that are economically viable
and that can be delivered in sufficient product quantity to OEMs at acceptable
yields, the Company's business, financial condition and results of operations
would be materially and adversely affected. Competition among the Company's
target customers is intense and thus many OEMs may be reluctant to implement new
technologies. Further, in each of the markets in which the Company competes,
prices of established products tend to decline significantly over time.
Developing these enhancements, new designs and technologies requires significant
-18-
<PAGE> 20
investments by the Company in research and development efforts, and there can be
no assurance that funds for such investments will be available when needed on
acceptable terms or that such efforts will be successful.
Need for Additional Capital
The Company will require substantial capital to complete the second
phase of its wafer fabrication facility and to fund its operations and growth.
The Company's wafer fabrication facility is being developed in two phases, the
first of which was completed in May 1998 at an approximate cost of $40 million
and the second of which, an expansion of production capacity, is scheduled to
begin in September 1998 at a budgeted cost of $30 million. The Company has used
approximately $15 million of the net proceeds from its June 1997 initial public
offering to finance part of the cost of constructing the first phase of the
fabrication facility and has financed the remainder of this phase with cash on
hand and previously obtained financing commitments. The Company's future capital
requirements will depend on many factors, including whether demand for the
Company's products justifies the phased expansion of its facility, the timing
and extent of spending to support product development efforts and expansion of
sales and marketing, the timing of introductions of new products and market
acceptance of the Company's products. The Company expects that it may need to
raise additional equity or debt financing during the second half of 1998 to
finance a portion of the cost of the second phase of the fabrication facility.
There can be no assurance that additional equity or debt financing, if required,
will be available on acceptable terms or at all. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations --Liquidity and
Capital Resources."
Dependence upon Key Personnel
The Company's success depends in part upon retaining the services of
certain technical, marketing, sales and management personnel. None of the
Company's employees has an employment agreement with the Company. The loss of
any key personnel would have a material adverse effect on the Company's
business, financial condition and results of operations. Further, the Company's
prospects depend upon its ability to attract qualified personnel for its
operations. The competition for qualified personnel is intense, and the number
of persons with experience, particularly in RF engineering, integrated circuit
design, wafer fabrication, wireless systems and technical marketing and support,
is limited. There can be no assurance that the Company will be able to attract,
assimilate or retain other skilled personnel in the future. Any inability on the
part of the Company to attract or retain additional key employees or the loss of
one or more of its current key employees would have a material adverse effect on
the Company's business, financial condition and results of operations.
International Sales and Operations
Sales to customers located outside the United States accounted for
approximately 24%, 42% and 50% of total revenues for fiscal 1996, 1997 and 1998,
respectively. Sales to Korean customers accounted for approximately 21.3% of the
Company's revenues during fiscal 1998. As a result of the recent turmoil in the
Asian financial markets, certain of the Company's Korean customers have
requested extensions of the payment terms for sales of products to such
customers, and the Company has extended such terms. The Company has not yet
experienced any collection problems
-19-
<PAGE> 21
with respect to amounts owed to it by such customers, although there can be no
assurance that this will not occur in the future. While the economic instability
in Asia has not yet adversely impacted the Company's revenues, the Company
currently expects that its sales to Korean customers as a percentage of total
revenues will decline during fiscal 1999 due to order delays, the possibility of
order cancellations and the tightening of credit. The Company cannot predict the
breadth or length of the turmoil in Asian economies or whether that turmoil will
spread to other parts of the globe. Although the Company currently expects that
any decrease in Korean sales will be offset by increased revenues from other
customers, there can be no assurance that this will occur or that the Asian
economic instability will not have a material adverse effect on the Company's
business, financial condition or results of operations.
The Company expects that revenues derived from international sales will
continue to represent a significant portion of its total revenues. International
sales are subject to a variety of risks, including those arising from currency
fluctuations and restrictions, tariffs, trade barriers, taxes and export license
requirements. Because all of the Company's foreign sales are currently
denominated in U.S. dollars, the Company's products become less price
competitive in countries with currencies that are low or are declining in value
against the U.S. dollar. In addition, there can be no assurance that the
Company's international customers will continue to accept orders denominated in
U.S. dollars. If such customers do not continue to accept orders denominated in
U.S. dollars, the Company's reported revenues and earnings would become more
directly subject to foreign exchange fluctuations. See Note 2 of Notes to
Financial Statements.
All of the packaging materials used to assemble the Company's
integrated circuits are supplied by, and all of the Company's products are
assembled by, independent circuit assembly vendors, most of which are located in
Asia. Due to its reliance on such foreign suppliers and assemblers, the Company
is subject to the risks of conducting business outside of the United States.
These risks include unexpected changes in, or impositions of, legislative or
regulatory requirements, delays resulting from difficulty in obtaining export
licenses, tariffs and other trade barriers and restrictions, and the burdens of
complying with a variety of foreign laws and other factors beyond the Company's
control. The Company also is subject to general geopolitical risks in connection
with its international operations, such as political, social and economic
instability, potential hostilities and changes in diplomatic and trade or
business relationships. Although the Company has not to date experienced any
material adverse effect on its operations as a result of such regulatory,
geopolitical and other factors, there can be no assurance that such factors will
not adversely affect the Company's operations in the future or require the
Company to modify its current business practices. The Company currently
transacts business with its foreign assemblers in U.S. dollars and consequently
the cost of the Company's packaging components, as well as assembly costs, would
increase in countries with currencies that are increasing in value against the
U.S. dollar. In addition, there can be no assurance that the Company's
international assemblers will continue to accept orders denominated in U.S.
dollars. If such assemblers do not continue to accept orders denominated in U.S.
dollars, the Company's costs would become more directly subject to foreign
exchange fluctuations.
Intellectual Property Claims
The Company's success depends in part on its ability to obtain patents,
trademarks and copyrights, maintain trade secret protection and operate its
business without infringing on the proprietary rights of third parties. See "--
Dependence on TRW."
The Company may be notified in the future that it is infringing patent
or other intellectual property rights of others, although there are no such
pending lawsuits against the Company or notices that the Company is infringing
intellectual property rights of others. No assurance can be given that in the
event of such infringement, licenses could be obtained on commercially
reasonably terms or that litigation will not occur. The failure to obtain
necessary license or other rights or the occurrence of litigation arising out of
such claims would have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition to patent and copyright protection, the Company also relies
on trade secrets, technical know-how and other unpatented proprietary
information relating to its product development and manufacturing activities
which
-20-
<PAGE> 22
it seeks to protect, in part, by confidentiality agreements with its employees
and third parties. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach or that
the Company's trade secrets and proprietary know-how will not otherwise become
known or independently discovered by others.
Government Regulation of Communications Industry
The sale of products by customers who purchase the Company's products
may be materially and adversely affected by governmental regulatory policies,
the imposition of common carrier tariffs or taxation of telecommunications
services. Further, national governments control the allocation and use of radio
frequencies and may implement regulations or take other action that directly or
indirectly has a material adverse effect on the Company's business, financial
condition or results of operations.
Concentration of Stock Ownership
Directors and executive officers of the Company and their affiliates
(including TRW) collectively beneficially own approximately 43.6% of the common
stock, and TRW, the Company's largest shareholder, beneficially owns
approximately 32.8% of the common stock. As a result, these shareholders are
able to exercise significant influence over all matters requiring shareholder
approval, including the election of directors and approval of significant
corporate transactions. In connection with its investment in the Company in June
1996, TRW had granted to David A. Norbury, President and Chief Executive Officer
of the Company, an irrevocable proxy to vote 2,683,930 of the 4,621,487 shares
of common stock then beneficially owned by TRW. In accordance with its terms,
such proxy will expire on July 15, 1998, 30 days after the date on which the
Company's wafer fabrication facility became "operational" for purposes of the
agreements between the Company and TRW.
Possible Volatility of Stock Price
The trading price of the Company's 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 or new products by the
Company or its competitors, or other events or factors. In addition, the stock
market has experienced extreme price and volume fluctuations based on
macroeconomic factors outside the Company's 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 the
Company's common stock.
Shares Eligible for Future Sale; Possible 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 the
Company's common stock and the ability of the Company to raise equity capital in
the future. As of June 15, 1998, the Company had outstanding an aggregate of
16,141,141 shares of common stock. Of such shares, an aggregate of approximately
8,837,140 shares are freely tradeable without restriction or further
registration under the Securities Act of 1933 (the "Securities Act"), except for
any of such shares acquired by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act ("Affiliates"). The Company
believes that the holders of the remaining 7,301,001 shares are Affiliates and,
accordingly, that such shares may be sold without registration only in
compliance with the Securities Act (including Rule 144). As of March 31, 1998,
options to purchase 1,072,139 shares of the Company's common stock were
outstanding under the Company's stock option plans, with a weighted average
exercise price of $5.52 per share and a weighted average remaining contractual
life of 8.24 years. Of these, options to purchase 252,689 shares were
exercisable at March 31, 1998, at a weighted average exercise price of $1.72 per
share. At March 31, 1998, there were warrants currently exercisable into an
aggregate of 41,322 shares of common stock at an exercise price of $9.00 per
share; in addition, TRW holds a warrant for the purchase of one million shares
of common stock at an exercise price of $10.00 per share that became exercisable
on June 15, 1998
-21-
<PAGE> 23
and must be exercised by September 14, 1998. The issuance of shares of capital
stock to address liquidity needs of the Company or for other business purposes
could also adversely affect the market price of the Company's common stock.
Anti-takeover and Certain Other Provisions
Certain provisions of the Company's articles of incorporation and
bylaws could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
the Company. These provisions include the ability of the Board of Directors to
designate the rights and preferences of preferred stock and issue such shares
without shareholder approval and the requirement of supermajority shareholder
approval of certain transactions with parties affiliated with the Company. Such
provisions could limit the price that certain investors might be willing to pay
in the future for shares of the Company's common stock.
Pursuant to an agreement among the Company, TRW and certain other
shareholders of the Company, TRW has agreed to refrain until June 6, 2002 from
taking certain actions affecting the control of the Company. This agreement
further provides, however, that in the event of an offer by a third party to
acquire all of the outstanding shares of the Company, TRW will have a 30-day
period in which to make a counterproposal on the same or better terms and to
have such proposal submitted to the Company's shareholders. This right could
have the effect of discouraging a third party from offering to acquire all of
the outstanding shares of the Company. In addition, under the terms of its
credit facility with Silicon Valley Bank, the Company is prohibited from
entering into mergers or acquisitions, undergoing a material change in ownership
or making dispositions of assets other than in the ordinary course of business.
Item 2. Properties
The Company's principal administrative facility is located in a
building comprising approximately 25,000 square feet in Greensboro, North
Carolina. Pursuant to the lease agreement under which the Company leases this
building, the Company has exercised an option to request an expansion of the
facility through the construction of an adjacent additional building consisting
of approximately 30,000 square feet. The term of the lease for these facilities
will be fifteen years from the date of completion of this expansion, which is
currently expected to occur in late calendar year 1998. The Company also leases
real estate adjacent to its principal facility on which its wafer fabrication
facility, consisting currently of approximately 64,000 square feet, has been
constructed. The lease for the fabrication facility has a term expiring in May
2013, with two 10-year renewal options. The Company also leases approximately
17,500 square feet of commercial space in Greensboro, North Carolina that it
uses for office space and storage. Such facility is leased under three leases
that each expire on December 31, 1999.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is traded on The Nasdaq National Market
under the symbol "RFMD." The following table presents the high and low
per-share sales prices of the Company's common stock for the periods
indicated during 1997 and 1998, as reported by The Nasdaq National Market.
The Company completed its initial public offering in the second quarter of
1997 at a price of $12.00 per share. As of June 15, 1998, there were 189
holders of record of the common stock.
-22-
<PAGE> 24
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Quarter ended
June 30, 1997
(from June 3) $19.13 $14.50
September 30, 1997 23.13 16.13
December 31, 1997 18.50 10.50
March 31, 1998 16.88 10.25
For fiscal year 1998 23.13 10.25
</TABLE>
The Company has never paid dividends on its capital stock. The Company
intends to retain earnings, if any, for use in its business and does not
anticipate paying any cash dividends in the foreseeable future.
On March 4, 1998, the Company issued 66,946 shares of common stock to
an entity believed to qualify as an accredited investor upon the exercise of
warrants held by such entity in exchange for approximately $225,000 in cash. The
Company issued these shares of common stock in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act.
<TABLE>
<S> <C>
Uses of Proceeds
Effective Date of the Company's
Registration Statement: June 3, 1997
Commission File Number: 333-22625
Date the Offering Commenced: June 3, 1997
Names of Managing Underwriters: NationsBanc Montgomery
Securities, LLC
Hambrecht & Quist
Oppenheimer & Co., Inc.
Class of Securities Registered: Common Stock
Amount Registered by Company: 3,455,550 shares
Amount Registered by Selling Shareholders: 37,000 shares
Amount Sold by Company 3,000,000 shares (6/6/97)
455,550 shares (6/12/97)
Amount Sold by Selling Shareholders 37,000 shares
Aggregate Price of Offering Amount
Registered and Sold by Selling Shareholders $ 444,000
Aggregate Price of Offering Amount
Registered and Sold by Company: $41,466,600
Underwriting Discounts and
Commissions Paid by Company (1) $2,902,662
</TABLE>
-23-
<PAGE> 25
<TABLE>
<S> <C>
Finder's Fees $0
Expenses Paid to or for Underwriters $0
Other Expenses Paid by Company (1) (2) $808,000
Total Expenses Paid by Company (1) (2) $3,710,662
Net Offering Proceeds to Company: $37,755,938
Use of Net Offering Proceeds:
</TABLE>
<TABLE>
<CAPTION>
Payments to Directors,
Officers, 10% Shareholders, Payments
Types of Use and Affiliates of Issuer (3) To Others (3)
<S> <C> <C>
Construction of Plant, Building, and Facilities $0 $6,942,300
Purchase/Install of Machinery and Equipment $0 $16,795,000
Purchase of Real Estate $0 $1,933,900
Repayment of Indebtedness $0 $645,000
Officers/Directors Compensation $532,100 $0
Product Development $0 $5,428,400
Sales, Marketing, and Administration $0 $5,479,200
TOTAL $532,100 $37,223,800
</TABLE>
(1) Does not include any direct or indirect payments to directors,
officers, general partners of the issuer or their associates;
to persons owning ten percent (10%) or more of any class of
equity securities of the issuer; or to affiliates of the
issuer.
(2) This amount represents a reasonable estimate.
(3) All amounts shown are a reasonable estimate.
Item 6. Selected Financial Data
The selected financial data set forth below should be read in
conjunction with the Management's Discussion of Financial Condition and Results
of Operations" and the Financial Statements and Notes thereto included herein.
The statement of operations data for the years ended March 31, 1996, 1997 and
1998, and the selected balance sheet data as of March 31, 1996, March 31, 1997
and March 31, 1998, are derived from, and are qualified by reference to, the
Financial Statements and Notes thereto included elsewhere herein. The statement
of operations data for the years ended March 31, 1994 and 1995, and the selected
balance sheet data as of March 31, 1994 and March 31, 1995, are derived from the
historical financial statements of the Company, which are not included herein.
-24-
<PAGE> 26
<TABLE>
<CAPTION>
Year Ended March 31, (1)
------------------------------------------------------------------
1994 1995 1996 1997 1998
------- ------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales $ 574 $ 1,254 $ 8,212 $ 27,852 $ 44,095
Engineering revenue 412 434 1,303 950 1,255
------- ------- -------- -------- --------
Total revenue 986 1,688 9,515 28,802 45,350
Costs and expenses:
Cost of goods sold 724 1,215 7,471 15,826 29,246
Research and development 1,553 2,836 4,245 6,178 8,761
Marketing and selling 808 1,180 1,817 3,760 6,220
General and administrative 725 620 1,226 1,391 2,528
------- ------- -------- -------- --------
Total costs and expenses 3,810 5,851 14,759 27,155 46,755
------- ------- -------- -------- --------
Income (loss) from operations (2,824) (4,163) (5,244) 1,647 (1,405)
Interest expense (62) (27) (81) (399) (184)
Interest income 40 68 137 513 1,066
------- ------- -------- -------- --------
Income (loss) before income taxes (2,846) (4,122) (5,188) 1,761 (523)
Income tax expense -- -- -- (109) --
------- ------- -------- -------- --------
Net income (loss) $(2,846) $(4,122) $ (5,188) $ 1,652 $ (523)
======= ======= ======== ======== ========
Net income (loss) per share:
Basic $ (4.86) $ (7.05) $ (8.87) $ 0.59 $ (0.04)
======= ======= ======== ======== ========
Diluted $ (4.86) $ (7.05) $ (8.87) $ 0.15 $ (0.04)
======= ======= ======== ======== ========
Shares used in per share calculation:
Basic 585 585 585 2,778 13,509
======= ======= ======== ======== ========
Diluted 585 585 585 11,215 13,509
======= ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $ 3,341 $ 2,223 $ 6,638 $ 2,330 $16,360
Working capital 3,443 2,686 7,912 7,313 34,226
Cash restricted for capital additions -- -- -- 12,358 --
Total Assets 4,519 4,343 13,192 36,265 93,364
Long-term debt -- 59 153 10,829 12,524
Shareholders' equity (deficiency) (5,047) (9,169) (14,357) (9,472) 66,763
</TABLE>
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<PAGE> 27
1) Each of the fiscal years ended March 31, 1994, March 31, 1995, March
31, 1996, March 31, 1997 and March 31, 1998 was a 52 week year.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
The Company designs, develops, manufactures, and markets proprietary
RFICs for wireless applications such as cellular and PCS applications, cordless
telephones, WLAN, WLL handsets, industrial radios, wireless security systems,
wireless data networks, remote meter reading systems, and interactive toys. The
Company derives revenues from the sale of standard and custom-designed products
and services. To date, a significant portion of the Company's revenues 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,
modulators/demodulators, and single-chip transceivers that represent a
substantial majority of the RFICs required in wireless subscriber equipment. The
Company designs products using three distinct process technologies: GaAs HBT,
GaAs MESFET and silicon bipolar transistor. For the fiscal year ended March 31,
1998, 81% of the Company's revenues was derived from the sale of GaAs HBT
products. The Company expects to continue to rely heavily on sales of GaAs HBT
products in future periods.
Results of Operations
The following table sets forth (i) the statement of operations data of
the Company expressed as a percentage of total revenues for the periods
indicated, and (ii) the percentage change in these items from year to year:
<TABLE>
<CAPTION>
For the Fiscal Year Ended March 31 Year-to-Year Changes
1998 1997 1996 1997 to 1998 1996 to 1997
--------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 57.5% 202.7%
Operating costs and expenses:
Cost of goods sold 64.5 54.9 78.5 84.8 111.8
Research and development 19.3 21.4 44.6 41.8 45.5
Marketing and selling 13.7 13.1 19.1 65.4 106.9
General and administrative 5.6 4.8 12.9 81.7 13.5
----- ----- ----- ----- -----
Total operating costs and expenses 103.1 94.2 155.1 72.2 84.0
Income/(loss)from operations (3.1) 5.8 (55.1) (185.3) 131.4
Other income, net 1.9 0.3 0.6 673.7 103.6
----- ----- ----- ----- -----
Income/(loss) before income taxes (1.2) 6.1 (54.5) (129.7) 133.9
Income tax expense -- (0.4) -- -- --
----- ----- ----- ----- -----
Net income/(loss) (1.2)% 5.7% (54.5)% (131.7)% 131.8%
===== ===== ===== ===== =====
</TABLE>
Revenues
Revenues increased 57.5% from $28.8 million for the fiscal year ended
March 31, 1997 to $45.4 million for the fiscal year ended March 31, 1998. The
increase in revenues during the year primarily reflected strong sales growth in
GaAs HBT power amplifiers for cellular and PCS handsets, including shipments of
3.0 volt, high-efficiency GaAs HBT power amplifiers to Nokia for their latest
series of GSM-based handsets. Engineering revenues were 2.8% of total revenues
for the year ended March 31, 1998, compared to 3.3% for the previous year.
-26-
<PAGE> 28
For the fiscal year 1997 ended March 31, 1997, revenues totaled $28.8
million, up 202.7% over the previous fiscal year's revenues of $9.5 million.
This was primarily the result of an overall increase in the volume of products
shipped to existing and new customers, primarily in the cellular and PCS
markets. Sales of GaAs HBT products totaled approximately 85% of revenues during
fiscal year 1997 versus 58% during fiscal year 1996. Engineering revenues
accounted for 3.3% of total revenues during the fiscal year ended March 31,
1997, compared to 13.7% for the fiscal year ended March 31, 1996.
During fiscal year 1998, GaAs HBT products accounted for 81% of total
revenue while silicon bipolar, GaAs MESFET and engineering revenue accounted for
11%, 5% and 3% of revenues, respectively. For the year ended March 31, 1997,
GaAs HBT products accounted for 85% of revenue, GaAs MESFET 7%, silicon 5%, and
engineering revenues 3 %. This increase in silicon revenues is the result of a
heightened focus on that segment of the business, resulting in greater product
development. International shipments accounted for 50% of revenues for the year
ended March 31, 1998, compared to 42% for the fiscal year ended March 31, 1997..
The recent financial crisis in the Asian markets has had an adverse impact on
the Company's revenues, with sales to Korean customers accounting for
approximately $9.6 million or 21.3% of total revenues during fiscal year 1998.
The Company expects that this segment of its business will continue to decline
as a percentage of the Company's revenues during fiscal year 1999. This
degradation in the Korean business is attributable to order delays, potential
order cancellations and the tightening of credit. Although the Company currently
expects that any decrease in Korean sales will be offset by increased revenues
from other customers, no assurance can be given that this will occur or that the
economic instability in Asia will not have a material adverse effect on the
Company's business, financial condition, or results of operations.
Gross Profit
Gross profit margin decreased to 35.5% for the fiscal year ended March
31, 1998 from 45.1% for the fiscal year ended March 31, 1997. The decrease was
primarily attributable to a one-time revenue reduction and inventory write-down
due to packaging-related product returns totaling $4.3 million. If not for these
packaging problems, the gross profit margin for the year would have been 42.4%.
This differential is due primarily to lower average unit prices associated with
high volume contracts, and fluctuations in test yields for RFICs in the early
stages of production and the initial higher costs for newly developed power
amplifier packages.
For the fiscal year ended March 31, 1997, the Company's gross profit
margin increased to 45.1% from 21.5% for the fiscal year ended March 31, 1996.
The increase was primarily attributable to increased production volumes, in
conjunction with favorable product sales mix and pricing; a reduction in average
wafer costs due primarily to quantity discounts; and improved manufacturing,
assembly and test yields, which reduced scrap and lowered the per unit cost of
goods sold.
The Company historically has experienced significant fluctuations in
gross profit margins. The Company believes that its gross profit margins have,
in the past, been significantly affected by low manufacturing, assembly and test
yields, and there can be no assurance that future operating results will not be
similarly affected. Further, the Company sells products in intensely competitive
markets, and the Company believes that downward pressure on average selling
prices is occurring and will continue to occur in the future.
Research and Development
Research and development expenses for the fiscal year ended March 31,
1998 increased 41.8%, to $8.8 million compared to $6.2 million for the fiscal
year ended March 31, 1997. These increases were primarily attributable to
increased salaries and benefits related to headcount growth, and additional
spending on small tools and supplies and other components necessary for
prototype assembly. In addition, amortization and depreciation expenses for
equipment leases and purchases increased. As a percentage of revenues, research
and development expenses were 19.3% of total revenues for the year ended March
31, 1998 compared to 21.4% for the year ended March 31, 1997. The Company plans
to continue to make substantial investments in research and development, and
expects that such expenses will continue to increase in absolute dollar amounts
in future periods.
-27-
<PAGE> 29
For the fiscal year ended March 31, 1997, research and development
expenses increased 45.5% to $6.2 million from $4.2 million for the fiscal year
ended March 31, 1996. This increase was primarily attributable to increased
salaries and benefits related to increased headcount, and additional spending on
prototype assembly charges for both standard and custom-designed products. As a
result of revenue growth, research and development expenses as a percentage of
total revenues decreased from 44.6% for the year ended March 31, 1996 to 21.4%
for the year ended March 31, 1997.
Marketing and Selling
Marketing and selling expenses for the year ended March 31, 1998 were
$6.2 million compared to $3.8 million for the year ended March 31, 1997, an
increase of 65.4%. These increases were primarily attributable to increased
salaries, benefits and recruiting expenses related to increased headcount and to
increased travel and marketing literature expenses. Marketing and selling
expenses as a percentage of revenues for the year ended March 31, 1998 increased
to 13.7% from 13.1% for the year ended March 31, 1997.
For the fiscal year ended March 31, 1997, marketing and selling
expenses increased 106.9%, from $1.8 million for the year ended March 31, 1996
to $3.8 million. The increase was primarily attributable to increased
commissions reflecting the increased sales in fiscal year 1997, and, to a lesser
degree, increased salaries and benefits related to increased headcount and
additional spending on promotional activities. Marketing and selling expenses as
a percentage of revenues decreased from 19.1% for the year ended March 31, 1996
to 13.1% for the year ended March 31, 1997.
General and Administrative
General and administrative expenses for the year ended March 31, 1997
were $2.5 million, compared to $1.4 million for the year ended March 31, 1996,
an increase of 81.7%. These increases were attributable primarily to increased
salaries and benefits related to headcount increases. In addition, recruiting
and accounting expenses increased during the year, as the Company experienced
for the first time costs associated with being a public company. General and
administrative expenses as a percentage of revenues increased to 5.6% for the
year ended March 31, 1998 from 4.8% for the year ended March 31, 1997.
For the fiscal year ended March 31, 1997, general and administrative
expenses increased 13.5% from $1.2 million for the year ended March 31, 1996 to
$1.4 million. The increase was attributable primarily to increased salaries and
benefits related to headcount. As a percentage of revenues, general and
administrative expenses decreased from 12.9% for the year ended March 31, 1996
to 4.8% for the year ended March 31, 1997. This decrease was attributable
primarily to revenue growth.
Other Income, Net
Other income, net, for the year ended March 31, 1998 increased to
$882,000 from $114,000 for the year ended March 31, 1997. These increases
resulted from higher interest income earned on higher cash balances due
primarily to the investment of proceeds from the Company's initial public
offering.
For the year ended March 31, 1997, other income, net, increased to
$114,000 from $56,000 for the year ended March 31, 1996. This increase was
primarily attributable to higher interest income earned on higher average cash
balances during the year ended March 31, 1997.
Income Tax Expense
The Company did not provide for income taxes in the year ended March
31, 1998 as a result of the loss incurred during the year. The effective tax
rate for the year ended March 31, 1997 was 6.1%, which is less than the combined
federal and state statutory rate of approximately 40% due to the use of net
operating loss carryforwards. There was no provision for income taxes for the
year ended March 31, 1996 due to the losses incurred during that year.
-28-
<PAGE> 30
Liquidity and Capital Resources
The Company has funded its operations to date through sales of equity
and debt securities, bank borrowings, capital equipment leases and revenues from
product sales. The Company completed its initial public offering in June 1997,
and raised approximately $37.6 million, net of offering expenses. As of March
31, 1998, the Company had working capital of approximately $34.2 million,
including $16.4 million in cash and cash equivalents.
Cash used by operating activities for the fiscal year ended March 31,
1998 was $14.6 million. The cash used by operating activities was primarily
attributable to a net loss of $0.5 million combined with increases in
inventories of $15.7 million and accounts receivable of $4.6 million, partially
offset by an increase in accounts payables of $5.2 million. The $1.9 million in
cash used by operating activities for the year ended March 31, 1997 was
attributable primarily to a $6.2 million increase in inventories, partially
offset by increases in accounts payable and accrued liabilities of $1.8 million
and $0.7 million respectively, and net income of $1.6 million.
The $19.9 million of cash used by investing activities for the year
ended March 31, 1998 was related primarily to expenditures associated with the
construction of the Company's GaAs HBT wafer fabrication facility, and for wafer
fabrication and general corporate capital equipment requirements. The $4.8
million of cash used by investing activities for the year ended March 31, 1997
was used for the purchase of capital equipment.
The $48.6 million of cash provided by financing activities for the year
ended March 31, 1998 related primarily to the issuance of common stock in the
Company's initial public offering, totaling $37.6 million, as well as a
reduction in restricted cash of $12.4 million set aside for the purchase of
wafer fabrication-related expenditures. The $2.4 million of cash provided by
financing activities for the year ended March 31, 1997 related primarily to the
net proceeds from long-term debt and proceeds from the issuance of preferred
stock offset by an increase in restricted cash. The Company currently maintains
major credit lines at its commercial banks, and in addition, has issued a
warrant to TRW to purchase up to 1,000,000 shares of the Company's common stock
at an exercise price of $10.00 per share.
The Company expects that it may need to raise additional equity or debt
financing during fiscal year 1999 to finance a portion of the cost of the new
fabrication facility and other corporate requirements. There can be no assurance
that any additional equity financing will not be dilutive to the holders of the
Company's common stock. Further, there can be no assurance that additional
equity or debt financing, if required, will be available on acceptable terms or
at all.
Year 2000 Issues
The Company has evaluated all internal software and all current
products against anticipated Year 2000 concerns, and believes that its products
and business will not be substantially affected by the advent of the year 2000
and that it has no significant exposure to contingencies related to the Year
2000 issue for the products it has sold. The Company has initiated a project to
upgrade all internal software to further ensure that all aspects of its business
will be Year 2000-compliant. The Company believes that this transition, which is
expected to be completed by August 1, 1998, will have no effect on the Company's
customers and will not require any material expenditures. Although the Company
believes its planning efforts are adequate to address its Year 2000 concerns,
there can be no guarantee that this will be the case or that the systems of
other companies on which the Company's systems and operations rely will be made
compliant on a timely basis and will not have any material adverse effect on the
Company.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 8. Financial Statements and Supplemental Data
The report of independent auditors and financial statements are set
forth below (see Item 14(a)(1) for list of financial statements and financial
statement schedules):
-29-
<PAGE> 31
Audited Financial Statements
RF Micro Devices, Inc.
Years ended March 31, 1998 and 1997
with Report of Independent Auditors
<PAGE> 32
RF Micro Devices, Inc.
Audited Financial Statements
Years ended March 31, 1998 and 1997
Contents
Report of Independent Auditors................................................1
Audited Financial Statements
Balance Sheets................................................................2
Statements of Operations......................................................4
Statements of Redeemable Convertible Preferred Stock and Shareholders'
Equity....................................................................5
Statements of Cash Flows......................................................6
Notes to Financial Statements.................................................7
<PAGE> 33
Report of Independent Auditors
Board of Directors
RF Micro Devices, Inc.
We have audited the balance sheets of RF Micro Devices, Inc. as of March 31,
1998 and 1997 and the related statements of operations, redeemable convertible
preferred stock and shareholders' equity and cash flows for each of the three
years in the period ended March 31, 1998. 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 generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the financial position of RF Micro Devices, Inc. at March
31, 1998 and 1997 and the results of its operations and its cash flows for each
of the three years in the period ended March 31, 1998, in conformity with
generally accepted accounting principles. 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 24, 1998
<PAGE> 34
RF Micro Devices, Inc.
Balance Sheets
<TABLE>
<CAPTION>
March 31,
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 16,360 $ 2,330
Accounts receivable, less allowance of $489 and
$510 (Note 2) 6,993 2,401
Inventories (Note 3) 24,869 9,216
Other current assets 81 17
-------- --------
Total current assets 48,303 13,964
Property and equipment (Note 4):
Land 1,934 --
Machinery and equipment 19,196 2,999
Furniture, fixtures and improvements 1,232 692
Computer equipment and software 1,454 805
-------- --------
23,816 4,496
Less accumulated depreciation (1,966) (1,041)
-------- --------
21,850 3,455
Construction in progress 14,917 1,233
Deposits on equipment 4,541 1,538
-------- --------
Total property and equipment 41,308 6,226
Cash restricted for capital additions -- 12,358
Other assets 551 515
Technology license (Note 14) 3,202 3,202
-------- --------
Total assets $ 93,364 $ 36,265
======== ========
</TABLE>
2
<PAGE> 35
<TABLE>
<CAPTION>
March 31,
1998 1997
-------- --------
(In thousands, except share amounts)
<S> <C> <C>
Liabilities and shareholders' equity (deficiency)
Current liabilities:
Accounts payable $ 10,273 $ 5,108
Accrued liabilities 754 699
Income taxes payable -- 49
Line of credit (Note 5) -- 350
Current maturities of long-term debt (Note 5) -- 178
Current obligations under capital leases (Note 4) 3,050 267
-------- --------
Total current liabilities 14,077 6,651
Long-term debt, less current maturities (Note 5) -- 117
Obligations under capital leases, less current maturities (Note 4) 12,524 411
Note and accrued interest payable to shareholder (Note 6) -- 10,301
-------- --------
26,601 17,480
Redeemable convertible preferred stock (Note 10) -- 28,257
Shareholders' equity (deficiency):
Preferred stock, no par value; 5,000,000 shares authorized; no
shares issued and outstanding -- --
Common stock, no par value; 50,000,000 shares authorized;
16,123,961 and 3,286,010 shares issued and outstanding,
respectively 80,224 2,960
Additional paid-in-capital -- 550
Deferred compensation (225) (269)
Accumulated deficit (13,236) (12,713)
-------- --------
Total shareholders' equity (deficiency) 66,763 (9,472)
-------- --------
Total liabilities and shareholders' equity $ 93,364 $ 36,265
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 36
RF Micro Devices, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Year ended March 31,
1998 1997 1996
-------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C>
Revenues:
Product sales $ 44,095 $ 27,852 $ 8,212
Engineering revenue 1,255 950 1,303
-------- -------- --------
Total revenue 45,350 28,802 9,515
Costs and expenses:
Cost of goods sold 29,246 15,826 7,471
Research and development 8,761 6,178 4,245
Marketing and selling 6,220 3,760 1,817
General and administrative 2,528 1,391 1,226
-------- -------- --------
Total costs and expenses 46,755 27,155 14,759
-------- -------- --------
Income (loss) from operations (1,405) 1,647 (5,244)
Interest expense (184) (399) (81)
Interest income 1,066 513 137
-------- -------- --------
Income (loss) before income taxes (523) 1,761 (5,188)
Income tax expense -- (109) --
-------- -------- --------
Net income (loss) $ (523) $ 1,652 $ (5,188)
======== ======== ========
Net earnings (loss) per share:
Basic $ (0.04) $ 0.59 $ (8.87)
======== ======== ========
Diluted $ (0.04) $ 0.15 $ (8.87)
======== ======== ========
Shares used in per share calculation:
Basic 13,509 2,778 585
======== ======== ========
Diluted 13,509 11,215 585
======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 37
RF Micro Devices, Inc.
Statements of Redeemable Convertible Preferred Stock and Shareholders' Equity
(In Thousands)
<TABLE>
<CAPTION>
Redeemable Convertible Preferred Stock
----------------------------------------------------------------
Class A-1 Class A-2 Class B Class C
Preferred Preferred Preferred Preferred
Stock Stock Stock Stock Total
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1995 $ 1,500 $ 1,750 $ 9,075 $ - $ 12,325
Issuance of Class C preferred stock - - - 11,000 11,000
Net loss - - - - -
----------------------------------------------------------------
Balance, March 31, 1996 1,500 1,750 9,075 11,000 23,325
Issuance of common stock - - - - -
Issuance of warrant - - - - -
Issuance of Class C preferred stock - - - 4,932 4,932
Deferred compensation related to
grant of stock options - - - - -
Amortization of deferred compensation - - - - -
Net income - - - - -
----------------------------------------------------------------
Balance, March 31, 1997 1,500 1,750 9,075 15,932 28,257
Conversion of preferred stock (1,500) (1,750) (9,075) (15,932) (28,257)
Conversion of note payable - - - - -
Initial public offering of common stock - - - - -
Exercise of stock options and warrants - - - - -
Issuance of common stock - - - - -
Amortization of deferred compensation - - - - -
Net loss - - - - -
----------------------------------------------------------------
Balance, March 31, 1998 $ - $ - $ - $ - $ -
================================================================
</TABLE>
<TABLE>
<CAPTION>
Shareholders' Equity
------------------------------------------------------------------------
Additional
Common Paid-in Deferred Accumulated
Stock Capital Compensation Deficit Total
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1995 $ 8 $ - $ - $ (9,177) $ (9,169)
Issuance of Class C preferred stock - - - - -
Net loss - - - (5,188) (5,188)
------------------------------------------------------------------------
Balance, March 31, 1996 8 - - (14,365) (14,357)
Issuance of common stock 2,952 - - - 2,952
Issuance of warrant - 250 - - 250
Issuance of Class C preferred stock - - - - -
Deferred compensation related to
grant of stock options - 300 (300) - -
Amortization of deferred compensation - - 31 - 31
Net income - - - 1,652 1,652
------------------------------------------------------------------------
Balance, March 31, 1997 2,960 550 (269) (12,713) (9,472)
Conversion of preferred stock 28,257 - - - 28,257
Conversion of note payable 10,401 - - - 10,401
Initial public offering of common stock 38,172 (550) - - 37,622
Exercise of stock options and warrants 286 - - - 286
Issuance of common stock 148 - - - 148
Amortization of deferred compensation - - 44 - 44
Net loss - - - (523) (523)
------------------------------------------------------------------------
Balance, March 31, 1998 $ 80,224 $ - $ (225) $ (13,236) $ 66,763
========================================================================
</TABLE>
See accompanying notes.
5
<PAGE> 38
<TABLE>
<CAPTION>
Year ended March 31,
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ (523) $ 1,652 $ (5,188)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation 935 502 245
Accrued interest converted to preferred stock -- -- 31
Gain on disposal of equipment (11) -- --
Amortization of deferred compensation 44 31 --
Changes in operating assets and liabilities:
Accounts receivable (4,592) (102) (1,947)
Inventories (15,653) (6,202) (1,781)
Other assets (100) (400) (125)
Accounts payable 5,165 1,832 2,525
Accrued liabilities 155 698 48
Income tax payable (49) 49 --
-------- -------- --------
Net cash used in operating activities (14,629) (1,940) (6,192)
Investing activities:
Purchases of property and equipment (20,020) (4,793) (686)
Proceeds from sale of equipment 126 -- --
-------- -------- --------
Net cash used in investing activities (19,894) (4,793) (686)
Financing activities:
Net proceeds from Initial Public Offering 37,622 -- --
Proceeds from issuance of common stock 148 -- --
Proceeds from exercise of stock options and warrants 286 -- --
Proceeds from bridge financing -- -- 1,500
Repayment of capital lease obligations (1,215) (286) (109)
Proceeds from issuance of redeemable preferred stock -- 4,932 9,469
(Decrease)increase in line of credit (350) -- 350
Proceeds from note payable to shareholder -- 10,000 --
Proceeds from long-term debt -- 273 128
Decrease(increase) in cash restricted for capital 12,357 (12,358) --
additions
Repayments of long-term debt (295) (136) (45)
-------- -------- --------
Net cash provided by financing activities 48,553 2,425 11,293
-------- -------- --------
Net increase(decrease) in cash 14,030 (4,308) 4,415
Cash and cash equivalents at beginning of year 2,330 6,638 2,223
-------- -------- --------
Cash and cash equivalents at end of year $ 16,360 $ 2,330 $ 6,638
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 441 $ 134 $ 81
======== ======== ========
Cash paid during the year for income taxes $ 61 $ 60 $ --
======== ======== ========
Noncash investing and financing activities:
Capital lease obligations incurred for new equipment $ 14,064 $ 826 $ 139
======== ======== ========
Conversion of bridge financing notes payable to
preferred stock $ -- $ -- $ 1,500
======== ======== ========
</TABLE>
6
<PAGE> 39
RF Micro Devices, Inc.
Notes to Financial Statements
March 31, 1998
1. Company Information
The Company designs, develops, manufactures and markets proprietary analog radio
frequency and intermediate frequency integrated circuits ("RFICs") for wireless
applications. These applications include cellular and PCS handsets and
basestations, cordless telephones, wireless local loop handsets, wireless
interactive toys, wireless security systems, wireless data networks, pagers and
remote meter reading systems.
The Company addresses the various wireless markets by a product delivery
strategy called Optimum Technology Matching (R). This product delivery strategy
utilizes three distinct semiconductor process technologies including gallium
arsenide heterojunction bipolar transistor ("GaAs HBT"), silicon bipolar
transistor, and gallium arsenide metal semiconductor field effect transistor. 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
commercial wireless applications operating at frequencies less than 10 GHz.
The Company and a third party developer have completed construction of a high
volume GaAs HBT manufacturing facility to address the various markets for this
technology. Currently, the Company projects commercial production from this
facility will begin in the summer of 1998. Until then, the Company will purchase
all of its GaAs HBT parts exclusively from TRW.
In June 1997, the Company completed an initial public offering of no par value
common stock (the "Offering"). The Offering consisted of 3,455,550 shares
offered by the Company and 37,000 shares offered by selling shareholders. The
Offering price was $12 per common share resulting in net offering proceeds of
approximately $37,600,000. Simultaneously with the Offering, the redeemable
convertible preferred stock and the $10 million subordinated convertible note
payable to shareholder of the Company were automatically converted into
7,954,320 and 1,111,111 shares of common stock, respectively.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
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.
7
<PAGE> 40
RF Micro Devices, Inc.
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
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 15 years.
The Company is capitalizing the costs of bringing its wafer fabrication facility
to an operational state. The capitalized expenses are included in Construction
in Progress in the accompanying balance sheet. Once the wafer fabrication
facility is completed, has been certified by TRW and begins operation, the
capitalized expenses will be amortized over a 15-year period. Equipment used in
the wafer fabrication facility will be depreciated over a 6-year life once the
facility commences operations.
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 28, 1998, March 29, 1997 and March
30, 1996 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.
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.
8
<PAGE> 41
RF Micro Devices, Inc.
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Risks and Uncertainties
Pursuant to the strategic alliance with TRW, (Note 14), TRW has granted to the
Company certain licenses to produce certain GaAs HBT products. The Company is
constructing a wafer fabrication facility and has begun testing the
manufacturing of its own GaAs HBT products covered by such licenses. These
licenses may be terminated by TRW if the fabrication facility is not operational
by December 31, 1998, and may be made non-exclusive by TRW if the Company does
not meet certain revenue goals.. A decision by TRW to terminate the license
agreements or 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 agreement.
Until the Company is able to internally produce GaAs HBT products, it will
continue to purchase all such products from TRW. Sales of GaAs HBT products
represented 81%, 85% and 58% of the Company's total revenue in 1998, 1997 and
1996, respectively. Failure by TRW to continue to supply adequate quantities of
product to the Company or the inability to successfully transfer the GaAs HBT
technology to the Company in a timely manner would have a material adverse
effect on the Company.
The demand for certain of the Company's products has exceeded supply capacity
and consequently, in certain instances, the Company has been unable to meet
requested delivery times and quantity requirements. Continuation of capacity
limitations may cause existing or potential customers to develop other sources
of supply.
Use of Estimates
The preparation of 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 and warranty reserves. Actual results could differ materially from
those estimates.
9
<PAGE> 42
RF Micro Devices, Inc.
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Sales and Accounts Receivable
The Company operates in a single industry 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,
1998 1997 1996
---------------- ------------------ -----------------
Customer 1 42% - -
Customer 2 13% - -
Customer 3 - - 12%
Customer 4 - 23% -
Customer 5 - 32% 31%
Additionally, 67% and 23% of the Company's accounts receivable were due from
these significant customers at March 31, 1998 and 1997, respectively.
Sales to customers by geographic region are summarized as follows:
Year ended March 31,
1998 1997 1996
----------------- ----------------- -----------------
USA 50% 58% 76%
Asia 24% 33% 12%
Canada 3% 2% 10%
Europe 23% 7% 2%
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.
10
<PAGE> 43
RF Micro Devices, Inc.
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Research and Development
The Company charges all research and development costs to expense as incurred.
Net Income (Loss) Per Common Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities, and only reflects actual common shares outstanding. Diluted earnings
per share is similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to SFAS 128 requirements.
In addition, in February 1998, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 98 ("SAB 98"), which revised the guidance for
earnings per share calculations in an IPO. As a result of SAB 98, the Company
restated its 1997 earnings per share of $0.14 as presented in its S-1
registration statement, by excluding the effect of cheap stock, which was
included in the calculation of weighted shares outstanding for the period prior
to the public offering.
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.
11
<PAGE> 44
RF Micro Devices, Inc.
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Stock-Based Compensation
The Company accounts for stock options in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Under APB No. 25, no compensation
expense is recognized for stock options issued to employees at fair value. For
stock options granted at exercise prices below the deemed fair value, the
Company records deferred compensation expense for the difference between the
exercise price of the shares and the deemed fair market value. The 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 No. 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 No. 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 12).
Impact of Recently Issued Accounting Standards
In June 1997, FASB issued Statement No. 130, "Reporting Comprehensive Income"
("SFAS 130") which is effective for fiscal years beginning after December 15,
1997. SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in financial statements. The Company will adopt SFAS
130 in the first quarter of fiscal year 1999 and will provide the required
financial statement disclosures. The application of the new rules is not
expected to have a material impact on the Company's financial statements.
12
<PAGE> 45
RF Micro Devices, Inc.
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131") which is effective for
fiscal years beginning after December 15, 1997. SFAS 131 changes the way public
companies report segment information in annual financial statements and also
requires those companies to report selected segment information in interim
financial statements to shareholders. SFAS 131 also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The Company will adopt SFAS 131 in 1998 and the adoption may result
in additional disclosures. The application of the new rules is not expected to
have a significant impact on the Company's financial results of operations .
3. Inventories
The components of inventories are as follows (in thousands):
Year ended March 31,
1998 1997
----------------------------------
Raw materials $ 6,356 $ 2,937
Work in process 7,190 2,830
Finished goods 14,036 4,296
----------------------------------
27,582 10,063
Inventory allowances (2,713) (847)
----------------------------------
Total inventories $ 24,869 $ 9,216
==================================
4. Leases
The Company leases certain equipment under capital and operating leases. The
table below depicts leased equipment balances included in property and equipment
(in thousands):
March 31,
1998 1997
------------------------------------
Machinery and equipment $ 1,170 $ 763
Accumulated amortization (249) (375)
------------------------------------
$ 921 $ 388
====================================
The lease information shown above is for assets not assoicated with the new
wafer fabrication facility. Amortization of equipment leases for the wafer
fabrication facility will commence once the facility becomes operational. RF
Micro Devices, Inc.
13
<PAGE> 46
RF Micro Devices, Inc.
Notes to Financial Statements (continued)
4. Leases (continued)
Capital lease amortization totaling approximately $163,000, $159,000 and $77,000
is included in depreciation expense for the years ended March 31, 1998, 1997 and
1996, respectively.
Minimum future lease payments under noncancelable capital and operating leases
as of March 31, 1998 are (in thousands):
Capital Operating
-----------------------------------
1999 $ 4,513 $ 3,046
2000 4,364 2,608
2001 4,159 1,899
2002 4,064 1,441
2003 2,353 1,439
Thereafter - 10,801
-----------------------------------
Total minimum payments 19,453 $21,234
==================
Less interest (3,879)
-----------------
Present value of net minimum payments 15,574
Less current portion (3,050)
-----------------
Long-term portion $ 12,524
=================
Rent expense under operating leases, including building and equipment was
approximately $2,233,000, $660,000 and $255,000 for the years ended March 31,
1998, 1997 and 1996, respectively.
Facility Construction and Equipment
The Company is committed to leasing from a third party real estate developer a
wafer fabrication facility which is under construction adjacent to its existing
facility. The first of the two phases has been completed at March 31, 1998. The
second phase is budgeted at approximately $30 million. The Company's lease
arrangement with the developer is based on total estimated cost to construct the
facility. The term of this operating lease is 15 years with the option to renew
for two separate 10 year periods. Lease payments for the facility and the
related equipment began in September 1997 and January 1998, respectively. Total
future minimum lease payments
14
<PAGE> 47
RF Micro Devices, Inc.
Notes to Financial Statements (continued)
4. Leases (continued)
of approximately $18.0 million related to the facility operating lease and
approximately $18.9 million related to the equipment capital leases, based on
costs incurred to date, are included in the above table. Additionally,
approximately $314,600 of interest expense related to facility equipment under
capital leases was capitalized in 1998. The developer is providing partial
construction financing for the facility. For the remainder of the estimated
construction costs, the Company is obligated to put up cash deposits with the
developer to fund the construction.
In 1997, in connection with a financing commitment related to the construction
of the facility, the Company issued a warrant to purchase 41,322 shares of its
common stock at an exercise price of $9.00 per share to an equipment financing
company.
The Company has available lease financing commitments with several finance
companies totaling approximately $7.7 million at March 31, 1998.
5. Line of Credit and Long-Term Debt
The Company maintains a $10 million revolving working capital line of credit.
The outstanding balance is limited to an amount equal to 80% of eligible
accounts receivable. The line commitment expires on December 18, 1998. At March
31, 1998, there was no outstanding balance on the line of credit. At March 31,
1997 the outstanding balance was $350,000. This line bears interest at the prime
rate and is collateralized by substantially all of the Company's assets. The
agreement contains provisions to allow the Company to utilize the line for
letters of credit and foreign exchange contracts, none of which are outstanding
for any of the periods presented.
The Company also maintains a $5 million equipment line of credit. Borrowings on
this line are converted to term loans, repayable in 48 equal monthly
installments at the time the draw is made. At March 31, 1998, and 1997 the
outstanding balance on the equipment line notes was approximately $0 and
$295,000, respectively. These borrowings bear interest at the prime rate plus
0.25% and are collateralized by substantially all of the Company's assets. The
loan agreements contain restrictions which, among other things, require
maintenance of certain financial ratios, liquidity and net worth and prohibit
the payment of dividends.
15
<PAGE> 48
RF Micro Devices, Inc.
Notes to Financial Statements (continued)
6. Note Payable to Shareholder
The $10,000,000 subordinated convertible note payable to shareholder bearing
interest at 6% converted into 1,111,111 shares of common stock at a conversion
rate of $9.00 per share upon completion of the Offering in June 1997. Accrued
interest on this note of $400,822 was forgiven by the holder and was included in
the conversion upon the completion of the Offering.
7. Income Taxes
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 deferred tax liabilities and assets are as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
1998 1997
-------------------------------
<S> <C> <C>
Deferred tax liabilities:
Accumulated depreciation $ 387 $ 110
Deferred tax assets:
Net operating loss carryforwards 1,672 1,274
Research and experimental credit carryforwards 1,044 741
Research and development costs 1,762 2,629
Allowance for bad debts 93 200
Software costs 99 109
Warranty reserve 86 53
Inventory valuation 1,109 331
Alternative minimum tax credit carryforwards 109 109
Other 224 73
-------------------------------
Total deferred tax assets 6,198 5,519
Deferred tax asset valuation allowance (5,811) (5,409)
-------------------------------
Net deferred tax assets 387 110
-------------------------------
Net deferred taxes $ - $ -
===============================
</TABLE>
16
<PAGE> 49
RF Micro Devices, Inc.
Notes to Financial Statements (continued)
7. Income Taxes (continued)
A reconciliation of the provision for income taxes, which consists only of
federal alternative minimum tax in 1997, to income tax expense computed by
applying the statutory federal income tax rate to pre-tax earnings (loss) at
March 31, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
March 31
----------------------------------------------------------------
1998 1997
----------------------------------------------------------------
Amount Percentage Amount Percentage
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Income tax expense at statutory federal
rate $ (177) (34%) $ 614 34%
Increase (decrease) resulting from:
Utilization of net loss carryforwards
177 34% (614) (34%)
Alternative minimum tax - - 109 6%
----------------------------------------------------------------
$ - - $ 109 6%
================================================================
</TABLE>
At March 31, 1998, the Company had federal net operating loss carryforwards and
research and experimental credit carryforwards of approximately $4,275,000 and
$1,044,000, respectively, for income tax purposes. The tax benefits of these
items are reflected in the accompanying table of deferred tax assets and
liabilities. If not used, these carryforwards begin to expire in 2010. State net
operating loss carryforwards begin to expire in the year 2000. U.S. tax rules
impose limitations on the use of net operating losses following certain changes
in ownership. If such a change occurs, the limitation could reduce the amount of
these benefits that would be available to offset future taxable income each
year, starting with the year of ownership change.
17
<PAGE> 50
RF Micro Devices, Inc.
Notes to Financial Statements (continued)
8. 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):
<TABLE>
<CAPTION>
Year Ended March 31,
1998 1997 1996
-------- ------- ---------
<S> <C> <C> <C>
Numerator for basic and diluted net income
(loss) per share:
Net income (loss) $ (523) $ 1,652 $ (5,188)
Denominator:
Denominator for basic net income (loss) per share -
weighted average shares 13,509 2,778 585
Effect of dilutive securities:
Convertible preferred stock -- 7,802 --
Employee stock options -- 635 --
-------- ------- ---------
Denominator for diluted net income (loss) per
share adjusted weighted average
shares and assumed conversions
13,509 11,215 585
Basic net income (loss) per share $ (0.04) $ 0.59 $ (8.87)
Diluted net income (loss) per share $ (0.04) $ 0.15 $ (8.87)
</TABLE>
9. 401(k) Plan
Each employee is eligible to participate in the Company's fully qualified 401(k)
plan after three months of service. An employee may invest a maximum of 15% of
pretax earnings in the plan. Employer contributions to the plan are made at the
discretion of the Company and its Board of Directors. An employee is fully
vested in the employer contribution portion of the plan after completion of five
continuous years of service. The Company contributed $97,602 during 1998. No
contributions to the plan were made during 1997 or 1996.
18
<PAGE> 51
RF Micro Devices, Inc.
Notes to Financial Statements (continued)
10. Redeemable Convertible Voting Preferred Stock
The Company's 975,000 shares of no par Class A-1 redeemable convertible
preferred stock, 1,034,091 shares of no par Class A-2 redeemable convertible
preferred stock, 3,300,000 shares of no par Class B redeemable convertible
preferred stock, and 2,645,229 shares of no par Class C redeemable convertible
preferred stock automatically converted into 7,954,320 shares of common stock on
a one-for-one basis upon completion of the Offering in June , 1997.
11. Employee Stock Purchase Plan
The Company has adopted the Employee Stock Purchase Plan (ESPP), which qualifies
as an "employee stock purchase plan" under Section 423 of the Code. All regular
full-time employees of the Company (including officers) and all other employees
who meet the eligibility requirements of the plan, may participate in the ESPP.
An aggregate of 500,000 shares of common stock have been reserved for offering
under the ESPP and are available for purchase thereunder, subject to
anti-dilution adjustments in the event of certain changes in the capital
structure of the Company. The Company makes no cash contributions to the ESPP,
but bears the expenses of its administration.
12. Stock Options
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 provides for
the granting of 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 permits the granting of both incentive stock options and
nonqualified stock options. The aggregate number of shares of common stock that
may be issued pursuant to options granted under the 1992 Option Plan may not
exceed 1,426,000 shares, subject to adjustment upon occurrence of certain events
affecting the Company's capitalization.
19
<PAGE> 52
RF Micro Devices, Inc.
Notes to Financial Statements (continued)
12. Stock Options (continued)
1997 Key Employees' Stock Option Plan
The Company adopted the 1997 Key Employees' Stock Option Plan (the "1997 Option
Plan"), which provides for the grant 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 1,300,000
shares, subject to adjustment in the event of certain events affecting the
Company's capitalization.
Directors' Option Plan
During 1997, the Company adopted the Directors' 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 200,000
shares of common stock have been reserved for issuance under this plan, subject
to adjustment for certain events affecting the Company's capitalization. In
1998, the Company issued 40,000 options to eligible participants under the plan.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options. 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 under 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, 1998 and 1997, respectively: risk-free interest rate of 5.66%
and 6%, no expected dividends, a volatility factor of .877 and .70 and a
weighted average expected life of the options of five years.
20
<PAGE> 53
RF Micro Devices, Inc.
Notes to Financial Statements (continued)
12. Stock Options (continued)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for per share information):
<TABLE>
<CAPTION>
Year ended March 31,
1998 1997 1996
-------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ (523) $ 1,652 $ (5,188)
Pro forma net loss $ (876) $ 1,608 $ (5,193)
Pro forma basic net (loss) income per share
$ (0.06) $ 0.58 $ (8.88)
Pro forma diluted net (loss) income per
share $ (0.06) $ 0.14 $ (8.88)
</TABLE>
21
<PAGE> 54
RF Micro Devices, Inc.
Notes to Financial Statements (continued)
12. Stock Options (continued)
A summary of the Company's stock option plan activity follows:
<TABLE>
<CAPTION>
Number of Shares Option Prices
------------------------------ -------------------------------------
Available for Options Per Share
Grant Outstanding Range Total
---------- ---------- ----------------- -----------
<S> <C> <C> <C> <C>
March 31, 1995 311,084 341,416 $ 0.15 - $ .275 $ 60,383
Reserved -- -- -- --
Granted (255,040) 255,040 $ 0.275 - $ 0.91 160,675
Exercised -- -- -- --
Canceled 2,250 (2,250) $ 0.15 - $ .275 (525)
Expired -- -- -- --
---------- ---------- ----------------- -----------
March 31, 1996 58,294 594,206 $ 0.15 - $ .91 220,533
Reserved 773,500 -- -- --
Granted (463,060) 463,060 $ 0.91 - $ 9.00 1,944,852
Exercised -- (18,080) $ 0.15 - $ 0.275 (2,839)
Canceled 7,850 (7,850) $ 0.15 - $ 0.91 (2,370)
Expired -- -- -- --
---------- ---------- ----------------- -----------
March 31, 1997 376,584 1,031,336 $ 0.15 - $ 9.00 2,160,176
Reserved 1,300,000 -- -- --
Granted (293,575) 293,575 $10.31 - $23.13 3,789,262
Exercised -- (238,052) $ 0.15 - $ 6.05 (66,491)
Canceled 14,720 (14,720) $ 0.15 - $18.88 (145,101)
Expired -- -- -- --
========== ========== ================= ===========
March 31, 1998 1,397,729 1,072,139 $ 0.15 - $23.13 $ 5,734,846
========== ========== ================= ===========
</TABLE>
Exercise prices for options outstanding as of March 31, 1998, ranged from $0.15
to $23.13. The weighted average remaining contractual life of outstanding
options is 8.24 years. The weighted average exercise price of outstanding
options at March 31, 1998 is $5.52. At March 31, 1998 and 1997, options to
purchase 252,689 and 268,013 shares of common stock were exercisable,
respectively.
22
<PAGE> 55
RF Micro Devices, Inc.
Notes to Financial Statements (continued)
12. Stock Options (continued)
The following table summarizes in more detail information regarding the
Company's stock options outstanding at March 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average
Options Remaining Options
Exercise Price Outstanding Contractual Life Exercisable
- - ---------------------------- -------------------------- -------------------------- ---------------------------
<S> <C> <C> <C>
$ 0.15 82,601 4.97 years 70,222
0.275 136,347 6.95 years 59,534
0.91 171,981 7.83 years 54,881
1.20 151,400 8.45 years 18,700
6.50 220,800 8.69 years 44,000
9.00 26,760 8.87 years 5,352
10.31 - 12.00 172,750 9.56 years -
12.56 - 15.94 60,000 9.79 years -
16.00 - 18.88 36,000 9.41 years -
19.50 - 23.13 13,500 9.32 years -
-------------------------- ---------------------------
1,072,139 252,689
========================== ===========================
</TABLE>
13. Common Stock Reserved for Future Issuance
At March 31, 1998, the Company had reserved a total of 4,200,541 of its
authorized 50,000,000 shares of common stock for future issuance as follows:
Outstanding stock options 1,072,139
Possible future issuance under stock option plans 1,397,729
Outstanding warrants issued to shareholders 1,041,322
Non-employee directors' option plan 160,000
Employee stock purchase plan 488,028
Possible future issuance related to lease agreements 41,323
-------------
Total shares reserved 4,200,541
=============
23
<PAGE> 56
RF Micro Devices, Inc.
Notes to Financial Statements (continued)
14. Related Party Transactions
In connection with the bridge financing in 1996 which was subsequently converted
to preferred stock, the Company issued to a shareholder warrants that entitle
the holder to purchase 66,946 shares of common stock at exercise prices ranging
from $2.75 to $6.05 per share. These warrants were exercised in March, 1998.
On June 6, 1996, the Company entered into a strategic alliance with TRW.
Pursuant to this alliance, the Company sold 826,445 shares of its Class C
preferred stock to TRW for net cash proceeds of $4,931,703.
Additionally, TRW granted to the Company a worldwide right and license to make,
have made, use and sell the products manufactured in the new wafer fabrication
facility currently under construction. This right and license will become
exclusive and perpetual upon completion of the condition discussed below. In
consideration of the license, the Company issued to TRW 2,683,930 shares of
restricted common stock valued at $2,952,323. The common stock is restricted in
that it is non-voting and non-transferable. These restrictions will lapse when
the Company successfully utilizes the TRW technology in its manufacturing
process in the fabrication facility. If by December 31, 1998, the wafer foundry
is not operational, as defined in the agreement, TRW has the right to revoke the
license and the Company correspondingly has the right to redeem as much as
one-half of the TRW shares, for a nominal amount. 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 the date on which the Company's wafer fabrication facility
becomes operational; during the first year, $30 million; during the second year,
$65 million; and during the third year, $125 million.
In connection with the licensing agreement, the Company issued a warrant to TRW
to purchase up to 1,000,000 shares of the Company's common stock at an exercise
price of $10.00 per share. The exercise price is subject to adjustment in the
event of certain changes, as defined by the agreement, affecting the Company's
capitalization. The TRW warrant first becomes exercisable on the date that the
Company's wafer facility becomes operational and thereafter must be exercised
before the first to occur of (i) the second anniversary of such date and (ii) 90
days after the Company has provided notice to TRW that the current market price
of the Company's common stock is, and has been for at least 20 consecutive days,
greater than $12.00 per share. If the Company's wafer facility does not become
operational by December 31, 1998, the warrant will terminate in full. A value of
$250,000 has been recorded for this warrant.
24
<PAGE> 57
RF Micro Devices, Inc.
Notes to Financial Statements (continued)
14. Related Party Transactions (continued)
The restricted common stock and the related warrant have an aggregate value of
$3,202,323 which represents the cost of the Company's right to use the
technology and accordingly, a related intangible asset has been recorded on the
Company's balance sheet. Amortization of this intangible asset will be provided
on a straight-line basis over a 15- year estimated useful life and will commence
once the wafer fabrication facility becomes operational. Should the technology
license be revoked or made nonexclusive under the circumstances described above,
a resulting charge to income would be recorded to recognize impairment, if any,
of its value.
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 RFIC's. The estimated minimum annual purchases are $35.0 million, $23.9
million, and $14.9 million in calendar years 1998, 1999 and 2000 respectively.
25
<PAGE> 58
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 the Registrant's
definitive proxy statement relating to its Annual Meeting of Shareholders to be
held on July 28, 1998 under the captions "Executive Officers," "Board 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 the Registrant's
definitive proxy statement relating to its Annual Meeting of Shareholders to be
held on July 28, 1998 under the caption "Executive 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 the Registrant's
definitive proxy statement relating to its Annual Meeting of Shareholders to be
held on July 28, 1998 under the caption "Security Ownership of Management and
Certain Beneficial Owners," which is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions
Information required by this Item is contained in the Registrant's
definitive proxy statement relating to its Annual Meeting of Shareholders to be
held on July 28, 1998 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 financial statements of RF Micro Devices, Inc. included
in this Annual Report on Form 10-K are included in Item 8:
i. Balance Sheets as of March 31, 1998 and 1997.
ii. Statement of Operations for the years ended March 31, 1998,
1997 and 1996.
iii. Statements of Shareholders' Equity for the years ended March
31, 1998, 1997 and 1996.
iv. Statements of Cash Flows for the years ended March 31, 1998,
1997 and 1996.
v. Notes to the Financial Statements for the years ended March
31, 1998, 1997, and 1996.
(a)(2) Schedule II -- 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 financial
statements or the notes thereto included herein.
<PAGE> 59
(a)(3) Exhibits
Exhibit No. Description
3.1 Articles of Incorporation of RF Micro Devices, Inc.*
3.2 Bylaws of RF Micro Devices, Inc.*
4.1 Specimen Certificate of Common Stock*
4.2 Warrant, dated June 6, 1996, for the purchase of up to
1,000,000 shares of Common Stock*
4.3 Warrant, dated February 25, 1997, for the purchase of up to
41,322 shares of Common Stock*
4.4 Loan and Security Agreement, dated March 29, 1995, and Loan
Modification Agreement, dated December 20, 1996, between RF
Micro Devices, Inc. and Silicon Valley Bank*
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.*+
10.2 Form of Stock Option Agreement (1992 Stock Option Plan)*+
10.3 1997 Key Employees' Stock Option Plan of RF Micro Devices,
Inc.*+
10.4 Form of Stock Option Agreement (1997 Key Employees' Stock
Option Plan)*+
10.5 Nonemployee Directors' Stock Option Plan of RF Micro Devices,
Inc.*+
10.6 Form of Stock Option Agreement (1997 Directors' Stock Option
Plan)*+
10.7 Securities Purchase Agreement, dated June 6, 1996, between RF
Micro Devices, Inc. and TRW Inc.*
10.8 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.*
10.9 Supply Agreement, dated June 6, 1996, between RF Micro
Devices, Inc. and TRW Inc.*
10.10 Amendment to the Supply Agreement, dated June 6, 1996,
between RF Micro Devices, Inc. and TRW Inc.**
10.11 Restricted Stock Agreement, dated June 6, 1996, between RF
Micro Devices, Inc. and TRW Inc.*
10.12 Second Amended and Restated Registration Rights Agreement,
dated June 6, 1996, between RF Micro Devices, Inc. and certain
shareholders, as amended*
10.13 Lease Agreement, dated October 31, 1995, between RF Micro
Devices, Inc. and Piedmont Land Company, as amended*
<PAGE> 60
Exhibit No. Description
10.14 Lease Agreement, dated October 9, 1996, between RF Micro
Devices, Inc. and Highwoods/Forsyth Limited Partnership, as
amended*
10.15 Master Equipment Lease Agreement, dated as of December 2,
1996, between Finova Technology Finance, Inc. and RF Micro
Devices, Inc.*
23 Consent of Ernst & Young LLP
27 Financial Data Schedule (filed in electronic format only)
- - ----------------
* Incorporated by reference to the registrant's Registration Statement on
Form S-1 (File No. 333-22625)
+ Executive compensation plan or agreement
** The registrant has requested that certain portions of this exhibit be
given confidential treatment
(b) Reports on Form 8-K filed in the 4th quarter of 1998:
The Registrant did not file any Current Reports on Form 8-K during the
last fiscal quarter of the period covered by this report.
(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).
<PAGE> 61
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 26, 1998
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 26, 1998.
/s/ David A. Norbury /s/ William A. Priddy, Jr.
- - ---------------------------------- --------------------------------------
Name: David A. Norbury Name: William A. Priddy, Jr.
Title: President, Chief Executive Title: Chief Financial Officer, Vice
Officer and Director President of Administration and Treasurer
(principal executive officer) (principal financial and accounting
officer)
/s/ Erik H. van der Kaay
- - ---------------------------------- --------------------------------------
Name: Robert C. Fleming Name: Erik H. van der Kaay
Title: Director Title: Director
/s/ Albert E. Paladino /s/ William J. Pratt
- - ---------------------------------- --------------------------------------
Name: Dr. Albert E. Paladino Name: William J. Pratt
Title: Director Title: Director
/s/ Walter H. Wilkinson, Jr. /s/ Terri D. Zinkiewicz
- - ---------------------------------- --------------------------------------
Name: Walter H. Wilkinson, Jr. Name: Terri D. Zinkiewicz
Title: Director Title: Director
<PAGE> 62
SCHEDULE II
Valuation and Qualifying Accounts
Years ended March 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Additions
Balance at Charged to Deductions Balance at
Beginning of Costs and from End of
Period Expenses Reserves Period
<S> <C> <C> <C> <C>
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
Year ended March 31, 1997
Allowance for doubtful accounts 489,131 21,000 - 510,131
Inventory Reserve 80,511 766,344 - 846,855
Warranty Reserve - 137,580 - 137,580
Year ended March 31, 1996
Allowance for doubtful accounts - 489,131 - 489,131
Inventory Reserve - 80,511 - 80,511
Warranty Reserve - - - -
</TABLE>
<PAGE> 1
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION AND
IS DENOTED HEREIN BY *****
EXHIBIT 10.10
THE REGISTRANT HAS REQUESTED THAT CERTAIN PORTIONS OF THIS EXHIBIT BE GIVEN
CONFIDENTIAL TREATMENT. AN UNREDACTED VERSION OF THIS
EXHIBIT HAS BEEN FILED WITH THE COMMISSION.
Contract Change Notice Amendment No. 2
to
TRW/RFMD Wafer Supply Agreement
Agreement No. 66710
THIS AMENDMENT ("Amendment") is made and entered into and between RF
Micro Devices, Inc. ("Buyer") and TRW Inc., by and through its Space and
Electronics Group, a corporation organized and existing under the laws of Ohio,
having offices at Redondo Beach, California, USA ("TRW").
WHEREAS, Buyer and TRW entered into Agreement No. 66710 ("Agreement")
with an effective date of 6 June 1996;
WHEREAS, Buyer and TRW to desire to amend the Agreement in order to:
allow Buyer to purchase processed, diced 3" HBT wafers containing Buyer MMIC
designs at *****, commit Buyer to a minimum quantity of wafer starts (and to
purchase all wafers resulting from such wafer starts) through the year 2000,
establish MBE epitaxial wafer minimum quantity purchase commitment and price and
to offer ***** for wafers containing TRW MMIC designs.
NOW, THEREFORE, the parties agree to amend the Agreement as follows:
Exhibit 1B, Price, Minimum Annual Quantities and Site, as included as
part of the original agreement is deleted and replaced with Exhibit 1B -
Revision 1 (copy attached).
The above changes constitute Contract Change Notice Amendment No. 2 to
the Agreement. Except as expressly provided hereinabove all other terms and
conditions of the Agreement shall apply herein and remain in full force and
effect as previously agreed to between Buyer and TRW. In the event of any
conflict between the terms of this Amendment and those of the Agreement, the
terms of this Amendment will be deemed to have superseded those of the Agreement
and exclusively will govern the matter in question.
Buyer TRW Inc.
Space and Electronics Group
By: /s/ David A. Norbury By: /s/ David B. Vandervoet
--------------------- --------------------------------
Name: David A. Norbury Name: David B. Vandervoet
Title: President & CEO Title: Vice President & General Manager
RF Micro Devices, Inc. Electronics Systems &
Technology Division
Date: 12/24/97 Date: 12/19/97
<PAGE> 2
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION AND
IS DENOTED HEREIN BY *****
EXHIBIT 1B - Revision 1
PRICE, MINIMUM ANNUAL QUANTITIES AND SITE
A. PRICE
All prices are subject to adjustment as provided in Section 4.9 (Gain
Sharing provision). Price is on a per wafer basis.
Product CY 1997 CY 1998 CY 1999 CY 2000
------- ------- ------- ------- -------
1. 3" Processed HBT wafers ***** ***** ***** *****
(RFMD Designs)
2. 3" Processed HBT wafers
(TRW DAMP Designs)
Quantity 1-19 ***** ***** ***** *****
Quantity 20-39 ***** ***** ***** *****
Quantity 40-79 ***** ***** ***** *****
Quantity 80-100+ ***** ***** ***** *****
3. 4" MBE epitaxial wafers ***** ***** ***** *****
Note: *****
Note: Items 4&5 have been identified in contract Change Amendment #1.
B. ANNUAL QUANTITIES REQUIREMENT
Product CY 1998 CY 1999 CY 2000
------- ------- ------- -------
1. 3" processed HBT wafers ***** ***** ***** Minimum yearly
that start processing wafer starts to
(RFMD Designs) be
ordered by RFMD
2. 4" GaAs epitaxial wafers ***** ***** ***** Min. purchase
(MBE) ***** ***** ***** Qty. Forecast
Note: *****
Note: Buyer shall be required to purchase all wafers manufactured
resulting from orders placed in fulfillment of annual quantity
requirements, provided however that the wafers met the
appropriate PCM specifications.
Note: Minimum MBE deliveries in 1998 are subject to first meeting
the three (3) inch processed wafer requirements; this
stipulation will be reassessed and may be modified by mutual
consent in May 1998.
C. SITE: RF Micro Devices, Inc., 7625 Thorndike Road, Greensboro, NC 27409
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-31037) pertaining to the 1997 Key Employees' Stock Option
Plan of RF Micro Devices, Inc., the Nonemployee Directors' Stock Option Plan of
RF Micro Devices, the Employee Stock Purchase Plan of RF Micro Devices, Inc.
and the RF Micro Devices 1992 Stock Option Plan of our report dated April 24,
1998, with respect to the financial statements and schedule of RF Micro
Devices, Inc. included in the Annual Report (Form 10-K) for the year ended
March 31, 1998.
/s/ Ernst & Young LLP
Raleigh, North Carolina
June 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEET AS OF MARCH 31, 1998 AND THE CONDENSED STATEMENT OF
OPERATIONS FOR THE TWELVE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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