<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
- OR -
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended August 31, 2000
Commission File No. 0-24414
RF Monolithics, Inc.
(Exact name of Registrant as specified in its charter)
_______________________________________
Delaware 75-1638027
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification)
4441 Sigma Road, Dallas, Texas 75244
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-2903
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK .001 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 (Section 229.405 of this chapter) 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 RF Monolithics, Inc. Common Stock held by
nonaffiliates based on the last reported sale price on the NASDAQ composite tape
on November 15, 2000, was $17,571,718. Shares of Common Stock held by each
officer and director and by each person who owns 5% or more of the outstanding
Common Stock of the Company have been excluded because such persons may be
deemed to be affiliates.
Common Stock outstanding at November 15, 2000: 6,206,876 shares, par value
$0.001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A, which will be filed with the Commission on or about
December 15, 2000, is incorporated by reference into Part III of this report.
<PAGE>
RF MONOLITHICS, INC.
FORM 10-K
YEAR ENDED AUGUST 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I
Item 1. Business................................................................ 2
Item 2. Properties.............................................................. 11
Item 3. Legal Proceedings....................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders..................... 11
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.... 12
Item 6. Selected Financial Data................................................. 13
Item 7. Management's Discussion and Analysis of Financial Condition
And Results of Operations............................................... 14
Item 8. Financial Statements and Supplementary Data............................. 22
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.................................................... 22
PART III
Item 10. Directors and Executive Officers of the Registrant...................... 22
Item 11. Executive Compensation.................................................. 22
Item 12. Security Ownership of Certain Beneficial Owners and Management.......... 23
Item 13. Certain Relationships and Related Transactions.......................... 23
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......... 23
</TABLE>
<PAGE>
PART I.
During the last five years, the Company has developed Virtual Wire(R)
Short-range Radio products as more value added products in comparison to its
base low-power component business. More recently, RFM has focused engineering
design resources on products for the rapidly growing communications products
market.
ITEM 1. BUSINESS
RF Monolithics, Inc. (RFM or the Company), organized in 1979 as a Texas
corporation and converted to a Delaware corporation in 1994, designs, develops,
manufactures and markets a broad range of radio frequency ("RF") component and
module products in two areas: communications products, which include frequency
control modules and filters; and low-power products which include low-power
components and Virtual Wire(R) Short-range Radio products. The Company's
products are based on surface acoustic wave ("SAW") technology and are
manufactured as discrete devices to perform specific functions and as integrated
modules to meet system performance requirements.
The Company focuses its product development in the frequency range of 50
megahertz ("MHz") to 1.5 gigahertz (GHz) and above. The Company markets its line
of more than 500 resonators, filters, clocks, oscillators, transmitters and
receivers to original equipment manufacturers ("OEMs") world-wide, including
Code-Alarm, Inc., Delco Electronics, Linear Corporation, Nokia
Telecommunications, Nortel (Northern Telecom, Inc.), Juniper, Siemens AG, and
Silicon Graphics, Inc.
Background
The Company believes that a significant market opportunity for more
widespread adoption of SAW technology is emerging. As electronic applications
increase in data speed and frequency, there will be an increasing demand for
improved performance and functionality, greater precision, reduced size, lower
power consumption and greater reliability. The Company believes that these
dynamics are creating frequency control opportunities that are not effectively
addressed by traditional RF approaches.
The Company believes that its SAW-based products, coupled with its RF
design and manufacturing expertise, offer electronics manufacturers certain
fundamental advantages over alternative technologies. As electronic applications
ranging from automotive remote keyless entry (RKE) to digital cellular phones to
computers migrate to higher operating frequencies with tighter tolerances and
more stringent performance specifications, demand for RF modules and SAW
discrete components is expected to increase.
SAW-technology-based discrete components, modules and RF systems combine
a complex mix of software-controlled design rules, wafer fabrication, hybrid
assembly and packaging processes to meet stringent customer and governmental
compliance requirements. The earliest SAW applications were developed for
high-level military systems for electronic warfare and volume consumer products
such as TVs and VCRs. The unique features of SAW technology provide flexible
solutions to systems designers defining tomorrow's emerging applications across
multiple market segments.
Markets and Applications
The Company focuses on specific market opportunities where the Company
believes that its SAW technology solutions coupled with its RF design expertise
address current and emerging market and application requirements. The Company
offers products in two product groups: Communications Products Group, which
includes frequency control modules and filter products; and Low-power Products
Group, which includes Low-power Components and Virtual Wire(R) Short-range Radio
products. These products are
2
<PAGE>
incorporated into application designs in four primary markets: wireless
communications, optical networks, automotive, and industrial markets.
Wireless Communications
The Company believes that a number of dynamics within the wireless
communications market are opening new applications for SAW technology. The
deployment of digital cellular telephone systems, such as European Global System
for Mobile Communications (GSM), Code Division Multiple Access (CDMA), Global
Positioning Systems (GPS), has been initiated worldwide. The digital modulation
requires SAW filters that minimize distortion and conform to international
cellular telephony standards. The Company believes that markets for SAW
technology products are expanding rapidly. The concept of Satellite Radio
appears to be gaining momentum. Digital modulation is spectrally more efficient
than traditional analog AM or FM. Current proposed digital standards, within the
same bandwidth, are achieving near CD quality audio. Other markets such as
wireless Internet access and broadband multimedia will continue to use SAW based
products.
Optical Networks
The Company believes as broadband wireless communication systems demand
more performance to support Internet requirements, bandwidth becomes the key
element that allows information to flow efficiently. This creates a requirement
to minimize systems noise present in broadband wireless communication and
provide clean timing to maximize throughput around the system's backbone. Analog
communications, test instrumentation, computer timing, and military applications
also create markets for SAW based frequency control products where timing
integrity and elimination of system noise in circuits are critical.
Automotive
The automotive industry utilizes SAW-based components in transmitter and
receiver designs for remote keyless entry (RKE) applications. Emerging
applications utilizing transmitter and receiver functions include the run flat
tire, tire pressure monitoring and immobilized theft-deterrent systems. The
automotive industry continues to develop new and improved safety features. With
recent regulation aimed at preventing safety issues associated with tire
pressure and performance, the run-flat-tire pressure monitoring application is
receiving considerable visibility. The Company believes that SAW devices are
stable and impermeable to shock, vibration and moisture, thus providing the
characteristics required for these application. Automotive electronic
applications continue to grow with the unending drive toward smaller size,
reduced cost and improved system performance as evidenced by some of the
emerging multiplexing design schemes. These market requirements are met by the
Company's Low-power Components and Virtual Wire(R) Short-range Radio products.
This market is subject to severe price competition.
Industrial
The industrial market includes applications such as security systems, RF
ID tags, meter reading and bar code reading devices, medical systems and custom
data link equipment. Low-power Components, Virtual Wire(R) Short-range Radio
products and Filters may all be designed into industrial applications.
3
<PAGE>
Products
The Company's products are organized into two product groups:
Communications Products Group, which include frequency control modules and
filters; and Low-power Products Group, which include Low-power Components and
Virtual Wire(R) Short-range Radio products modules.
Communications Product Group
Frequency Control Modules:
The Company's frequency control modules consist of frequency source
products for both analog and digital applications. These products provide added
value to the SAW components manufactured by the Company. Each module
incorporates one or more SAW discrete devices with standard and custom
integrated circuits and related passive components. The Company manufactures
clocks and oscillators applying resonators and coupled-resonator filters to
eliminate tuning coils for signal filtering and stabilization. Specialized SAW
devices are incorporated in voltage-controlled sources to allow frequency
variability along with very good phase noise for both analog and digital
applications.
High-frequency clocks. The Company's high-frequency clock modules are
used in high bandwidth optical network systems. The Company's "Diff Sine" clocks
allow the network to realize improved performance by providing a highly stable
frequency source which results in very low timing variations from one cycle to
the next (commonly referred to as "jitter") and good symmetry across each cycle.
Most customers in this rapidly growing application prefer SMT packages.
Oscillators. The Company produces commercial and military
fixed-frequency and voltage-controlled SAW oscillators. These products are
supplied in SMT or leaded metal packages and used in applications such as
microwave radios, identification friend or foe (IFF) transponders for commercial
and military avionics, and precision instrumentation.
Optical timing products. The Company has recently introduced a new line
of oscillators that target the Optical Dense Wave Division Multiplex (DWDM)
market that utilizes RFM's patented technology. The initial versions are
in Dip style (leaded) packages. In development is a surface mount version of
these products. These products are targeted for customers in the optical network
market, including high-speed routers and the OC768 backbone system.
Filters:
RFM was the pioneer in several SAW technologies, and has the design
capability for the major SAW filter structures: 1) High Loss Bi-directional
Filter; 2) Medium Loss Single Phase Uni-directional Transducer (SPUDT) Filter;
and 3) Low Loss Coupled Resonator Filter, including in-line (or longitudinally)
coupled resonator filter, and proximity (or transversally, or wave-guide)
coupled resonator filter.
In response to the new demand from wireless communications, RFM has focused
on intermediate frequency (IF) SAW filters based on new SAW structures that
provide the best performance, e.g., slanted (or fan shape, or taper) SPUDT
filter, and resonant SPUDT (or RSPUDT) filter, etc.
4
<PAGE>
Low-power Product Group
Low-power Components:
Resonators. The Company's resonators are used in low-power wireless
transmitter and receiver applications, including automotive remote keyless entry
systems, wireless security systems, remote meter reading and related products.
The Company manufactures SAW resonators in volume, and they are supplied in both
three-lead metal packages ("TO-39") and leadless surface mount ("SMT") packages.
The market for low-power resonators is intensely competitive and has been
characterized by price erosion, rapid technological change and product
obsolescence. As a result, the Company has experienced continued price
competition for these products.
Coupled-Resonator Filters. Coupled-resonator filters are well suited for
certain frequency stabilization applications, such as the frequency control
clock modules, and as input filters for the hybrid receiver modules and output
filters for the hybrid transmitter modules manufactured by the Company. The
Company provides coupled resonators in leaded and surface mount packages.
Virtual Wire(R) Short-range Radio Products:
In the past year, the Company has decided to discontinue seeking
business for the first generation of these products. Customers were allowed to
purchase them under a last time buy program. The Company's second-generation
hybrid transmitter (TX), receiver (RX) and transceiver (TR) modules are the
primary products included in Virtual Wire(R) Short-range Radio products. The
Company's Transceiver module, based on its patented Amplifier Sequenced Hybrid
("ASH") technology, offers two-way data communication in a single small module
with performance identical to the separate TX and RX (hybrid receiver) modules
at lower total cost.
These products feature small size, very low-power consumption and
excellent RF performance, and provide the system designer flexibility and fast
time to market for emerging applications. The breadth of frequency ranges covers
both North American and international frequency bands for low-power data
transmission. The receiver's ASH architecture provides exceptional performance
with extremely low harmonic radiation, allowing customers' ease of international
standards certification.
The Virtual Wire(R) Short-range Radio product offerings also include
complete transceiver design and development kits that allow the system designer,
who has minimal RF experience, the ability to apply wireless, two-way data
transfer to emerging applications. The application market for Virtual Wire(R)
Short-range Radio products includes remote bar code data entry, remote meter
reading, point of sale terminals, medical monitor systems, home automation, data
link equipment and wireless thermostats. The Company believes that markets for
wireless products will continue to expand.
Manufacturing
The manufacturing of the Company's products is a highly complex and
precise process that is sensitive to a wide variety of factors, including the
level of contaminants in the manufacturing environment, impurities in the
materials used and the performance of manufacturing personnel and production
equipment. Until the devices are enclosed or sealed within their final package,
they are subject to contamination. Because of this, almost all operations prior
to enclosure welding or sealing are performed in controlled environments such as
clean-room environments. In the past, the Company has experienced, from time to
time, product shipment delays and lower-than-expected production yields. The
Company has experienced and may in the future experience a delay in transferring
products from engineering to volume manufacturing
5
<PAGE>
status. The manufacturing process could result in shipment delays or loss of
production yields that will materially and adversely increase the cost of
manufacturing. The Company's manufacturing operations are housed in two
buildings located side by side in Dallas, Texas. Many of the Company's
competitors have manufacturing facilities in low labor rate countries. The
Company intends to transition manufacture of low-power components and filter
products offshore and has identified two manufacturing partners in the
Philippines. This transition is expected to be completed during fiscal 2001. As
a result of the Company's substantial reliance on a single domestic
manufacturing location and with both offshore manufacturing partners located in
the Philippines, damage occurring to any facility, whether by act of nature,
major economic or political change, or otherwise, may have a material adverse
affect on the Company's manufacturing operations.
The Company's customers demand an increasing level of quality. Despite
the fact that the Company has achieved QS 9000 and ISO 9001 certification, and
its offshore partners have either achieved or are in the process of achieving
certification, the Company could fail to maintain these needed improvements and
quality levels in its operations. To the extent improvements are not achieved,
the Company's operating results could be materially and adversely affected. The
Company has experienced sudden increases in demand which have put pressure on
its manufacturing facilities to increase capacity to meet this demand. In
addition, new products sometimes require different manufacturing processes than
the Company currently possesses. The Company has devoted the bulk of its capital
expenditures to increase capacity and improve its manufacturing processes and
has been aggressive in securing increased manufacturing capacity through
offshore manufacturing alliances. The Company may not be able to continue to
increase its manufacturing capacity and improve its manufacturing processes in a
timely manner to take advantage of increased market demand.
Over the past several years, the Company completed an expansion of its
factories, adding facilities and new automated processing equipment. As demands
on the manufacturing facilities increase, there is an ongoing need to increase
the capacity and operational efficiencies. The Company may not be able to
achieve these improvements in a timely manner. To the extent the Company does
not achieve acceptable yields or experiences product shipment delays as a result
of problems associated with the expansion of the factories or increase in
offshore capacity, the Company's operating results could be materially and
adversely affected.
The Company divides its manufacturing operations into three key areas:
wafer fabrication, domestic assembly, and off shore assembly. In assembly, there
are three production areas that correspond to the three distinct types of
packages being manufactured: (1) TO-39 components; (2) module devices; and (3)
SMT components.
Wafer Fabrication
Fabrication of deposited and patterned wafers takes place in a
clean-room environment. Thin aluminum films are precisely deposited onto
three-inch and four inch-diameter quartz substrates that are subsequently etched
with very small (micron and submicron) patterned structures. Each patterned
device is called a die, and there may be from 40 to 3,000 die on a single
three-inch or four-inch wafer. All wafer fabrication takes place at the
Company's Dallas location.
Domestic Assembly
TO-39 component manufacturing involves the assembly of single-die
devices into leaded metal packaging. This method of assembly includes some of
the Company's older low-power component products.
6
<PAGE>
Module manufacturing consists of multiple devices, one or more of which
is a SAW. The Company's products assembled in module manufacturing include
transceivers, frequency control modules and filters.
The Company's SMT products contain SAW die and, in some cases, other
electronic components as well. The Company's manufacturing process is based on
arrays, which allows for automated processing of up to 400 devices at a time.
Since this represents a unique manufacturing process, some of the equipment has
been custom-designed for the Company and represents several unique applications
of existing manufacturing technology. The SMT facility is responsible for
assembly of low-power components and Virtual Wire(R) Short-range Radio products.
Offshore Assembly
The Company has manufacturing arrangements with Automated Technology,
Inc. and Cirtek Electronics Corporation. Both organizations are highly
experienced in hermetic semiconductor manufacturing and are knowledgeable of the
unique aspects of SAW component assembly and test. Assembly and test of the
Company's low-power components and filters occur at these locations. The
transition to offshore began with the Company's TO-39 products.
Source of Components/Labor
While the Company uses standard components whenever possible, certain of
the components used in the Company's SAW devices and modules are made to the
Company's specifications. This is particularly true for specialized
manufacturers from whom the Company purchases several RF integrated circuits and
ceramic arrays. These companies include Maxim Integrated Products, Nortel
Networks Inc. and Kyocera America Inc. The Company has experienced delays and
quality control problems with certain of its single-source suppliers in the
past. Although the Company is attempting to obtain second-source suppliers, the
Company believes it will continue to be dependent upon single-source suppliers
for the foreseeable future. Also, during the fourth quarter of fiscal 2000, the
Company experienced difficulty in securing the additional labor resources
necessary to meet rising demand for products. The company is actively addressing
this labor shortage and is implementing techniques to improve labor
productivity. The Company anticipates the transition to offshore production will
result in significant additional manufacturing capacity, which will mitigate the
impact of labor shortages. Delays in delivery, quality problems or the inability
of the Company to obtain the components and labor resources required to
manufacture the Company's products on a cost-effective basis could have a
material adverse effect on the Company's business and results of operations.
Sales and Marketing
The Company distributes its products in the United States through
manufacturers' representatives managed by the Company's restructured area sales
management team (internal sales force.) Additionally, the Company has authorized
a major North American distributor to stock and sell all Company products.
International sales are handled through manufacturers' representatives,
manufacturers' representatives acting as distributors and direct sales
management. Despite these sales efforts, the Company may not be able to increase
or maintain demand for the its products.
The Company's international sales are currently denominated in U.S.
currency. An increase in the value of the U.S. dollar relative to foreign
currencies could make the Company's products more expensive and, therefore,
potentially less competitive in those markets. Additional risks inherent in the
Company's international business activities generally include unexpected changes
in regulatory requirements, tariffs and other trade barriers, costs and risks of
localizing international operations, potentially adverse tax
7
<PAGE>
consequences, repatriation of earnings and the burdens of complying with a wide
variety of foreign laws. Such factors could have a material adverse effect on
the Company's future results of operations.
In 2000, one customer accounted for 9.7% of sales while no company did
so for 1999. The top 10 customers accounted for approximately 49% and 45% of
total sales in 2000 and 1999, respectively. Sales to distributors accounted for
22% of the sales in fiscal 2000, and 21% in fiscal 1999. Sales to major
customers have fluctuated in the past and may continue to fluctuate in the
future.
RFM enters into select, custom product development programs. These
development programs can last from 6 months to 18 months. The scope of these
programs includes initial engineering of the RF function under development
through assisting in the interface of the RF and digital hardware. The Company
is engaged in an increasing number of these programs. The Company cannot predict
when or if a particular customer's program will be designed and reach volume
production status. In addition, many of the Company's products are subject to
regulations. Customers may require their products to be certified with various
regulatory agencies. The Company offers its customers various types of
assistance in obtaining certification. The Company's customers may not obtain
required certifications in a timely manner or at all. Delays in obtaining
certification could result in significant losses of potential Company sales.
Competition
The markets for the Company's products are intensely competitive and are
characterized by price erosion, rapid technological change and product
obsolescence. In most of the markets for the Company's products, the Company
competes with very large vertically integrated, international companies,
including Matsushita Electrical Industrial Co., Ltd., and Murata Manufacturing
Co., that have substantially greater financial, technical, sales, marketing,
distribution and other resources, and broader product lines than the Company.
The Company's competitors who have greater financial resources or broader
product lines may be able to engage in sustained price reductions in the
Company's primary markets to gain market share. The Company also expects
increased competition from existing competitors as well as competition from a
number of companies that currently use SAW expertise largely for internal
requirements. In addition, the Company experiences increased competition from
companies that offer alternative solutions such as phase locked loop technology,
which combines a semiconductor with a traditional crystal. The Company believes
competitors may duplicate the Company's products, which would cause additional
pressure to selling prices and which could adversely affect market share.
The Company believes that its ability to compete in its target markets
depends on factors both within and outside the Company's control, including
timing and success of new product introductions by the Company and its
competitors, the availability of manufacturing capability, the Company's ability
to support decreases in selling price through reduction in cost of sales, the
pace at which the Company's customers incorporate the Company's products into
their end user products and general economic conditions.
Research and Development
The Company's research and development efforts are primarily aimed at
deriving new, proprietary, innovative SAW device structures and SAW-based hybrid
modules that uniquely address market needs. These developments also include
process improvements in wafer fabrication involving better line width and metal
thickness control as well as improvements in device packaging.
RFM employs approximately 50 individuals in engineering and product and
process development, including design engineers and scientists. They are
responsible for new products and new processes from inception to the
commencement of volume manufacturing. The Company believes that the efforts of
this
8
<PAGE>
group help to ensure that RFM's products provide an optimum system solution
for the customer and are manufacturable at a competitive cost.
From time to time, the Company has entered into agreements with
customers to develop specific SAW devices for inclusion in the customer's end
product. Pursuant to such agreements, the nonrecurring engineering ("NRE") cost
associated with such development work, which is treated by the Company as cost
of technology development sales, is generally reimbursed by the customer. Total
technology development (or NRE) sales during fiscal years 2000 and 1999 were
$386,000 and $233,000, respectively. Costs related to these sales were included
in the Company's cost of sales during these years. The Company considers the
development of new products essential to increasing and maintaining sales.
Proprietary Rights
The Company relies on a combination of patents, copyrights and
nondisclosure agreements in order to establish and protect its proprietary
rights. The Company's policy is to file patent applications to protect
technology, inventions and improvements that are important to its business.
Patents may not be issued from any of the Company's pending applications. In
addition, claims that are allowed from existing or pending patents may not be
sufficiently broad to protect the Company's technology. While the Company
intends to protect its intellectual property rights vigorously, patents held by
the Company may be challenged, invalidated or circumvented, or the rights
granted thereunder will provide competitive advantages to the Company.
The Company also seeks to protect its trade secrets and proprietary
technology, in part, through confidentiality agreements with employees,
consultants and other parties. These agreements could be breached and the
Company may not have adequate remedies for any breach. Further, the Company's
trade secrets could otherwise become known to or independently developed by
others. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as the laws of the United
States.
The electronics industry is characterized by uncertainty and conflicting
intellectual property claims. The Company has in the past and may in the future
become aware of the intellectual property rights of others that it may be
infringing. The Company may be notified that it is infringing on other patents
and/or other intellectual property rights of third parties. In the event of such
alleged infringement, a license to the technology in question may not be
available on commercially reasonable terms, if at all. In addition, litigation
could occur and the outcome of such litigation might be adverse to the Company.
The failure to obtain necessary licenses or other rights, the occurrence of
litigation arising out of such claims or an adverse outcome from such litigation
could have a material adverse effect on the Company's business. In any event,
patent litigation is expensive, and the Company's results of operations could be
materially adversely affected by such litigation, regardless of its outcome.
Regulations
The Company is subject to a variety of federal, state and local laws,
rules and regulations related to the use, storage, emission, treatment,
disposal, transportation and exposure of others to certain toxic, volatile and
other hazardous chemicals used in the Company's manufacturing process. The
failure to comply with present or future regulations could result in fines being
imposed on the Company, suspension of production or a cessation of operations.
Such regulations could also require the Company to acquire costly equipment, to
make changes to its manufacturing process, or to incur substantial other
expenses to comply with environmental regulations. Any past or future failure by
the Company to control the use of, or to restrict
9
<PAGE>
adequately the discharge of, hazardous substances could subject the Company to
future liabilities and could have a material adverse effect on the Company's
business, operating results and financial condition.
Employees
As of August 31, 2000, the Company had a total of 510 employees. Of such
employees, approximately 55 were temporary employees and 3 were consultants.
With the exception of an employee located in each of the sales locations in
Europe, Georgia, Minnesota and California, all of the employees of the Company
are based at the Company's headquarters in the metropolitan area of Dallas,
Texas. The Company's future success depends to a significant degree upon the
continued service of its key technical and senior management personnel and its
continuing ability to attract and retain highly qualified technical and
managerial personnel. Competition for such personnel is intense. The Company may
not be able to retain or continue to attract key managerial and technical
employees. Failure to retain or continue to attract key managerial and technical
employees could have a material adverse effect on the Company's business results
and operations. None of the Company's employees are represented by a labor
union. The Company has not experienced any work stoppages and considers its
relations with its employees to be good. During the fourth quarter of fiscal
2000, the Company experienced some difficulty in securing the additional labor
resources necessary to meet rising demand for products. The Company is actively
addressing this labor shortage and is implementing techniques to improve labor
productivity. The Company anticipates the transition to offshore production will
result in significant additional manufacturing capacity, which will mitigate the
impact of labor shortages.
Potential Fluctuations in Results of Operations; Order Trends and Backlog
The Company's quarterly and annual results have been and will continue
to be affected by a wide variety of factors that have had in the past and in the
future could have a material adverse effect on the Company's business and
results of operations during any particular period, including the level of
orders that are received and can be shipped in a quarter, the rescheduling or
cancellation of orders by its customers, competitive pressures on selling
prices, changes in product or customer mix, availability and cost of raw
materials, availability of labor resources, the ability of the Company to
manufacture a sufficient volume of products in a cost-effective manner,
fluctuations in manufacturing yield, availability of wafer fabrication and
assembly manufacturing capacity, loss of any strategic relationship, the ability
to introduce new products and technologies on a timely and cost-effective basis,
new product introductions by the Company's competitors, market acceptance of
products of both the Company and its customers, supply constraints for other
components incorporated into its customers' products, foreign currency
fluctuations, delays in customer orders or payments or interruptions in
operations and the level of expenditures for research and development, sales,
and general and administrative functions.
Historically, the electronics industry has experienced sudden and
unexpected economic downturns. The Company's results of operations are subject
to such downturns. In addition, the Company's operating expenses are largely
fixed and difficult to change quickly should sales not meet the Company's
expectations, thus magnifying the adverse effect of any such revenue shortfall.
The Company believes that period-to-period comparisons of its financial results
should not be relied upon as an indication of future performance.
The Company's backlog at August 31, 2000, was approximately $17.1
million as compared to $7.1 million as of August 31, 1999. The Company includes
in its backlog all purchase orders scheduled for delivery within the subsequent
12 months. The Company's backlog, although useful for scheduling production,
does not represent actual sales and should not be used as a measure of future
sales. All orders in backlog are subject to cancellation after 30 days before
shipment without penalty at the option of the
10
<PAGE>
customer and to changes in delivery schedules. The Company's backlog is subject
to fluctuations. Backlog as of any particular date may not be a reliable measure
of sales for any future period.
Except for the historical information contained herein, the preceding
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the sections entitled "Legal Proceedings," "Selected Financial Data" and
"Management's Discussion and Analysis" in this report.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing, research and
development, and manufacturing facilities are located in the metropolitan area
of Dallas, Texas, in two adjacent buildings totaling approximately 93,000 square
feet. One building, totaling approximately 63,000 square feet, is leased through
July 2003. The second building, totaling approximately 30,000 square feet, is
also leased through July 2003, with the Company having an option to cancel the
lease after July 31, 2001. The Company believes that its existing facilities are
adequate for its current requirements. The Company believes that the current
properties are suitable and productive for the currently intended purposes.
Although the majority of its current properties are utilized, there is some room
for expansion. In addition, RFM is working with offshore partners to utilize
their properties. Should additional space be needed, there can be no assurance
that it will be commercially available on reasonable terms when it is needed.
ITEM 3. LEGAL PROCEEDINGS
In April 1999, the Company become involved in a lawsuit filed in the US
District Court in Connecticut (Civil Action No. 399cv 00311) seeking to collect
outstanding receivables that were incurred by Akom Technologies, Inc. (Akom) in
connection with Raytheon Company's (Raytheon) Goldmine Project. Also named in
the action were Raytheon, Raycom, Inc. and fifteen other companies who supplied
materials and services for the Goldmine Project. The plaintiffs sought a
declaratory judgment against the Company seeking a declaration that plaintiffs
owed no monetary amounts to the Company. The Company filed a counterclaim
against Akom and cross claims against Raytheon and Raycom asserting damages to
the extent of unpaid invoices and custom inventory parts and materials
approximating $1.7 million. The Company settled all pending claims by and
against Akom, Raytheon and Raycom on October 11, 2000. The terms of the
settlement are covered by a non-disclosure agreement. See further discussion in
footnote 12 of the financial statements found in the Appendix.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
<PAGE>
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) National Market System
(symbol RFMI). The following table sets forth the high and low sales prices of
the Company Common Stock for each quarter of fiscal 2000 as furnished by NASDAQ.
These prices reflect prices between dealers, without retail markups, markdowns
or commissions, and may not necessarily represent actual transactions.
Price Range
-------------------------------------------
2000 1999
------------------- ------------------
Quarter Ended High Low High Low
---- --- ---- ---
November 30
11.0625 5.5625 12.5000 7.8333
February 29/28
27.3750 5.4375 11.5000 8.6250
May 31
15.0000 8.6250 11.3125 6.0625
August 31
16.0000 7.4375 10.3750 7.1250
The Company has not paid dividends on its Common Stock during the past two
most recent fiscal years and presently intends to continue this policy in order
to retain earnings for use in its business.
The number of stockholders of Common Stock of RFM as of November 15, 2000,
was approximately 200 (which number does not include the number of stockholders
whose shares are held of record by a brokerage house or clearing agency, but
rather includes such brokerage house or clearing agency as one record holder).
The last sales price for RFM's Common Stock, as reported by NASDAQ on
November 15, 2000, was $4.875.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended August 31,
---------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(In thousands, except gross profit margin & earnings
per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales $ 47,256 $ 51,297 $ 55,172 $ 47,692 $ 35,718
Cost of sales 43,250 35,950 33,549 28,136 22,336
-------- -------- -------- -------- --------
Gross profit 4,006 15,347 21,623 19,556 13,382
Gross profit margin % 8.5% 29.9% 39.2% 41.0% 37.5%
Research and development 4,700 5,697 5,081 4,169 3,366
Sales and marketing 6,047 5,415 5,646 5,842 4,391
General and administrative 3,546 3,092 2,889 3,391 2,747
Litigation 301 - 641 - -
-------- -------- -------- -------- --------
Total operating expenses 14,594 14,204 14,257 13,402 10,504
-------- -------- -------- -------- --------
Income (loss) from operations (10,588) 1,143 7,366 6,154 2,878
Other income (expense), net (634) (145) 14 (142) (107)
-------- -------- -------- -------- --------
Income (loss) before income taxes (11,222) 998 7,380 6,012 2,771
Income tax (benefit) expense (3,614) 269 2,620 2,205 882
-------- -------- -------- -------- --------
Net income (loss) $ (7,608) $ 729 $ 4,760 $ 3,807 $ 1,889
======== ======== ======== ======== ========
Earnings (Loss) per share:
Basic $ (1.26) $ 0.13 $ 0.86 $ 0.70 $ 0.37
======== ======== ======== ======== ========
Diluted $ (1.26) $ 0.12 $ 0.80 $ 0.66 $ 0.35
======== ======== ======== ======== ========
Weighted average common shares outstanding:
Basic 6,046 5,783 5,551 5,379 5,084
======== ======== ======== ======== ========
Diluted 6,046 5,932 5,978 5,790 5,429
======== ======== ======== ======== ========
Balance Sheet Data (at August 31):
Cash, cash equivalents and short-term investments $ 4,085 $ 5,188 $ 5,613 $ 5,969 $ 6,060
Working capital 13,025 17,386 17,286 14,674 12,879
Total assets 45,767 48,508 44,790 37,360 30,571
Long-term debt 68 68 815 1,911 2,413
Stockholders' equity 30,386 35,499 34,166 27,995 23,128
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS
RFM designs, develops, manufactures and markets a broad range of radio
frequency components and modules. The Company's products are organized into two
Product Groups, the Communications Products Group and the Low-power Products
Group. The Communications Products Group includes frequency control modules and
filter products. The Low-power Products Group includes Low-power Componenets, as
well as Virtual Wire(R) Short-range Radio products. The Company's products are
based on SAW technology, and the Company's strategy is to leverage its radio
frequency design skills and its packaging technology to provide SAW-based
solutions to the current and emerging needs of the electronics industry. The
Company's products include more than 500 resonators, filters, oscillators,
transceivers, transmitters and receivers. The Company's average selling prices
within these product lines generally range from $.50 to $10 for low-power
products and $5 to $100 for communications products.
RESULTS OF OPERATIONS
The following discussion relates to the financial statements of the Company
for the fiscal year ended August 31, 2000 (current year or fiscal 2000), in
comparison to the fiscal year ended August 31, 1999 (prior year or fiscal 1999),
as well as the fiscal year ended August 31, 1998 (fiscal 1998). In addition,
there is discussion of the financial statements for the three months ended
August 31, 2000 (fourth quarter), in comparison to the three months ended August
31, 1999 (comparable quarter of the prior year), as well as the three months
ended May 31, 2000 (previous quarter).
The following table sets forth, for the years ended August 31 (i) the percentage
relationship of certain items from the Company's statements of income to total
sales and (ii) the percentage change in these items from year to year:
<TABLE>
<CAPTION>
Percentage of Sales Year-to-Year Change
1999 to 1998 to
2000 1999 1998 2000 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Sales 100% 100% 100% (8)% (7)%
Cost of sales 92 70 61 20 7
------- ------- ------- ------- -------
Gross profit 8 30 39 (74) (29)
Research and development 10 11 9 (18) 12
Sales and marketing 13 11 10 12 (4)
General and administrative 7 6 5 15 7
Litigation 1 - 1 - (100)
------- ------- ------- ------- -------
Total operating expenses 31 28 25 3 -
------- ------- ------- ------- -------
Income (loss) from operations (23) 2 14 (1,026) (85)
Other income (expense), net (1) - - 337 (1,136)
------- ------- ------- ------- -------
Income (loss) before income taxes (24) 2 14 (1,224) (87)
Income tax (benefit) expense (8) 1 5 1,443) (90)
------- ------- ------- ------- -------
Net income (loss) (16)% 1% 9% (1,144)% (85)%
======= ======= ======= ======= =======
</TABLE>
14
<PAGE>
Sales
The following table sets forth the components of the Company's sales and
percentage relationship of the components to total sales for the periods
indicated:
<TABLE>
<CAPTION>
Year Ended August 31,
2000 1999 1998
% % %
Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Product sales:
Low-power Product Group:
Low-power components $ 31,376 66% $ 35,317 69% $ 39,961 72%
Virtual Wire(R) radio products 7,269 15 7,456 15 3,384 6
-------- ------ -------- ------ -------- ------
Subtotal 38,645 81 42,773 84 43,345 78
Communications Products Group:
Frequency control modules 2,365 5 3,622 7 4,164 8
Filters 5,860 13 4,669 9 7,325 13
-------- ------ -------- ------ -------- ------
Subtotal 8,225 18 8,291 16 11,489 21
-------- ------ -------- ------ -------- ------
Total product sales 46,870 99 51,064 100 54,834 99
Technology development sales 386 1 233 - 338 1
-------- ------ -------- ------ -------- ------
Total sales $ 47,256 100% $ 51,297 100% $ 55,172 100%
======== ====== ======== ====== ======== ======
</TABLE>
Product sales decreased 8% in fiscal 2000 as compared to fiscal 1999,
primarily due to a decrease in number of units sold of Low-power Component
products. Product sales decreased 7% in fiscal 1999 as compared to fiscal 1998,
due to reduced prices amidst competitive pressures in the Company's largest
product line, Low-power Components.
Low-power Components sales decreased 11% in fiscal 2000 as a result of
a decrease in the number of units shipped, primarily due to a change in the
Company's sales policy, largely occurring in the Company's first quarter. In the
first quarter, the Company decided not to offer special promotions programs to
increase its turns business, because of the impact such programs had on long-
term gross margins. This decision decreased sales in all product lines in the
first quarter, but particularly Low-power Components. In addition, average
selling prices for Low-power Components products declined 7% from the prior
year, due to continuing competitive pressures. During the year, however, the
average selling prices for Low-power Component products stabilized, at least in
part due to the Company's decision to discontinue special promotions programs.
Sales for Low-power Component products decreased 12% in fiscal 1999 compared to
fiscal 1998, due to declining prices from competitive markets. This decline was
partially offset by a 3% increase in the number of units shipped. The Company
believes that the markets for its Low-power Component products are still very
competitive and these markets have attracted a number of large international
competitors, particularly for the automotive segment. The increased competition
has resulted in lower average selling prices in many cases. The Company believes
that the impact of lower average selling prices may continue to be significant
enough in future periods to offset the impact of selling an increased number of
units. Thus sales for Low-power Components may not increase, or even remain at
the same level in future periods.
15
<PAGE>
For several years, the Company has devoted a considerable amount of its
capital, technical, sales and marketing resources to the Virtual Wire(R) Short-
range Radio products. Sales for these products have decreased 3% in fiscal year
2000 and increased 120% in fiscal 1999 compared to fiscal 1998. In both years,
sales were favorably impacted by an increase in the number of units sold for
these products, as they achieved greater acceptance in the marketplace. In
current fiscal year, average-selling prices for these products decreased 22% as
the products reached higher volume price points, resulting in a small overall
decrease in sales. During the year, the Company made two significant decisions
related to these products. The first was a decision to stop selling the first
generation version of these products, after allowing customers an opportunity to
have a last time buy and to transition these customers to second generation or
other Company products. The second-generation products are designed to be more
cost effective than first generation products. The negative impact on gross
margins of selling the first generation products should be largely complete by
the second quarter of fiscal year 2001. The second decision impacting these
products was the decision to focus new product development on communications
products, rather than low-power products. The Company believes that it has
already developed a full family of Virtual Wire(R) products, so it can convert
some of the engineering resources devoted to these products elsewhere. The
Company intends to continue to work with its customers to develop new
applications using Virtual Wire(R) Short-range Radio products. The timing of
when any sales resulting from such new applications reach the production phase
is dependent upon the timing of both the customers' product development cycles
and their product introduction cycles. It is difficult to predict when, or if,
these new products will have a significant impact on the Company's sales.
Filter sales increased 26% in fiscal 2000, while they decreased 36% in
fiscal 1999. The higher sales in fiscal 2000 results from an increased number of
units sold. The Company has increased its engineering resources in this area and
has developed a number of new products this year. The increase in number of
units sold reflects success in several of these programs. The Company will
continue to invest in new product development in Filter products, as it believes
the rapidly growing wireless communications markets that they serve represent an
excellent growth opportunity. There is a long development and introduction cycle
for Filter products, so there can be no assurance as to when or if this strategy
to focus on Filter products will have a significant impact on the Company's
sales. The decrease in fiscal 1999 over fiscal 1998 was due to a loss of sales
to a major customer that ceased operation in fiscal 1998.
Frequency Control Module sales decreased 35% in fiscal 2000 and sales
decreased 13% in fiscal 1999. The reduction in sales in fiscal 2000 was
primarily due to a reduced number of units sold for several types of older
products; particularly military oscillators and clock oscillators as programs
involving these products experienced decreased demand. The Company expects that
demand for these older products may not return to former levels, and in fact may
continue to decline. Late in fiscal year 2000, the Company introduced a new line
of optical timing products based upon its patented technology that target the
Optical Dense Wave Division Multiplex (DWDM) marketplace. The Company believes
that products serving the optical network market represent a tremendous growth
opportunity. The first versions of this product were in dip style packages and
began shipping in the fourth quarter of fiscal year 2000. The Company plans to
introduce surface mount versions of these products in the second half of fiscal
year 2001. It is not certain when or if these new products will have a
significant impact on the Company's sales.
The Company's top five customers accounted for approximately 36%, 32%, and
27% of the Company's total sales in fiscal 2000, 1999 and 1998, respectively.
Distribution related customers accounted for approximately 22%, 21% and 10% of
the Company's total sales in fiscal 2000, 1999 and 1998, respectively. One
customer accounted for 9.7% of total sales in 2000, while no customer did so for
fiscal years 1999 and 1998. The company's sales strategy is to seek
diversification in its customer base, but due to the very competitive nature of
the markets in which it competes, the Company is not certain it will be able to
continue to achieve this diversification.
International sales (primarily in Europe and Asia) were approximately 62%,
57% and 56% of the Company's total sales during fiscal years 2000, 1999 and
1998, respectively. The Company considers all
16
<PAGE>
product sales with a delivery destination outside North America to be
international sales. These sales are denominated primarily in U.S. currency. The
Company intends to continue its focus on international sales in the future and
anticipates that international sales will continue to represent a significant
portion of its business. However, international sales are subject to
fluctuations as a result of local economic conditions and competition.
Therefore, the Company cannot predict whether it will continue to derive a
significant portion of its business from international sales.
While the Company has achieved sales increases in prior periods, there can
be no assurance that this can be achieved in future periods. The Company's
success is highly dependent on achieving technological advances in its product
design and manufacturing capabilities, as well as its ability to sell its
products in a competitive marketplace that can be influenced by outside factors
such as economic and regulatory conditions. Competition from alternative
technologies or from competitors duplicating the Company's technologies may
adversely affect selling prices and market share.
Gross Profit Margin
Gross profit margin decreased to 8.5% in fiscal 2000, compared to 29.9% in
fiscal 1999, and 39.2% in fiscal 1998. The decline of gross margins is the
result of three significant trends that occurred in both fiscal 1999 and fiscal
2000. First, the sales prices for the Low-power Components and Virtual Wire(R)
Short-range Radio products declined due to competitive pressures in the market
place. Average selling prices for Low-power Components decreased 14% from fiscal
1998 to fiscal 1999, and 7% from fiscal 1999 to fiscal 2000. Average selling
prices for Virtual Wire(R) Short-range Radio products decreased 24% from fiscal
1998 to fiscal 1999, and 22% from fiscal 1999 to fiscal 2000. This decline in
average selling price was not matched by a decrease in per unit manufacturing
costs, which in fact increased slightly as explained in the following paragraph.
In the first quarter of fiscal year 2000, the Company changed its sales strategy
to no longer offer special promotions programs to increase its turns business.
This has had the effect of stabilizing prices for its low-power products during
fiscal 2000 and to greatly reduce the adverse impact that short lead time orders
had on manufacturing costs for expediting materials, additional overtime, and
other incremental costs. It is believed that the long-term benefits of this
decision will allow for more stable prices and more predictable manufacturing
costs and result in improved gross margins. These products are still sold in a
very competitive market, so it is not certain that a strategy to seek stable
prices will allow the Company to increase or even maintain its sales levels for
its low-power products. If selling prices need to be reduced to maintain sales
levels, it is not certain if the Company can reduce per unit manufacturing costs
in future periods to the same extent as the decrease in selling prices. If that
were to occur, gross margins would be adversely impacted in a material way.
Second, a decline in sales volume in both fiscal years 1999 and 2000
resulted in higher fixed overhead costs as a percentage of sales. The decrease
in selling prices caused the need to produce more units to reach the same sales
dollars. The Company has added equipment and other manufacturing overhead costs
to increase the capacity in each of its facilities to handle both new products
and an increased volume of its older products. In the past year, added fixed
overhead costs related to additional manufacturing equipment amounted to
approximately $2.1 million. As a result, overhead costs as a percentage of sales
increased by 15% in fiscal 2000. If additional sales dollars are not obtained in
future periods, overhead costs would remain at very high levels or even increase
as a percentage of sales. Due to its offshore initiative, the Company does not
believe it will need significant additions to assembly facilities and equipment
in the next year.
Third, there were $1.2 million in special charges to Cost of Sales in the
first quarter, primarily related to the transition to new products, including
continuing product introduction costs for the transceiver and costs related to
the conversion to the second generation of Virtual Wire(R) Short-range Radio
products. As stated above, a decision was made to stop selling the first
generation version of these products, after allowing
17
<PAGE>
customers an opportunity to have a last time buy. The second generation products
are designed to be more cost effective than first generation products. The
negative impact on gross margins of selling the first generation products should
be largely complete by the second quarter of fiscal year 2001.
The Company has embarked upon efforts to reduce manufacturing costs. The
first effort involves a focused program to improve production rates, yields and
productivity within the existing facilities. This has resulted in a significant
reduction in per unit manufacturing costs in the second half of fiscal year
2000, compared to the first half. Management intends to continue this focus on
improved operations, although there can be no assurance these efforts will
result in lower per unit costs.
The other major cost reduction effort is a program to outsource some
assembly operations offshore. In the first quarter of fiscal 2001, the Company
signed agreements with two different partners to manufacture its filter and
TO-39 products. Production also began in this quarter. The Company believes a
successful offshore manufacturing program could result in a material reduction
in manufacturing costs. The Company plans to phase in the transition of products
over several quarters, to insure uninterrupted product delivery to customers. In
addition, the transition will be supported with ample resources to address any
contingencies that may arise. As a result, the full benefit of the offshore
program will not be seen at least until fiscal year 2002. Given the complexities
of the manufacturing processes involved, there can be no assurance that the
offshore program will be successful.
The Company has in the past experienced sudden increases in demand, which
have put pressure on its manufacturing facilities to increase capacity to meet
this demand. In current quarter, for instance, the Company experienced some
difficulty in securing the additional labor resources necessary to meet rising
demand. In addition, new products sometimes require different manufacturing
processes than the Company currently possesses. The Company has devoted the bulk
of its capital expenditures to increase capacity and improve its manufacturing
processes. The Company may not be able to increase its manufacturing capacity
and improve its manufacturing processes in a timely manner so as to take
advantage of increased market demand. Failure to do this would result in a loss
of potential sales in the periods impacted.
Research and Development
Research and development expenses decreased approximately $1 million in
fiscal 2000 and increased approximately $600,000 in fiscal 1999. Expenses in
fiscal 1999 were relatively high, due to costs of approximately $300,000 in the
second quarter related to the introduction of a new packaging process and
approximately $550,000 in the fourth quarter related to the costs of the
transceiver product introduction. These unusual 1999 expenses resulted in the
increase in costs over 1998. Since these unusual costs did not recur in fiscal
2000, this also accounted for the bulk of the decrease compared to 1999. In
addition, in fiscal year 2000 there was an increase of approximately $150,000 in
engineering costs included in Cost of Sales related to the increase in
technology development sales that occurred. The Company believes that the
continued development of its technology and new products is essential to its
success and is committed to continuing its investment in research and
development, which is expected to increase in absolute dollars in future
periods.
Sales and Marketing
Sales and marketing expenses increased approximately $630,000 or 12% in
fiscal 2000 and decreased 4% in fiscal 1999. The increase in 2000 was due to an
increase in sales commission expense related to the Company's efforts to
increase sales coverage by sales representative firms. The decrease in 1999 was
due primarily to decreases in sales incentives and marketing costs. Since sales
and marketing expenses increased slightly more than sales, such expenses
increased to 13% of total sales in fiscal 2000 from 11% of total sales in fiscal
1999. The Company believes that while sales and marketing expenses initially
increased as a percentage of sales, the changes it has made with its sales force
will ultimately result
18
<PAGE>
in greater sales, although this increase is not assured. The Company expects to
incur higher sales and marketing expenses in absolute dollars in future periods
as it expands its sales and marketing efforts.
General and Administrative
General and administrative expenses increased approximately 15% in fiscal
2000 and increased 7% in fiscal 1999. The increase in 2000 was primarily
attributable to employee severance costs, most of which occurred in the first
quarter. The increase in 1999 was primarily related to an increase in incentive
costs related to restricted stock grants. Since sales decreased and general and
administrative expenses increased, such expenses increased to 7% of sales in
fiscal 2000 from 6% in fiscal 1999. The Company currently expects general and
administrative expenses will increase in absolute dollars in future periods to
support future operations, but that severance costs are not expected to recur.
Litigation and Unusual Legal Expense
Litigation and unusual legal expense, which amounted to $301,000 in fiscal
2000, zero in fiscal 1999 and $641,000 in fiscal 1998, primarily consists of
expenses related to the resolution of several unrelated legal issues. All of the
legal matters involved have been resolved and the Company does not expect to
incur similar expenses in future periods.
Other Income (Expense)
During the current year, the Company maintained indebtedness at a higher
average balance compared to prior years, resulting in an increase in interest
expense for fiscal 2000, compared to fiscal 1999. As a result, other expense
increased approximately $500,000 in the current year compared to the prior year.
The Company expects that increased borrowings will result in increased interest
expense in future periods.
Income Tax Expense (Benefit)
The Company's income tax benefit was approximately $3.6 million in the
current year, compared to an expense of $269,000 in fiscal 1999 and an expense
of $2.6 million in fiscal 1998, reflecting changes in income or loss before
income taxes. The Company's effective tax rate was approximately 32%, 27%, and
36%, in fiscal 2000, 1999 and 1998, respectively. The changes in the effective
tax rate largely resulted from the availability of net operating loss credits in
fiscal year 2000 and changes in benefits derived from the Foreign Sales
Corporation in fiscal year 1999.
Earnings per Share
The net loss was $7.6 million in the current year as compared to a net
income of $729,000 in the prior year and a net income of $4.8 million in fiscal
1998. The Company's diluted loss per share was $1.26 per share for fiscal 2000,
compared to a net income of $.12 per share for fiscal 1999 and net income of
$.80 per share for fiscal 1998.
Fourth Quarter of Fiscal 2000
Unaudited quarterly financial data is presented in Note 13 of the
accompanying financial statements.
Sales for the fourth quarter of $13.0 million increased approximately 6%,
compared to $12.3 million in the comparable quarter of the prior year. The sales
increase was primarily due to an increase in the number of units sold in three
of the Company's four product lines. Sales also increased approximately 3%
compared to the previous third quarter.
Gross profit margins were 15.5% in the fourth quarter, compared to 12.3%
for the comparable quarter of the prior year. This was primarily due to
significant additional costs in the prior year related to ramping production
late in the quarter and in bringing newly developed products to production
status for the Company's transceiver product line. As a result, start-up costs,
lower than desired yields and some loss of
19
<PAGE>
productivity occurred in the prior year. Gross profit margins were slightly
lower than the 16.2% in the previous quarter, reflecting a large increase in
sales of lower margin first generation Virtual Wire(R) Short-range Radio
products which were shipped as part of a last time buy program.
Operating expenses for the fourth quarter were approximately $3.9 million
for the current quarter, compared to approximately $4.2 million for the
comparable quarter of the prior year. Current quarter expenses included a
$550,000 decrease in research and engineering expense related to an unusual
expense that occurred in the prior year that did not recur and an increase of
$301,000 for litigation and unusual legal expenses. Current quarter operating
expenses were higher than the previous quarter's $3.5 million, primarily due to
the litigation and unusual legal expense.
Operating loss for the fourth quarter was approximately $1.8 million
compared to a loss of $2.7 million in the comparable quarter of the prior year.
This decline in operating loss was due to the higher gross margins for the
current quarter and lower operating expenses. The operating loss for the current
quarter was larger than the approximately $1.4 million for the previous quarter,
primarily due to the litigation and unusual legal expenses. Diluted loss per
share was $.20 in the fourth quarter, compared to a loss of $.29 for the
comparable quarter of the prior year and $.18 for the previous quarter. Without
the unusual legal expenses in the quarter, the loss for the current quarter
would have been $.17 per diluted share.
FINANCIAL CONDITION
New Financing Arrangements
In December 2000, the Company entered into an agreement with a commercial
bank for a new credit facility consisting of a $13.5 million revolving credit
facility and a $3 million term note. Included in the revolving credit facility
is an $8 million loan that is supported by the Export/Import bank (Exim bank).
Both facilities terminate on December 31, 2003. In addition, the Company
borrowed $1 million under a temporary overadvance loan, collateralized by its
fiscal year 2000 federal income tax refund that is to be repaid by January 1,
2001. The proceeds of these new loans and the sale of approximately $3.6 million
in short term investments were used to pay off approximately $6.9 million for
the revolving credit facility that was effective as of August 31, 2000, and $8.8
million in obligations related to the equipment-collateralized operating lease
facility that was also in effect as of August 31, 2000. As a result, the Company
completely satisfied its obligations to its former bank and acquired
approximately $8.3 million in capital assets that had formerly been utilized
under operating leases.
The structure of the new banking agreement ties amounts borrowed under the
agreement to a borrowing base consisting of certain receivables, inventory, and
fixed assets. Essentially all the assets of the Company, tangible and
intangible, are pledged as collateral under both facilities. The term loan
requires equal monthly payments of principal and interest totaling $50,000
beginning January 2001. The interest rate for both facilities is 2% over prime
rate. As part of the agreement, the bank was given a ten-year warrant to
purchase 30,000 shares of the Company's common stock at $5.00 per share. This
new credit facility contains financial covenants relating to various matters,
including but not limited to, minimum net worth, quarterly and monthly earnings,
and limitations on changes in corporate structure, and restrictions on dividends
and capital spending. Although the Company believes that it will be able to meet
the covenants, there is no assurance that this will occur. Should there be a
covenant violation without a waiver on favorable terms, there could be a
significant adverse impact on the Company's operations. To move manufacturing
equipment to support the offshore manufacturing initiative, it will be necessary
to pay off the portion of the Term Note related to the equipment being moved.
There is no assurance that this can be accomplished on favorable terms. Should
that not occur, there could be a slowdown in the Company's plans to expand
offshore production.
20
<PAGE>
In December 2000, the Company entered into an agreement to raise
approximately $2,000,000 in cash by the sale of common stock and warrants to
purchase common stock. The sale consisted of 533,332 units. Each unit was sold
at a price of $3.75 and consisted of one share of common stock and a three-year
warrant to purchase one share of common stock at $7.50. The agreement called for
certain restrictions on the sale or further acquisition of stock by the
investors, as well as the right to require regristration in the future. The
proceeds of the sale of this stock will be used to support the operations of the
Company.
Old Financing Arrangements
The major source of liquidity at August 31, 2000, consisted of
approximately $542,000 of cash. The $3.5 million in short-term investments were
pledged as collateral on a line of credit agreement with a commercial bank and
not available for immediate use. As of August 31, 2000, the Company was in
violation of certain covenants in regards to its line of credit. The amount of
the line was reduced to the amount outstanding as of August 31, 2000
(approximately $6.9 million) and there was no remaining availability under an
equipment-collateralized operating lease facility. The structure of the loan had
previously been modified to tie amounts borrowed under the agreement to a
borrowing base consisting of certain receivables, inventory, cash and marketable
securities, all of which are pledged as collateral, and the interest rate was
increased by one percentage point. The current credit facility contains
restrictions and financial covenants relating to various matters including net
worth, interest coverage and levels of debt. The expiration date of the old line
of credit was December 31, 2000.
Cash Flows
Net cash used in operating activities was $3.1 million in the year-to-date
period of fiscal 2000 as compared to net cash provided from operating activities
of $1.8 million for the year-to-date period of fiscal 1999. The decrease in cash
available from operations is due to the $7.6 million net loss in the current
year-to-date period that was partially offset by a $1.2 million reduction in
accounts receivable and inventories. The Company's internal plan is to maintain
a nearly breakeven cash flow from operations for fiscal year 2001. There can be
no assurance that this will be achieved.
Cash used in investing activities was $563,000 for the current year, as
compared to $3.8 million of cash used in investing activities for the prior
year, primarily as a result of approximately $1.5 million in capital
expenditures offset by a net reduction of $1 million in short-term investments.
Cash used in investing activities was $3.8 million in the prior year, due to
$4.7 million in capital expenditures. The Company expects to acquire a total of
approximately $1 million to $3 million of capital equipment by the end of fiscal
2001, consisting primarily of equipment needed for its wafer fabrication
manufacturing facilities. Due to its offshore manufacturing initiative, the
Company does not expect to require significant additions to its assembly
facilities or equipment.
Net cash generated from financing activities was $3.5 million in 2000 and
$2.5 million in 1999, respectively. In the current year, approximately $2.3
million was raised from a net increase in borrowings and $2.4 million in sales
of stock from stock options and the employee stock purchase plan. In the prior
year, $2.5 million was raised in a net increase in borrowings and $760,000 in
sales of stock.
As of the date of this report, the Company had approximately $3 million
available in cash and under the new credit arrangement, based upon the borrowing
base at that time. In addition, approximately $4 million more may become
available under the Revolving Credit facility, if the Company's borrowing base
were to increase sufficiently to support the increased borrowing. There can be
no assurance that this will happen. The Company believes that cash generated
from operations, if any, its cash balances and the amounts available under its
new credit facility will be sufficient to meet the Company's operating cash
requirements through the fiscal year 2001. To the extent that these sources of
funds are insufficient to meet the Company's capital or operating requirements,
the Company may be required to raise additional funds. No assurance can be given
that additional financing will be available or, if available, that it will be
available
21
<PAGE>
on acceptable terms. Should that occur, there could be significant adverse
impact on the Company's operations.
YEAR 2000 READINESS DISCLOSURE
The Company completed its plan to address Year 2000 (Y2K) computer issues
and during the year 2000 rollover the Company did not experience any significant
problems related to computer hardware, software and imbedded chip malfunctions.
The Company does not expect to experience Y2K issues in future periods.
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, the preceding
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the sections entitled "Business," "Legal Proceedings" and "Selected Financial
Data" in this report.
This report and other presentations made by RF Monolithics, Inc. (RFM)
contain forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. Although RFM believes that in
making any such statements its expectations are based on reasonable assumptions,
any such statement involves uncertainties and is qualified in its entirety by
reference to the following important factors, among others, that could cause the
actual results of RFM to differ materially from those statements: (i) timely
development, acceptance and pricing of new products; (ii) timely implementation
of manufacturing processes and transition to offshore manufacturing; (iii)
ability to obtain production material and labor; (iv) the potential transition
to value-added products; (v) the impact of competitive products and pricing;
(vi) general industry trends; (vii) general economic conditions as they affect
RFM's customers; and (viii) availability of required financing on favorable
terms.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in Appendix A attached
hereto and incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is found under the heading Nominees
and the heading Executive Officers of the Registrant in the definitive proxy
statement to be filed by RF Monolithics, Inc. with the Securities and Exchange
Commission (Commission) on or about December 15, 2000, in connection with the
2001 Annual Meeting.
22
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is found under the heading Executive
Compensation in the definitive proxy statement to be filed with the Commission
by RF Monolithics, Inc. on or about December 15, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is found under the heading Security
Ownership of Certain Beneficial Owners and Management in the definitive proxy
statement to be filed by RF Monolithics, Inc. with the Commission on or about
December 15, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is found under the heading Certain
Transactions in the definitive proxy statement to be filed by RF Monolithics,
Inc. with the Commission on or about December 15, 2000.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements. Financial statements are attached as Appendix A to
this report. The index to the financial statements is found on page F-1
of Appendix A.
(a) 2. Financial Statement Schedules. All schedules are omitted since the
required information is not present or is not present in amounts
sufficient to require a submission of the schedules, or because the
information required is included in the financial statements and notes
thereto.
(a) 3. Exhibits. See Exhibit Index in part (c), below.
(b) The Company did not file any reports on Form 8-K during the quarter
ended August 31, 2000
(c)
Exhibit
Number Description
3.1 Restated Certificate of Incorporation of Registrant. (2)
3.2 Bylaws of Registrant. (2)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen Stock Certificate. (2)
4.3 Rights Agreement dated as of December 20, 1994. (15)
4.4 First Amendment to Rights Agreement dated August 14, 1996. (16)
10.1 Form of Indemnity Agreement entered into by the Registrant and
each of its officers and directors. (1)
10.2 1982 Incentive Stock Option Plan, as amended and related grant
forms. (1)
10.3 1982 Supplemental Stock Option Plan, as amended and related
grant forms. (1)
23
<PAGE>
10.4 1986 Incentive Stock Option Plan, as amended and related grant
forms. (1)
10.5 1986 Supplemental Stock Option Plan, as amended and related
grant forms. (1)
10.6 Form of Employee Stock Purchase Plan. (1)
10.7 Form of Employee Stock Purchase Plan Offering. (1)
10.8 Non-Employee Director's Stock Option Plan. (2)
10.9 Form of Non-Employee Director's Stock Option. (1)
10.10 Lease Agreement between the Registrant and Jeff Yassai. (2)
10.11 Lease Agreement between the Registrant and JFC Growth Fund,
Ltd. (2)
10.12 Transfer Agreement between the Registrant and Peter V. Wright,
dated October 31, 1990. (1)
10.13 Agreement regarding payment due under the October 31, 1990,
Transfer Agreement between the Registrant and Peter V. Wright,
dated March 30, 1994. (1)
10.14 Letter Agreement by and between the Registrant and Comerica
Bank - Texas, dated January 1, 1994. (1)
10.15 Promissory Note between the Registrant and Comerica Bank -
Texas, dated December 1, 1994. (3)
10.16 Promissory Note between the Registrant and Comerica Bank -
Texas, dated March 1, 1995. (4)
10.17 Master Lease Agreement between Registrant and Banc One Leasing
Corporation, dated November 3, 1995. (5)
10.18 Form of Restrictive Stock Bonus Agreement to be entered
November 30, 1995. (6)
10.19 Loan Letter Agreement and Promissory Note between the
Registrant and Bank One, Texas, N.A. dated March 8, 1996. (7)
10.20 Promissory Note between the Company and Gary A. Andersen dated
March 28, 1996. (7)
10.21 Change of Control Agreement between the Company and Gary A.
Andersen and Sam L. Densmore dated December 18, 1995. (7)
10.22 Separation and Consulting Agreement between the Company and
Gary A. Andersen dated August 13, 1996. (8)
10.23 Form of Change of Control Agreement for certain officers. (9)
10.24 Separation and Consulting Agreement between the Company and
Chris G. Conlin dated June 10, 1998. (10)
10.25 Form of Restricted Stock Bonus Agreement. (11)
10.26 1999 Equity Incentive Plan. (11)
10.27 Form of Notice of Grant of Stock Options and Grant Agreement.
(11)
10.28 Promissory Note between the Company and James P. Farley dated
November 30, 1999. (12)
10.29 Promissory Note between the Company and Darrell Ash dated
November 30, 1999. (12)
10.30 Separation Agreement between the Company and Sam L. Densmore
dated November 11, 1999. (12)
10.31 Waiver and Third Amendment to Loan Agreement, dated as of
February 29, 2000, among RF Monolithics, Inc., Banc One Leasing
Corporation, and Bank One, Texas, National Association. (13)
10.32 Promissory Note, dated February 29, 2000, in the principal
amount of $7,500,000, executed and delivered by RF Monolithics,
Inc. to Bank One, Texas, National Association. (13)
10.33 Waiver and Amendment to Master Lease Agreement dated as of
February 29, 2000, by and between RF Monolithics, Inc. and Banc
One Leasing Corporation. (13)
10.34 Collateral Pledge Agreement dated as of May 31, 2000, by RF
Monolithics, Inc. in favor of Bank One, Texas, National
Association. (14)
24
<PAGE>
10.35 Waiver and Fourth Amendment to Loan Agreement, dated as of May
31, 2000, among RF Monolithics, Inc., Banc One Leasing
Corporation, and Bank One, Texas, National Association. (14)
10.36 Promissory Note, dated May 31, 2000, in the principal amount of
$7,500,000, executed and delivered by RF Monolithics, Inc. to
Bank One, Texas, National Association. (14)
10.37 Waiver and Amendment to Master Lease Agreement dated as of May
31, 2000, by and between RF Monolithics, Inc. and Banc One
Leasing Corporation. (14)
10.38 Separation Agreement between the Company and Thomas Phillips,
Jr. dated July 14, 2000. (17)
10.39 Consulting Agreement between the Company and Tom Garrett dated
June 28, 2000. (17)
10.40 Promissory Note, dated May 12, 1999, in the principal amount of
$19,500.00, executed and delivered by RF Monolithics, Inc. to
David Kirk. (17)
10.41 Consulting Agreement between the Company and Michael Bernique
dated June 23, 1999. (17)
11.1 Computation of net income per share. (17)
23.1 Consent of Deloitte & Touche LLP, Independent Auditors. (17)
24.1 Power of Attorney. See page 27.
(1) Previously filed as an exhibit to the Registration Statement on
Form S-1, as amended (Registration No. 33-78040) and
incorporated herein by reference.
(2) Previously filed as an exhibit to the Annual Report on Form 10-
K for the year ended August 31, 1994, and incorporated herein
by reference.
(3) Previously filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended November 30, 1994, and incorporated
herein by reference.
(4) Previously filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended February 28, 1995, and incorporated
herein by reference.
(5) Previously filed as an exhibit to the Annual Report on Form 10-
K for the year ended August 31, 1995, and incorporated herein
by reference.
(6) Previously filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended November 30, 1995, and incorporated
herein by reference.
(7) Previously filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended February 29, 1996, and incorporated
herein by reference.
(8) Previously filed as an exhibit to the Annual Report on Form 10-
K for the year ended August 31, 1996, and incorporated herein
by reference.
(9) Previously filed as an exhibit to the Annual Report on Form 10-
K for the year ended August 31, 1997, and incorporated herein
by reference.
(10) Previously filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended May 31, 1998, and incorporated
herein by reference.
(11) Previously filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended May 31, 1999, and incorporated
herein by reference.
(12) Previously filed as an exhibit to the Quarterly Report on
Form 10-Q for the quarter ended November 30, 1999, and
incorporated herein by reference.
25
<PAGE>
(13) Previously filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended February 29, 2000, and incorporated
herein by reference.
(14) Previously filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended May 31, 2000, and incorporated
herein by reference.
(15) Previously filed as an exhibit to the Form 8-K file December
29, 1994, and incorporated herein by reference.
(16) Previously filed as an exhibit to the Form 8-K file December
19, 1996, and incorporated herein by reference.
(17) Filed as an exhibit to this Annual Report on Form 10-K.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel, the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
26
<PAGE>
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 on the 13th day of
December, 2000.
RF MONOLITHICS, INC.
By: /s/ DAVID KIRK
------------------------------------
David Kirk
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears on
the following page constitutes and appoints Worsham Forsythe Wooldridge LLP and
David Kirk, respectively, his attorneys-in-fact for him in any and all
capacities, to sign any amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
the said attorney-in-fact, or his substitute or substitutes, may do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of RF
Monolithics, Inc. and in the capacities indicated on the 13th day of December,
2000.
/s/ DAVID KIRK /s/ CORNELIUS C. BOND, JR.
---------------------------- ------------------------------------
David Kirk Cornelius C. Bond, Jr.
CEO, President & Director Director
/s/ JAMES P. FARLEY /s/ DEAN C. CAMPBELL
---------------------------- ------------------------------------
James P. Farley Dean C. Campbell
VP Finance and Controller Director
/s/ MICHAEL R. BERNIQUE /s/ FRANCIS J. HUGHES, JR.
---------------------------- ------------------------------------
Michael R. Bernique Francis J. Hughes, Jr.
Chairman Director
27
<PAGE>
APPENDIX A
FINANCIAL STATEMENTS
<PAGE>
RF MONOLITHICS, INC.
INDEX TO FINANCIAL STATEMENTS -
ITEM 8 OF FORM 10-K
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES:
Consolidated Balance Sheets as of August 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the Years Ended August 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
for the Years Ended August 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the Years Ended August 31, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of RF Monolithics, Inc.:
We have audited the accompanying consolidated balance sheets of RF Monolithics,
Inc. and subsidiary (collectively referred to as the Company) as of August 31,
2000 and 1999, and the related consolidated statements of operations,
stockholders' equity and comprehensive income (loss), and of cash flows for each
of the three years in the period ended August 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of RF Monolithics, Inc. and subsidiary
as of August 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended August 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
October 16, 2000
(December 13, 2000, as to Note 14)
F-2
<PAGE>
RF MONOLITHICS, INC.
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2000 AND 1999
(In Thousands)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
2000 1999
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 542 $ 672
Short-term investments 3,543 4,516
Trade receivables, less allowance of $320 and $475 in 2000 and 1999,
respectively 9,868 10,840
Inventories 11,176 11,593
Prepaid expenses and other 1,111 1,208
Income taxes receivable 1,342 851
Deferred tax benefit 756 647
----------- -----------
Total current assets 28,338 30,327
PROPERTY AND EQUIPMENT - Net 14,063 17,645
DEFERRED TAX BENEFIT 2,782 -
OTHER ASSETS - Net 584 536
----------- -----------
TOTAL $ 45,767 $ 48,508
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit and current portion of notes payable $ 6,898 $ 5,100
Capital lease obligations - current portion 30 352
Accounts payable - trade 5,602 4,305
Accounts payable - construction and equipment 469 844
Accrued expenses and other liabilities 2,285 2,340
Income taxes payable 29 -
----------- -----------
Total current liabilities 15,313 12,941
LONG-TERM DEBT - Less current portion:
Notes payable - 5
Capital lease obligations 68 63
----------- -----------
Total long-term debt 68 68
COMMITMENTS AND CONTINGENCIES (Notes 7 and 12) - -
STOCKHOLDERS' EQUITY:
Common stock: $.001 par value, 20,000 shares authorized; 6,208 and
5,875 shares issued in 2000 and 1999, respectively 6 6
Additional paid-in capital 30,562 28,043
Treasury stock, 36 common shares (227) (227)
Retained earnings 474 8,082
Unearned compensation (359) (405)
Accumulated other comprehensive loss (70) -
----------- -----------
Total stockholders' equity 30,386 35,499
----------- -----------
TOTAL $ 45,767 $ 48,508
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
RF MONOLITHICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31, 2000, 1999, AND 1998
(In Thousands, Except Per-Share Amounts)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
2000 1999 1998
<S> <C> <C> <C>
SALES $ 47,256 $ 51,297 $ 55,172
COST OF SALES (43,250) (35,950) (33,549)
------------ ------------ -----------
GROSS PROFIT 4,006 15,347 21,623
OPERATING EXPENSES:
Research and development 4,700 5,697 5,081
Sales and marketing 6,047 5,415 5,646
General and administrative 3,546 3,092 2,889
Litigation (Note 12) 301 - 641
------------ ------------ -----------
Total 14,594 14,204 14,257
------------ ------------ -----------
INCOME (LOSS) FROM OPERATIONS (10,588) 1,143 7,366
OTHER INCOME (EXPENSE):
Interest income 249 268 306
Interest expense (866) (420) (325)
Other (17) 7 33
------------ ------------ -----------
Total (634) (145) 14
------------ ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES (11,222) 998 7,380
INCOME TAX EXPENSE (BENEFIT) - Current and deferred (3,614) 269 2,620
------------ ------------ -----------
NET INCOME (LOSS) $ (7,608) $ 729 $ 4,760
============ ============ ===========
EARNINGS (LOSS) PER SHARE:
Basic $ (1.26) $ 0.13 $ 0.86
============ ============ ===========
Diluted $ (1.26) $ 0.12 $ 0.80
============ ============ ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 6,046 5,783 5,551
============ ============ ===========
Diluted 6,046 5,932 5,978
============ ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
RF MONOLITHICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED AUGUST 31, 2000, 1999, AND 1998
(In Thousands)
------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Additional Retained Other
Paid-in Treasury Earnings Unearned Comprehensive
Shares Amount Capital Stock (Deficit) Compensation Income (Loss)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 1, 1997 5,514 $ 6 $ 25,535 $ - $ 2,593 $ (142) $ 3
Common stock options exercised, including tax
benefit (Note 10) 66 - 506 - - - -
Forfeiture of common stock grants (1) - (7) - - 7 -
Amortization of unearned compensation (Note 8) - - - - - 60 -
Issuance of common stock under the Purchase
Plan (Note 8) 117 - 828 - - - -
Change in unrealized gain on investments _ _ _ - - - 17
Net income - - - - 4,760 - -
----- ------ --------- ------- -------- ------- -------
BALANCE, AUGUST 31, 1998 5,696 6 26,862 - 7,353 (75) 20
Common stock options exercised, including tax
benefit (Note 10) 48 - 275 - - - -
Forfeiture of common stock grants (4) - (26) - - 26 -
Amortization of unearned compensation (Note 8) - - - - - 91 -
Issuance of common stock under the Purchase
Plan (Note 8) 61 - 485 - - - -
Issuance of common stock under the 1997 Equity
Incentive Plan (Note 8) 74 - 447 - - (447) -
Treasury stock transactions - - - (227) - - -
Change in unrealized gain (loss) on investments - - - - - - (20)
Net income - - - - 729 - -
----- ------ --------- ------- -------- ------- -------
BALANCE, AUGUST 31, 1999 5,875 6 28,043 (227) 8,082 (405) -
Common stock options exercised, including tax
benefit (Note 10) 262 - 2,044 - - - -
Forfeiture of common stock grants (8) - (50) - - 50 -
Amortization of unearned compensation (Note 8) - - - - 171 -
Issuance of common stock under the Purchase
Plan (Note 8) 69 - 350 - - - -
Issuance of common stock under the 1997 Equity
Incentive Plan (Note 8) 10 - 79 - - (79) -
Issuance of stock options to non-employees
(Note 8) - - 96 - - (96) -
Change in unrealized loss on investments - - - - - - (70)
Net loss - - - - (7,608) - -
----- ------ --------- ------- -------- ------- -------
BALANCE, AUGUST 31, 2000 6,208 $ 6 $ 30,562 $ (227) $ 474 $ (359) $ (70)
===== ====== ========= ======= ======== ======= =======
<CAPTION>
-------------------------------------------------------------------------------------
Comprehensive
Total Income (Loss)
<S> <C> <C>
BALANCE, SEPTEMBER 1, 1997 $ 27,995
Common stock options exercised, including tax
benefit (Note 10) 506
Forfeiture of common stock grants -
Amortization of unearned compensation (Note 8) 60
Issuance of common stock under the Purchase
Plan (Note 8) 828
Change in unrealized gain on investments 17 $ 17
Net income 4,760 4,760
--------- -----------
BALANCE, AUGUST 31, 1998 34,166 $ 4,777
===========
Common stock options exercised, including tax
benefit (Note 10) 275
Forfeiture of common stock grants -
Amortization of unearned compensation (Note 8) 91
Issuance of common stock under the Purchase
Plan (Note 8) 485
Issuance of common stock under the 1997 Equity
Incentive Plan (Note 8) -
Treasury stock transactions (227) -
Change in unrealized gain (loss) on investments (20) $ (20)
Net income 729 729
--------- -----------
BALANCE, AUGUST 31, 1999 35,499 $ 709
===========
Common stock options exercised, including tax
benefit (Note 10) 2,044
Forfeiture of common stock grants -
Amortization of unearned compensation (Note 8) 171
Issuance of common stock under the Purchase
Plan (Note 8) 350
Issuance of common stock under the 1997 Equity
Incentive Plan (Note 8)
Issuance of stock options to non-employees
(Note 8) -
Change in unrealized loss on investments (70) $ (70)
Net loss (7,608) (7,608)
--------- -----------
BALANCE, AUGUST 31, 2000 $ 30,386 $ (7,678)
========= ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
RF MONOLITHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 2000, 1999, AND 1998
(In Thousands)
------------------------------------------------------------------------------------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (7,608) $ 729 $ 4,760
Noncash items included in net income (loss):
Deferred income taxes (2,891) (12) 1,002
Depreciation and amortization 5,203 4,328 3,750
Reduction in provision for doubtful accounts 155 82 103
Amortization of unearned compensation 171 90 60
(Decrease) Increase in other assets (203) (49) 13
Cash from (used in) operating working capital:
Trade receivables 818 435 (1,943)
Inventories 417 (3,079) (3,580)
Prepaid expenses and other 97 (232) (15)
Accounts payable - trade 1,298 905 1,265
Accrued expenses and other liabilities (56) (64) (560)
Income tax receivable (491) (851) -
Income taxes payable 29 (439) (146)
-------- -------- --------
Net cash used in operating activities (3,061) 1,843 4,709
-------- -------- --------
INVESTING ACTIVITIES:
Purchase of short-term investments (6,199) (5,980) (5,785)
Proceeds from sale of short-term investments 7,172 6,858 5,875
Acquisition of property and equipment (1,536) (4,712) (7,079)
-------- -------- --------
Net cash used in investing activities (563) (3,834) (6,989)
-------- -------- --------
FINANCING ACTIVITIES:
Borrowings on notes payable 2,298 3,100 1,500
Repayments of notes payable (505) (500) (500)
Repayments of capital lease obligations (317) (647) (599)
(Repayments) Borrowings of accounts payable - construction and equipment (375) (22) 262
Common stock issued for options exercised 2,043 275 506
Common stock issued under the Purchase Plan 350 485 828
Common stock acquired under the Repurchase Program - (227) -
-------- -------- --------
Net cash from financing activities 3,494 2,464 1,997
-------- -------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (130) 473 (283)
CASH AND CASH EQUIVALENTS:
Beginning of year 672 199 482
-------- -------- --------
End of year $ 542 $ 672 $ 199
======== ======== ========
SUPPLEMENTAL INFORMATION:
Interest paid $ 745 $ 443 $ 295
======== ======== ========
Income taxes (refunded) paid $ (799) $ 1,524 $ 1,605
======== ======== ========
Noncash investing and financing activities - property and
equipment acquisitions by capital leases $ 68 $ 53 $ 37
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
RF MONOLITHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - RF Monolithics, Inc. designs, develops, manufactures and markets
a broad range of radio frequency (RF) component and module products in two
areas: communications and low-power products. The Company's products, which
are based on surface acoustic wave (SAW) technology, address the growing
requirements in the electronics markets for miniaturization, reduced power
consumption, increased precision, and greater reliability and durability.
These products are incorporated into application designs in four primary
markets: wireless communications, optical networks, automotive and
industrial, and are sold primarily in North America, Europe and Asia.
Consolidated Financial Statements include the accounts of RF Monolithics,
Inc. and its wholly owned subsidiary, RFM Export, Inc. (referred to
collectively as the Company). Significant intercompany balances and
transactions are eliminated in consolidation.
Financial Statement Preparation requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as
of the date of the financial statements and revenues and expenses for the
period. Actual results could differ significantly from those estimates.
Revenues are recognized when products are shipped. The Company permits the
return of damaged or defective products and accepts limited amounts of
product returns in other instances. Accordingly, the Company provides
allowances for the estimated amounts of these returns at the time of
revenue recognition.
Cash Equivalents represent liquid investments with maturities at the date
of acquisition of three months or less.
Short-Term Investments represent primarily government obligations with
original maturities at the date of acquisition of three or more months,
which are classified as available-for-sale and are stated at fair value.
Accrued income at August 31, 2000 and 1999, was $0 and $76,000,
respectively, which is included in prepaid expenses and other. Short-term
investments at August 31, 1999, represent primarily government and
corporate obligations with original maturities at the date of acquisition
of three or more months, which are classified as held-to-maturity and
stated at cost. Because of the nature of the investments, the Company
believes that there is very little credit risk in them.
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property and Equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided using the
straight-line method over the following estimated useful lives: machinery
and equipment, three to seven years or the related capital lease term if
shorter; leasehold improvements, three to eight years not exceeding the
lease term; computer software, three years; and office furniture, five
years.
Other Assets include legal costs of obtaining patents. These costs are
amortized over the estimated useful lives of the respective patents, which
are based on the related technology, ranging from three to seventeen years.
The Company had no impairment charges during fiscal 2000 and fiscal 1999,
in accordance with FAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of".
F-7
<PAGE>
Financial Instruments consist of cash, short-term investments, receivables,
payables and debt, the carrying value of which are a reasonable estimate of
their fair values due to their short maturities or variable interest rates.
Research and Development Costs are expensed as incurred. These costs do not
include nonrecurring engineering costs related to contract technology
development sales, which are included in cost of sales.
Deferred Income Taxes are provided under the asset and liability method for
temporary differences in recognition of income and expense for tax and
financial reporting purposes.
Earnings per Share (EPS) - Basic EPS is calculated using income available
to common stockholders divided by the weighted average number of common
shares outstanding during each year. Diluted EPS is similar to Basic EPS
except that it is based on the weighted average number of common and
potentially dilutive shares, from dilutive stock options, outstanding
during each year.
Stock-Based Compensation arising from stock option grants is accounted for
by the intrinsic value method under Accounting Principles Board (APB)
Opinion No. 25. Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation, requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but
does not require) compensation cost to be measured based on the fair value
of the equity instrument awarded. As permitted by SFAS No. 123, the Company
will continue to apply APB Opinion No. 25 to its stock-based compensation
awards to employees and will disclose the required pro forma effect on net
income and earnings per share (Note 8).
New Accounting Standards - SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137 and 138,
establishes standards for measuring, classifying and reporting all
derivative financial instruments in the financial statements. SFAS No. 133
is effective for the Company beginning the first quarter of fiscal year
2001. The Company does not expect the adoption of this standard to have a
material impact on the Company's financial position or results of
operations.
2. INVENTORIES
Inventories consist of the following (in thousands):
2000 1999
Raw materials and supplies $ 6,362 $ 5,713
Work in process 2,631 3,099
Finished goods 2,183 2,781
------- -------
Total $11,176 $11,593
======= =======
F-8
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Machinery and equipment $ 25,729 $ 23,116
Equipment under capital leases (Note 6) 2,753 2,684
Construction in progress 1,059 2,679
Leasehold improvements 5,854 5,766
Computer software 2,531 2,344
Office furniture 405 404
--------- --------
Total 38,331 36,993
Less accumulated depreciation and amortization (including $1,917 and
$1,500 in 2000 and 1999, respectively, for capital leases) 24,268 19,348
--------- --------
Property and equipment - net $ 14,063 $ 17,645
========= ========
</TABLE>
Construction in progress includes equipment and other assets not yet placed
in service primarily related to increasing the capacity of the
manufacturing facilities.
4. OTHER ASSETS
Other assets consist of the following (in thousands):
2000 1999
Patents, less accumulated amortization of $451
and $369 in 2000 and 1999 respectively $ 222 $ 277
Patent deposits 171 205
Other 191 54
-------- --------
Total $ 584 $ 536
======== ========
5. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following (in
thousands):
2000 1999
Accrued payroll and compensation $ 1,159 $ 1,160
Other accrued expenses 1,126 1,180
--------- ---------
Total $ 2,285 $ 2,340
========= =========
F-9
<PAGE>
6. NOTES PAYABLE
Notes payable at August 31, 2000 and 1999, consist of the following (in
thousands):
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Note payable under $6,898 revolving line-of-credit facility that
expires December 31, 2000, bearing interest at 2% over the bank's
prime floating rate or LIBOR (11.5% at August 31, 2000), subject to
certain covenants generally related to working capital, stockholders'
equity and earnings and collateralized by all accounts receivable,
inventory and equipment purchased on or subsequent to March 1, 1996
(net book value of $10,556 at August 31, 2000), excluding leased equipment $ 6,898 $ 4,600
Note payable under $2,500 equipment term loan facility payable in equal
monthly installments, maturing five years from the date of each advance,
bearing interest at the bank's prime floating rate or LIBOR (8.5% to
8.9% at August 31, 1999), subject to certain covenants generally related
to working capital, shareholders' equity and earnings and collateralized
by certain equipment (net book value of $2,184 at August 31, 1999). Not
in effect at August 31, 2000. - 505
---------- ---------
Total 6,898 5,105
Less current portion 6,898 5,100
---------- ---------
Long-term portion $ - $ 5
========== =========
</TABLE>
At August 31, 2000, the available unused balance under the revolving
line-of-credit facility was zero. The Company's Line of Credit arrangements
as of August 31, 2000, were scheduled to expire at December 31, 2000. The
Company violated financial covenants related to earnings and liquidity at
several points during the year, including as of August 31, 2000. As a
result of these violations, interest rates were increased, the borrowing
structure converted to an asset-based loan, investments were frozen as
collateral, and borrowing limits were frozen in amount.
The revolving line-of-credit facility was replaced by another credit
facility in December 2000. See Note 14.
7. LEASES AND OTHER COMMITMENTS
The Company has entered into non-cancelable capital and operating lease
agreements for its manufacturing facility and certain equipment. Rent
expense under the operating leases in 2000, 1999, and 1998 was $2,595,000,
$1,828,000, and $922,724, respectively.
F-10
<PAGE>
Minimum future rental commitments under the capital and operating leases at
August 31, 2000, are as follows (in thousands):
Capital
Lease Operating
Obligations Leases
Fiscal year ending August 31:
2001 $ 30 $ 3,074
2002 68 2,479
2003 - 1,924
2004 - 209
2005 - -
------- --------
Total minimum payments 98 $ 7,686
========
Less amounts representing interest -
-------
Total present value of net minimum
lease payments at August 31, 2000 98
Less current portion 30
-------
Long-term portion $ 68
=======
Lease obligations, which are presented as operating lease obligations in
the above table, are under a $6,000,000 equipment lease facility, which the
Company had fully utilized at August 31, 2000. Payments are due in monthly
installments over a four-year period from the date of each advance.
8. CAPITAL STOCK
Preferred stock of 5,000,000 shares with $.001 par value is authorized;
none was issued at August 31, 2000 and 1999. Rights, preferences and other
terms of the preferred stock will be determined by the Board of Directors
at the time of issuance.
The following table reconciles the numerators and denominators used in
the computation of both basic and diluted earnings per share:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Basic EPS computation:
Numerator:
Net income (loss) $ (7,608) $ 729 $ 4,760
Denominator:
Weighted average shares outstanding (000's) 6,046 5,783 5,551
-------- ------ -------
Basic EPS $ (1.26) $ .13 $ 0.86
Diluted EPS computation:
Numerator:
Net income (loss) $ (7,608) $ 729 $ 4,760
Denominator (000's):
Weighted average shares outstanding 6,046 5,783 5,551
Dilutive effect of stock options 149 427
-------- ------ -------
6,046 5,932 5,978
-------- ------ -------
Diluted EPS $ (1.26) $ 0.12 $ 0.80
</TABLE>
Stock Options - In 1999, the Company adopted the 1999 Incentive Stock
Option Plan (the 1999 Plan). The Company initially authorized for grant
200,000 shares of common stock and, in fiscal 2000, increased the
authorized amount to 401,200 shares of common stock for issuance under this
plan. Under the terms of the 1999 Plan, incentive
F-11
<PAGE>
options to purchase common stock and stock bonuses and rights to purchase
restricted stock may be granted to non-officer employees at the discretion
of the board of directors and subject to certain restrictions. Generally,
one forty-eighth of the shares optioned become exercisable each month
beginning the first day of the month following the date of grant. The
exercise price of each option equals the market price of the Company's
stock on the date of grant and the options expire ten years after the date
of grant. At August 31, 2000, there are 341,444 options outstanding and
48,014 options available for grant under this plan. A summary of the
activity for the 1999 Plan follows:
<TABLE>
<CAPTION>
1999 2000
----------------------------- ---------------------------
Weighted-average Weighted-average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year - - 115,055 $ 6.2113
Granted 135,500 $ 6.1888 304,200 $ 7.5428
Exercised (1,486) $ 6.0625 (10,256) $ 7.0652
Expired (18,959) $ 6.0625 (67,555) $ 7.0735
--------- --------
Outstanding at end of year 115,055 $ 6.2113 341,444 $ 7.2014
========= ========
Options exercisable at year-end 8,941 $ 6.1560 67,262 $ 6.9539
========= ========
</TABLE>
Under the terms of the 1997 Equity Incentive Plan (1997 Plan), the Company
has authorized for grant 1,375,000 shares of common stock. Under terms of
the 1997 Plan, nonqualified and incentive options to purchase common stock,
and stock bonuses and rights to purchase restricted stock may be granted to
key employees, directors or consultants at the discretion of the board of
directors and subject to certain restrictions. Generally, one forty-eighth
of the shares optioned become exercisable each month beginning the first
day of the month following at the date of grant. The exercise price of each
option equals the market price of the Company's stock on the date of grant
and the options expire ten years after the date of grant. At August 31,
2000, there are 856,458 options outstanding and 147,266 options available
for grant under this plan. A summary of the activity for the 1997 Plan
follows:
<TABLE>
<CAPTION>
1998 1999 2000
---------------------- ----------------------- ------------------------
Weighted Weighted Weighted
-average -average -average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 484,431 $ 7.8367 753,902 $ 9.9690 853,058 $ 9.1878
Granted 409,000 $11.9583 249,000 $ 7.0960 268,900 $ 9.1358
Exercised (45,734) $ 7.0169 (28,054) $ 7.4508 (152,376) $ 8.5986
Expired (93,795) $ 9.0700 (121,790) $10.1447 (113,124) $11.1288
--------- --------- ---------
Outstanding at end of year 753,902 $ 9.9690 853,058 $ 9.1878 856,458 $ 9.0586
========= ========= =========
Options exercisable at year-end 250,442 $ 8.3307 386,277 $ 8.9605 374,517 $ 8.9575
========= ========= =========
</TABLE>
Under terms of the 1986 Stock Option Plan (1986 Plan), nonqualified options
to purchase common stock may be granted to key employees and consultants at
the discretion of the board of directors, subject to certain restrictions.
Generally, one forty-eighth of the shares optioned become exercisable each
month beginning the first day of the month following at the date of grant.
The exercise price of each option equals the market price of the Company's
stock on the date of grant and the options expire ten years after the date
of grant. The Company has authorized a total of 712,501 shares of common
stock for issuance under the 1986 Plan. At August 31, 2000, there are
111,283 options outstanding and
F-12
<PAGE>
18,385 options available for grant under this plan. A summary of the
activity for the 1986 Plan is as follows:
<TABLE>
<CAPTION>
1998 1999 2000
---------------------- ----------------------- ------------------------
Weighted Weighted Weighted
-average -average -average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 248,560 $ 1.4637 227,616 $ 1.5078 214,036 $ 1.6899
Granted - - 10,000 $ 7.6250 - -
Exercised (20,613) $ 0.9437 (18,425) $ 1.0396 (101,491) $ 1.1742
Expired (331) $ 3.5328 (5,155) $ 7.4902 (1,262) $ 4.4290
--------- -------- ---------
Outstanding at end of year 227,616 $ 1.5078 214,036 $ 1.6899 111,283 $ 2.1292
========= ======== =========
Options exercisable at year-end 224,214 $ 1.5053 210,058 $ 1.5775 108,529 $ 1.9897
========= ======== =========
</TABLE>
Under the terms of the Non-Employee Director Stock Option Plan (Director
Plan), options to purchase common stock may be granted every January 1 to
each director who is not an officer of the Company. One-fourth of the
shares optioned become exercisable on the first anniversary of the date of
grant and one forty-eighth of the shares optioned become exercisable each
month thereafter, with all options fully exercisable four years after the
date of grant. The exercise price of each option equals the market price of
the Company's stock on the date of grant and the options expire ten years
after the date of grant. The Company has authorized a total of 275,000
shares of common stock for issuance under the Director Plan. At August 31,
2000, there are 141,278 options outstanding and 126,490 options available
for grants. A summary of the activity for the Director Plan is as follows:
<TABLE>
<CAPTION>
1998 1999 2000
---------------------- ----------------------- ------------------------
Weighted Weighted Weighted
-average -average -average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 70,768 $ 7.7400 109,268 $12.6100 131,768 $12.0362
Granted 38,500 $21.5616 22,500 $ 9.2500 22,500 $ 6.1250
Exercised - - - - - -
Expired - - - - (12,990) $15.3095
-------- -------- --------
Outstanding at end of year 109,268 $12.6100 131,768 $12.0362 141,278 $10.7939
======== ======== ========
Options exercisable at year-end 56,424 $ 7.6091 81,383 $10.6479 102,570 $11.1944
======== ======== ========
</TABLE>
Options under the above plans are granted at prices equal to or greater
than the fair value of the common stock at grant dates as determined by the
board of directors.
The following table summarizes information about stock options outstanding
at August 31, 2000 for all four plans:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- ----------------------------
Weighted-
average
Number Remaining Weighted- Number Weighted-
Outstanding Contractual average Exercisable average
Range of Exercise Prices at 8/31/00 Life Exercise Price at 8/31/00 Exercise Price
------------------------ ---------- ---- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.60 to $ 1.50 90,639 2.14 years $1.1462 90,639 $1.1462
$ 4.50 to $ 7.50 686,952 8.14 years $6.5279 252,581 $6.2894
$ 7.5625 to $ 11.375 434,937 7.97 years $9.4031 201,013 $9.3953
$ 11.875 to $ 27.0625 237,935 7.94 years $13.8947 108,647 $14.8228
</TABLE>
F-13
<PAGE>
Employee Stock Purchase Plan - In 1994, the Company adopted an employee
stock purchase plan (Purchase Plan). In connection with the adoption of the
Purchase Plan, the Company initially reserved 175,000 shares of its common
stock. During January 1998 and 2000, the Company increased the number of
shares available under the plan to 350,000 and 525,000 shares of common
stock, respectively. Under terms of the Purchase Plan, rights to purchase
common stock may be granted to eligible employees at the discretion of the
board of directors, subject to certain restrictions. The Purchase Plan
enables eligible employees of the Company to purchase shares of common
stock at not less than 85% of the fair market value of the common stock at
the determination date through payroll withholding. A summary of the
activity for the employee stock purchase plan is as follows:
Purchase
Shares Proceeds
Purchases:
As of September 1, 1997 92,464 $ 530,917
1998 117,117 827,666
1999 60,178 485,524
2000 68,653 350,130
-------- ----------
Total 338,412 $2,194,237
======== ==========
Common Shares reserved at August 31, 2000, for possible future conversion
or issuance are as follows:
Options granted:
1999 Plan 341,444
1997 Plan 856,458
1986 Plan 111,283
Director Plan 141,278
---------
Total shares contingently issuable 1,450,463
Options and purchase rights available for grants:
1999 Plan 48,014
1997 Plan 147,266
1986 Plan 18,385
Director Plan 126,490
Purchase Plan 186,588
---------
Total 526,743
---------
Total common shares reserved 1,977,206
=========
Stock-Based Compensation - The Company applies APB Opinion No. 25 and
related Interpretations in accounting for its stock option plans. No
compensation cost (generally measured as the excess, if any, of the quoted
market price of the common stock at the date of the grant over the amount
an employee must pay to acquire the common stock) has been recognized for
the Company's stock option plans. SFAS No. 123 prescribes a method to
record compensation cost for stock-based employee compensation plans at
fair value, but allowed disclosure as an alternative. Pro forma disclosures
as if the Company had adopted the cost recognition requirements under SFAS
No. 123 are presented below. The pro forma compensation cost may not be
representative of that expected in future years.
F-14
<PAGE>
<TABLE>
<CAPTION>
Years Ended
-------------------------------------
2000 1999 1998
<S> <C> <C> <C>
Net (loss) income (in thousands):
As reported $ (7,608) $ 729 $ 4,760
Pro forma (8,774) (344) 4,126
Earnings (loss) per share - diluted:
As reported $ (1.26) $ 0.12 $ 0.80
Pro forma (1.45) (0.05) 0.69
Stock options issued 595,600 490,700 475,500
Weighted average exercise price $ 8.21 $ 5.58 $ 12.86
Average compensation value of options
granted per option $ 3.60 $ 3.95 $ 3.82
</TABLE>
Compensation cost (for current-year grants) was calculated in accordance
with the binomial model, using the following assumptions: (i) expected
volatility computed using the monthly average of the Company's common stock
market price as listed on the New York Stock Exchange for the period July
28, 1994, date of the Company's initial public offering, through August
2000, which market price volatility averaged 70%; (ii) expected dividend
yield of 0%; (iii) expected option term of six years; and (iv) risk-free
rate of return as of the date of grant, which ranged from 5.5% to 6.5%,
based on extrapolated yield of five- and seven-year U.S. Treasury
securities.
Stock Options for Employees Converting to Consultants - During the fourth
quarter of 2000, two employees of the Company terminated employment and
entered into consulting agreements to perform certain activities. Under
guidance of FASB Interpretation 44, the Company recorded $52,000 of
unearned compensation relating to the unvested portion of stock options
held by these employees. This amount is to be expensed over the remaining
vesting periods or the consulting period, whichever is shorter. The
remaining unvested options at the end of the consulting period will be
cancelled. Compensation expense for these vesting options was approximately
$5,000 in 2000.
Common Stock Grants - In January 1995, the Company granted 51,700 shares of
its common stock to key employees of the Company. Based on a share price of
$7.00 per share at the measurement date, the Company recorded unearned
compensation of $361,900. The Company's right to reacquire one-fourth of
the shares granted expired on November 27, 1996, 1997, 1998, and 1999,
respectively. During 1998 and 1999, certain employees who were originally
granted 1,000 and 500 shares, respectively, terminated their employment
with the Company. The remaining unvested shares granted to these employees
were reacquired and retired. Compensation expense related to these common
stock grants was approximately $16,000, $56,000 and $60,000 in 2000, 1999
and 1998, respectively.
In April 1999, the Company granted 73,700 shares of its common stock to key
employees of the Company. Based on a share price of $6.06 per share at the
measurement date, the Company recorded unearned compensation of $446,800.
The Company's right to reacquire one-fourth of the shares granted expires
on May 1, 2000, 2001, 2002, and 2003, respectively. During 1999 and 2000,
certain employees who were originally granted 3,600 and 16,800 shares,
respectively, terminated their employment with the Company. In 2000, the
Company allowed certain terminating employees to retain 6,200 previously
unvested shares. The remaining unvested shares granted to employees who
terminated were reacquired and retired in all years. Compensation expense
related to these common stock grants was approximately $124,000 and $34,000
in 2000 and 1999, respectively.
In January 2000, the Company granted 10,800 shares of common stock to
consultants of the Company. Based on a share price of $7.56 per share the
Company recorded unearned compensation of $78,650. The Company's right to
reacquire one-fourth of the shares granted expires on February 1, 2001,
2002,
F-15
<PAGE>
2003 and 2004. During 2000, one consultant who was originally granted 2,400
shares completed his contract with the Company. The Company allowed this
consultant to retain all rights in the previously unvested shares.
Compensation expense related to these common stock grants was approximately
$26,000 in 2000.
Stockholder Rights Plan - In December 1994, the Company adopted a
stockholder rights plan. In connection with the adoption of such plan, the
Company reserved 250,000 shares of its Series A Junior Participating
Preferred Stock, $.001 par value, and declared a dividend of one preferred
share purchase right (a Right) for each outstanding share of common stock,
par value $.001 per share (the Common Shares), of the Company. The dividend
of 4,965,847 Rights was issued to the stockholders of record on January 16,
1995. Each Right entitles the registered holder to purchase from the
Company one one-hundredth of a share of Series A Junior Participating
Preferred Stock, par value $.001 per share (the Preferred Shares), at a
price of $74.40 per one one-hundredth of a Preferred Share, subject to
adjustment. The Rights become exercisable on the earlier of the tenth day
after the public announcement of acquisition by a person or group of
persons, not including an exempt person as defined by the stockholder
rights plan, of 15% or more of the Company's common shares outstanding on
the tenth business day after the date of first public announcement of the
intention of a person or group of persons to commence a tender or exchange
offer to acquire 15% or more of the Company's common shares outstanding.
When issued, the Preferred Shares have dividend and voting rights that are
defined in the Rights plan. The Rights may be redeemed by the Company at a
redemption price of $.01 per Right in accordance with the Rights plan, and
the Rights expire on December 20, 2004.
Subsequent Stock and Option Grants - On December 6, 2000, the Company
granted to certain employees restricted stock for 26,000 shares of common
stock and non-qualified options to purchase 130,500 shares of common stock
of the Company. The items were granted in accordance with the Company's
1997 Equity Incentive Plan and the 1999 Equity Incentive Plan,
respectively. The options were granted with an exercise price of $3.875
which was equal to the fair value of the common stock at the date of grant.
9. EXPORT SALES
Export sales to foreign markets are as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
----------------------- ------------------------ ------------------------
As a As a As a
Percentage Percentage Percentage
of Total of Total of Total
Sales Revenue Sales Revenue Sales Revenue
<S> <C> <C> <C> <C> <C> <C>
Export sales:
France $ 6,279 13.3% $ 6,001 11.7% $ 6,560 11.9%
Germany 5,275 11.2% 6,120 11.9% 5,113 9.3%
Other European 6,094 12.9% 7,639 14.9% 7,857 14.2%
Asia 8,793 18.6% 7,150 13.9% 8,165 14.8%
Other 2,820 6.0% 2,082 4.1% 3,752 6.8%
---------- --------- ------------ --------- ---------- ---------
Total export sales $ 29,261 61.9% $ 28,992 56.5% $ 31,447 57.0%
========== ========= ============ ========= ========== =========
</TABLE>
There are no assets separately identified with foreign sales, and the
profitability of such sales is similar to that of domestic sales.
F-16
<PAGE>
10. INCOME TAXES
The tax effects of significant items comprising the Company's net deferred
income tax benefits as of August 31, 2000 and 1999, are as follows (in
thousands):
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Net operating losses $ 2,199 $ -
Accruals and valuation allowances not currently deductible 194 146
Inventory costs capitalized for tax purposes 501 216
Tax credit carryforwards 994 285
Less: Valuation allowance (350) -
-------- --------
Total deferred income tax benefit $ 3,538 $ 647
======== ========
</TABLE>
Management believed that no valuation allowance against the deferred tax
benefits was necessary at August 31, 1999.
The resulting income tax expense (benefit) is shown below (in thousands):
2000 1998 1999
Current - federal $ (752) $ 232 $ 1,470
Current - state 29 49 148
Deferred (2,891) (12) 1,002
-------- ------ ---------
$ (3,614) $ 269 $ 2,620
======== ====== =========
A reconciliation between income taxes computed at the federal statutory
rate and income tax expense is shown below (in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Income taxes computed at federal statutory rate $ (3,817) $ 339 $ 2,510
State income tax expense - net of federal
income tax benefit 19 11 117
Expenses not deductible for tax purposes 11 17 20
Change in valuation allowance 350 - -
Effect on tax of foreign sales corporation - (98) (101)
Other (177) - 74
--------- -------- ---------
Total income tax expense (benefit) $ (3,614) $ 269 $ 2,620
========= ======== =========
</TABLE>
As of August 31, 2000, the Company has income tax carryforwards of
$6,468,005, $417,000 and $577,000 related to net operating losses,
alternative minimum federal income tax benefits and general business
credits, respectively, available to reduce future federal income tax
liabilities. The net operating loss carryforward expires August 31, 2020.
11. EMPLOYEE BENEFIT PLAN
The Company has a profit sharing plan under Section 401(k) of the Internal
Revenue Code, which covers substantially all employees. The Company may
match employee contributions at a rate determined by the board of
directors. Matching contributions of $140,000 and $81,000 were made in 1999
and 1998, respectively. No matching contributions were made in 2000.
F-17
<PAGE>
12. LITIGATION
The Company is not currently involved in any litigation. The litigation the
Company had been involved in with Akom Technologies, Inc. and Raytheon
Company was settled in the first quarter of Fiscal 2001. The impact on
earnings has been included in computation of litigation and unusual legal
expense in the fourth quarter results of fiscal 2000.
13. QUARTERLY INFORMATION (UNAUDITED)
Selected unaudited quarterly financial data is as follows (in thousands,
except per-share amounts):
<TABLE>
<CAPTION>
Fiscal 2000 Quarter Ended Fiscal 1999 Quarter Ended
----------------------------------------- ----------------------------------------
Nov. 30 Feb. 28 May 31 Aug. 31 Nov. 30 Feb. 28 May 31 Aug. 31
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $ 9,329 $12,186 $12,697 $13,044 $12,880 $13,102 $12,967 $12,348
Cost of sales 10,766 10,817 10,642 11,025 8,338 8,516 8,263 10,833
------- ------- ------- ------- ------- ------- ------- -------
Gross profit (1,437) 1,369 2,055 2,019 4,542 4,586 4,704 1,515
Operating expenses:
Research and development 1,231 1,026 1,263 1,180 1,144 1,509 1,155 1,889
Sales and marketing 1,496 1,501 1,493 1,557 1,296 1,322 1,378 1,419
General and administrative 1,265 705 746 830 655 735 785 917
Litigation - - - 301 - - - -
------- ------- ------- ------- ------- ------- ------- -------
Total 3,992 3,232 3,502 3,868 3,095 3,566 3,318 4,225
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations (5,429) (1,863) (1,447) (1,849) 1,447 1,020 1,386 (2,710)
Other income (expense), net (124) (150) (154) (206) (17) (20) (49) (59)
------- ------- ------- ------ ------- ------- ------- -------
Income (loss) before
income taxes (5,553) (2,013) (1,601) (2,055) 1,430 1,000 1,337 (2,769)
Income tax expense (benefit) (1,694) (614) (488) (818) 507 355 475 (1,068)
------- ------- ------- ------ ------- ------- ------- -------
Net income (loss) $(3,859) $(1,399) $(1,113) $(1,237) $ 923 $ 645 $ 862 $(1,701)
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic $ (0.65) $ (0.23) $ (0.18) $ (0.20) $ 0.16 $ 0.11 $ 0.15 $ (0.29)
======= ======= ======= ======= ======= ====== ======= =======
Diluted $ (0.65) $ (0.23) $ (0.18) $ (0.20) $ 0.16 $ 0.11 $ 0.15 $ (0.29)
======= ======= ======= ======= ======= ====== ======= =======
Weighted average common
shares outstanding:
Basic 5,894 5,983 6,116 6,191 5,708 5,744 5,818 5,864
======= ======= ======= ======= ======= ======= ======= =======
Diluted 5,894 5,983 6,116 6,191 5,890 5,927 5,894 5,864
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
14. SUBSEQUENT EVENTS
Banking Agreement. In December 2000, the Company entered into an agreement with
a commercial bank on a new credit facility consisting of $13.5 million in a
revolving credit facility and a $3 million term note. Included in the revolving
credit facility is an $8 million loan that is supported by the Export/Import
bank (Exim bank). Both facilities terminate on December 31, 2003. In addition,
the Company borrowed $1 million under a temporary overadvance loan,
collateralized by its fiscal year 2000 federal income tax refund that is to be
repaid by January 1, 2001. The proceeds of these new loans and the sale of
approximately $3.6 million in short term investments were used to pay off
approximately $6.9 million for the revolving credit facility that was effective
as of August 31, 2000, and $8.8 million in obligations related to the
equipment-collateralized operating lease facility that also was in effect as of
August 31, 2000. As a result, the Company
F-18
<PAGE>
completely satisfied its obligations to its former bank and acquired
approximately $8.3 million in capital assets that had formerly been utilized
under operating leases.
The structure of the new banking agreement ties amounts borrowed under the
agreement to a borrowing base consisting of certain receivables, inventory, and
fixed assets. Essentially all the assets of the Company, tangible and
intangible, are pledged as collateral under both facilities. The term loan
requires equal monthly payments of principal and interest totaling $50,000
beginning January 2001. The interest rate for both facilities is 2% over prime
rate. As part of the agreement, the bank was given a ten year warrant to
purchase 30,000 shares of the Company's common stock at $5.00 per share. This
new credit facility contains financial covenants relating to various matters,
including but not limited to, minimum net worth, quarterly and monthly earnings,
and limitations on changes in corporate structure, and restrictions on dividends
and capital spending.
Equity Investment. In December 2000, the Company entered into an agreement to
raise approximately $2,000,000 in cash by the sale of common stock and warrants
to purchase common stock. The sale consisted of 533,332 units. Each unit was
sold a a price of $3.75 and consisted of one share of common stock and a three-
year warrant to purchase one share of common stock at $7.50. The agreement
called for certain restrictions on the sale or further acquisition of stock by
the investors, as well as the right to require registration in the future. The
proceeds of the sale of this stock will be used to support the operations of the
Company.
******
F-19
