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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 27, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 0-22511
RF MICRO DEVICES, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1733461
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7625 THORNDIKE ROAD 27409-9421
GREENSBORO, NORTH CAROLINA (Zip code)
(Address of principal executive offices)
(336) 664-1233
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant was approximately $1,760,890,247 as of June 17,
1999. For purposes of such calculation, shares of common stock held by persons
who hold more than 10% of the outstanding shares of common stock and shares held
by directors and officers of the registrant and their immediate family members
have been excluded because such persons may be deemed to be affiliates. This
determination is not necessarily conclusive. There were 39,501,598 shares of the
registrant's common stock outstanding as of June 17, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's proxy statement with respect to the
1999 annual meeting of shareholders of the registrant have been incorporated by
reference herein.
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This Annual Report on Form 10-K contains forward-looking statements that
relate to our plans, objectives, estimates and goals. Words such as "expects,"
"anticipates," "intends," "plans," "believes" and "estimates," and variations of
such words and similar expressions, identify such forward-looking statements.
Our business is subject to numerous risks and uncertainties, including probable
variability in our quarterly operating results, manufacturing capacity
constraints, risks associated with our operation of a wafer fabrication
facility, our dependence on a limited number of customers, variability in our
production yields, our ability to manage rapid growth and our dependence on
third parties. These and other risks and uncertainties, many of which are
addressed in more detail below in the sections entitled "Business -- Additional
Factors That May Affect Future Results" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," could cause our
actual results and developments to be materially different from those expressed
or implied by any of these forward-looking statements.
We use a 52 or 53 week fiscal year ending on the Saturday closest to March
31 of each year. Each of the 1997, 1998 and 1999 fiscal years was a 52-week
year. Our other fiscal quarters end on the Saturday closest to June 30,
September 30 and December 31 of each year. For purposes of this Annual Report on
Form 10-K (including the Financial Statements and Notes thereto), we describe
each fiscal year is described as having ended on March 31 and each of the first
three quarters of each fiscal year is described as having ended on June 30,
September 30 and December 31.
Where appropriate, we have adjusted references in this Annual Report on
Form 10-K to prices and share numbers of our common stock to reflect a 2-for-1
stock split that we effected in the form of a 100% share dividend payable on
March 31, 1999 to record holders of common stock on March 17, 1999.
PART I
ITEM 1. BUSINESS
INTRODUCTION
We design, develop, manufacture and market proprietary radio frequency
integrated circuits, or RFICs, for wireless communications applications such as
cellular and personal communication services, cordless telephony, wireless local
area networks, wireless local loop, industrial radios, wireless security and
remote meter reading. We offer a broad array of products -- including
amplifiers, mixers, modulators/demodulators and single chip transmitters,
receivers and transceivers -- that represent a substantial majority of the RFICs
required in wireless subscriber equipment. We design products using three
distinct process technologies: gallium arsenide heterojunction bipolar
transistor, or GaAs HBT; silicon bipolar transistor; and, to a lesser extent,
gallium arsenide metal semiconductor field effect transistor, or GaAs MESFET.
We began manufacturing our own GaAs HBT products at our new wafer
fabrication facility in September 1998, and we are now concentrating our efforts
on increasing our manufacturing capacity to satisfy customer demand for GaAs HBT
products, which is currently greater than we can meet. Before September 1998,
TRW Inc., which is our largest shareholder, manufactured all of our GaAs HBT
products. TRW has granted us a perpetual non-royalty bearing license to use its
GaAs HBT process to design and manufacture products for commercial wireless
applications. Our GaAs HBT power amplifiers and small signal devices have been
designed into advanced subscriber equipment made by leading original equipment
manufacturers, or OEMs, such as Nokia Mobile Phones Ltd., LG Information and
Communications, Ltd., Hyundai Electronics Industries Co. Ltd., Samsung
Electronics Co., Ltd., and Motorola, Inc. Through a delivery strategy called
Optimum Technology Matching(R), we also offer silicon and GaAs MESFET components
to complement our GaAs HBT products. Optimum Technology Matching(R) allows us to
offer RFIC solutions, on a component-by-component basis, that best fulfill OEMs'
performance, cost and time-to-market requirements.
INDUSTRY BACKGROUND
The wireless communications industry grew rapidly over the past decade as
cellular, paging, PCS and other emerging wireless communications services became
more widely available and affordable. Technological
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advances, changes in telecommunications regulations and the allocation and
licensing of additional radio spectrum have helped cause this growth worldwide.
Technological advances have also led to the development of competing wireless
communications services, and to the development of new and emerging wireless
applications, including second generation digital cordless telephony, wireless
LANs, WLL, wireless security and remote meter reading. As wireless usage grows,
wireless service providers continue to improve the quality and function of the
services they offer and seek to offer greater bandwidth for more capacity.
To expand capacity from first generation cellular communications networks,
certain national governments made available less congested frequency bands for
new wireless communications services. In the United States, the Federal
Communications Commission allocated and auctioned 10 MHz and 30 MHz portions of
spectrum in the 1850 to 1990 MHz range for PCS, and allocated broad band
spectrum in the 2.4 GHz range for wireless LANs. Capacity and functionality also
are being addressed by the wireless industry's movement from wireless networks
that use analog signal modulation techniques to wireless networks that use
digital signal modulation techniques. As compared to analog technologies,
digital technologies generally provide better signal quality, help the
transmission of both voice and data and improve capacity by allowing the
transmission of more information in a smaller amount of frequency space. These
digital technologies place a premium on linear power amplification, which can
mean higher quality signals.
The wireless communications markets have many different air interface
signal transmission standards in different parts of the world, including digital
standards, such as Global System for Mobile Communications, Time Division
Multiple Access and Code Division Multiple Access, analog standards, such as
Advanced Mobile Phone Service and Total Access Communications Systems, and
certain hybrid standards. For PCS, the FCC has approved seven different air
interface standards. The handsets designed for each air interface standard
generally require unique RF and baseband integrated circuit solutions that must
be designed to meet the demands of subscriber equipment users for greater
functionality, smaller and lighter equipment, longer battery life and better
security, all at reduced costs. As a result of these technical challenges and
end user demands, it has become increasingly difficult for OEMs of subscriber
equipment to develop and supply all the required components in a timely and
cost-effective manner. This has caused some OEMs to rely increasingly on third
party value-added technology providers that have the component and systems level
expertise to design and the production capacity to supply these solutions. In
addition, because new entrants to the wireless subscriber equipment market, such
as large consumer electronics companies, tend to be less vertically integrated
than established OEMs, they must rely even more on third party suppliers. This
technology outsourcing trend is particularly evident in the RF segment of the
equipment due to the scarcity of RFIC engineers and the design complexity of the
technology.
RF OVERVIEW
A typical subscriber device for wireless personal communications, such as a
handset, contains digital, baseband and RF components. Digital components
control the overall circuitry and encrypt the voice or other data intended for
transmission and reception, while baseband components are used to process
signals into or from their original electrical form (low frequency analog voice
or data). RF components, such as amplifiers, mixers, attenuators, switches,
modulators, demodulators, oscillators and frequency synthesizers, convert,
switch, process and amplify the high frequency signals that carry the
information to be transmitted or received.
RF technology presents different engineering challenges than standard
semiconductor design. In general, digital and baseband semiconductor design
engineers create standard semiconductor circuit designs by combining "cells"
that previously have been evaluated and characterized. Because cells have
predictable performance, the design engineer can use computers to automate the
design process, which helps accelerate the development of these components. Each
RF component, however, has distinctly different characteristics that influence
overall system performance in complex ways. Instead of having stable inputs and
outputs, the RF circuit characteristics can drift based on process variations,
temperature, power supply and other variables. As a result, performance
characteristics are unique for each device, and the RF engineer must evaluate
and develop new designs on a continuous basis for each system performance level
and air interface standard. In addition to being skilled in semiconductor
circuit design, the RF circuit designer must have a thorough understanding of
signal processing principles, must understand the totality of the system for
which the device is intended and must be able to create designs that function
within the unique parameters of different wireless system architectures. As RF
technology
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has moved from discrete components to integrated circuit solutions, the scarcity
of engineers with both integrated circuit design and RF expertise has become
more pronounced.
In early wireless communications equipment, individually packaged discrete
components were mounted on circuit boards to form complex circuits used to
transmit and receive RF signals. Size, reliability and cost concerns ultimately
led to a move from discrete devices to silicon-based integrated circuits.
Particularly for the critical power amplifier function, the use of silicon
integrated circuits at cellular and PCS frequencies has been limited because of
decreased operating performance. In particular, at high frequencies silicon
integrated circuits consume more power, have relatively higher noise and
distortion parameters and create excess heat.
Within the last decade, GaAs semiconductor technology has emerged as an
effective alternative or complement to silicon technology in many high
performance RF applications. GaAs has inherent physical properties that allow
electrons to move up to five times faster than in silicon, which permits the
manufacture of GaAs devices that operate at much higher speeds than silicon
devices or at the same speeds with lower power consumption. This is particularly
important in battery powered portable applications such as handsets. Moreover,
the semi-insulating GaAs substrate significantly reduces some of the unwanted
parasitic effects of the conductive silicon substrate that cause its performance
to degrade at high frequencies.
GaAs integrated circuits were first implemented using a type of transistor
known as MESFET. While GaAs MESFET integrated circuits have become accepted for
many high frequency applications, these devices have certain limitations. In
particular, for power amplifiers used in digital systems it is important to have
a linear signal (i.e., one that is not altered or distorted when amplified).
GaAs MESFET devices have difficulty meeting high linearity performance criteria
without sacrificing other performance criteria. In addition, GaAs MESFET power
amplifiers generally require both a positive and negative power supply for power
stages, which requires the inclusion of additional components or circuitry and a
corresponding increase in device size and complexity. Additionally, the lateral
structure of GaAs MESFET devices hinders the ability to shrink the device size
to enhance manufacturing yields and reduce costs. A different type of GaAs
transistor known as an HBT, which has been used in military and space
applications over the past decade, emerged recently in commercial RF
applications.
Our GaAs HBT products include power amplifiers and small signal devices
that have been designed into advanced subscriber handsets manufactured by
leading OEMs such as Nokia, Hyundai, Phillips, Motorola and LGIC. We believe
that GaAs HBT components offer benefits over GaAs MESFET devices in comparable
applications in a number of ways, including speed, efficiency, the ability to
operate at high frequencies, lack of signal distortion, complexity and size.
STRATEGY
Our goal is to be the leading worldwide supplier of RFICs for a broad range
of commercial wireless applications. To meet this goal, we have developed a
focused strategy. The key elements are:
Expand Manufacturing Capacity. We have completed construction of an
approximately 64,000 square foot fabrication facility and are now
fabricating our own GaAs HBT wafers. This facility became operational in
June 1998, and has been qualified by our major customer and by other
current and potential customers. We have recently undertaken a 6,000 square
foot expansion to the clean room and the purchase or lease of additional
production equipment to increase the facility's capacity to 30,000
four-inch wafers per year, which we expect to complete by the winter of
2000. In addition, we plan to implement a number of additional steps that
we anticipate would increase the facility's capacity to 50,000 four-inch
wafers per year by the spring of 2001. We are also in the process of
evaluating other options to expand manufacturing capacity. We believe that
operating our own GaAs HBT wafer fabrication facility has improved our
ability to respond to customer demand for GaAs HBT products and is
providing us with greater opportunities to enhance product and process
quality and reliability, and that our future success depends heavily upon
our ability to expand our manufacturing capacity.
Offer a Wide Range of RF Products. We offer a full line of products
that include power amplifiers, low noise amplifiers/mixers, quadrature
modulators/demodulators and single chip transceivers. For cellular
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and PCS applications, we offer products addressing virtually all of the
analog and digital air interface standards. Our design engineering staff
has developed proprietary design and fabrication modeling techniques and
tools to enable us to deliver state-of-the-art integrated circuit designs
that meet our customers' stringent technical specifications. In response to
customer requests, we are also preparing to offer certain RFICs in a
"modular" package that, in addition to one or more RFMD-designed integrated
circuits, includes passive components, such as filters and resistors, that
are commonly incorporated into end-user devices. We currently plan to
assemble and package these modules both in-house and through one of our
packaging vendors. Assembling and packaging these products in-house will
present us with a variety of technical and other challenges, but we believe
this is a necessary step for us to remain competitive in our industry.
Maintain Diversification in Process Technologies. We believe that we
are the only provider of RFICs in commercial volumes that is able to design
products in three distinct process technologies -- GaAs HBT, GaAs MESFET
and silicon. We believe that our GaAs HBT expertise allows us to deliver
high efficiency, high performance components such as linear power
amplifiers and low noise amplifiers to the wireless communications markets.
While attempting to leverage our GaAs HBT capabilities, we also intend to
expand our line of silicon-based RFICs and to greatly increase the portion
of overall revenue attributable to sales of silicon products. As a part of
this strategy, in March 1998, we entered a multi-year agreement with
International Business Machines Corporation that provides for expanded
development, manufacture and sale of custom RFICs by us using IBM's
advanced Blue Logic silicon process technology. We have developed more than
40 RFICs using this technology, and revenues represented by sales of
silicon products have increased from $5.2 million in fiscal 1998 to $15.0
million in fiscal 1999. Moreover, we are continually evaluating RF test
circuits under emerging semiconductor process technologies, such as silicon
germanium. On January 11, 1999, we announced that we have expanded our
relationship with IBM to add access to IBM's silicon germanium foundry
services, and we are in the early stages of designing products using this
technology. Final negotiations with IBM regarding the terms for use of
silicon germanium are expected to be complete by the end of the second
quarter of fiscal year 2000.
Focus on Wireless Markets. Since RFMD's formation in 1991, we have
focused our efforts almost exclusively on the design, development,
manufacture and sale of RFICs to participants in the commercial wireless
markets. We have developed and sold integrated circuits for a broad range
of applications within these markets, including cellular and PCS, cordless
telephony, industrial radios, wireless LANs, WLL, wireless security and
wireless utility meter reading. Our customers include some of the leading
OEMs, including Nokia, LGIC, Hyundai, Samsung and Motorola.
Maintain Balanced Product Mix. We strive to maintain a balance
between custom and standard products. Custom-designed products are usually
developed for volume production orders from large OEMs. Custom products
normally are manufactured on an exclusive basis for the originating
customer for an agreed period of time. Once exclusive production is over,
we attempt to move custom products quickly into the standard product
category in order to broaden our customer base and leverage our design and
product development expenditures.
MARKETS
We design, develop, manufacture and market our products to both domestic
and international OEMs for commercial applications in the wireless markets,
including cellular and PCS handsets, cordless telephony, industrial radios,
wireless LAN equipment, WLL handsets, wireless security systems and wireless
utility meter reading systems.
Cellular Telephony and Personal Communication Services
In cellular and PCS applications, calls are placed through handheld
subscriber devices by making a connection with a base station via RF channels.
While the initial PCS services are similar to cellular telephony, as PCS becomes
more widely used, it is expected that a subscriber will be able to use a single
small, lightweight handset and a single phone number for all calls in the home,
office or elsewhere with relatively seamless routing.
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Cordless Telephony
Cordless telephones have moved from first generation analog phones to
digital cordless phones operating at higher frequencies. These digital cordless
phones typically use spread spectrum modulation to provide improved range and
voice quality, less interference and greater security.
Wireless Local Loop Systems
A WLL system is a fixed location wireless communications system in which
the end user is connected to the local telephone company's central switch via a
wireless connection. WLL systems employ simplified cellular or PCS technology.
The absence of high speed mobility, roaming or intercell handoff requirements
make the infrastructure and operating costs of WLL systems significantly lower
than traditional wired and cellular systems. WLL systems can be rapidly
deployed, even in difficult terrain areas, and are easily scalable.
Wireless Networks
Wireless networking involves the transmission and reception of data such as
e-mail, faxes and computer files by desktop and portable computers via wireless
RF links rather than wired lines. Network coverage ranges from wireless LANs,
which might be found within a business or single building, to metropolitan area
networks, which would be limited to a defined metropolitan or geographic area,
to wide area networks, which connect individuals and work groups over larger
geographic areas.
Industrial Radios
Industrial digital radios are trunked radio networks that transmit voice
communications from one location to another (point-to-point) and from one
location to many locations (point-to-multipoint). Industrial radios are
primarily used by law enforcement officers and in other public safety
applications.
Other Markets
We also supply custom components for other applications in wireless
markets, such as wireless security systems and wireless utility meter reading
systems. We are pursuing other emerging wireless markets, including enhanced
two-way paging, wireless monitoring devices, interactive toys, home networking,
keyless entry and wireless handheld devices used for point-of-sale, bar coding
and other applications. We also pursue opportunities to leverage the
technological advantages of our RF components by identifying applications in
other markets. For example, we have has applied our RF power amplifier design
expertise to develop high performance power line amplifiers for the cable
television market and markets various GaAs HBT and MESFET components for
satellite and microwave communications applications. In addition, certain of our
components, such as gain blocks and attenuators, are used for instruments and in
other non-wireless applications.
MANUFACTURING, PACKAGING AND TESTING
Our manufacturing cycle consists of semiconductor wafer fabrication,
assembly and packaging, and final product testing. We began manufacturing GaAs
HBT products at our new wafer fabrication facility in September 1998 and also
use independent foundries located in the United States to manufacture our
products. We currently use one independent foundry to supply our silicon-based
product requirements and one independent foundry to supply our GaAs MESFET
devices. We purchase a significant portion of our GaAs HBT wafers from TRW and
currently expect that we will continue to do so. Although our new wafer
fabrication facility is operational, we will continue to rely on independent
foundries for the manufacturing of a substantial portion of our products for the
foreseeable future. This reliance involves a number of risks, including the
possibility of material disruptions in the supply of key RFICs and the lack of
control over delivery schedules, manufacturing yields, quality and fabrication
costs.
In June 1998, we completed the first phase of an approximately 64,000
square foot fabrication facility adjacent to our primary facility in Greensboro,
North Carolina to fabricate four-inch diameter GaAs HBT wafers using
technologies licensed from TRW. This first phase, at a cost of approximately $40
million, involved
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construction of the building shell, installation and certification of an
approximately 10,300 square foot clean room and the purchase or lease and
installation of the required fabrication equipment. We have completed the
transfer of TRW's manufacturing process and molecular beam epitaxy, or MBE,
process for producing wafer start material. We began shipping commercial
quantities of integrated circuits from this facility in September 1998. The
facility has been qualified by both current and potential customers. Production
at the facility is expected to increase during fiscal 2000 as additional
customers qualify our fabrication facility and additional components are
manufactured.
The second phase, currently underway, involves expansion of wafer
fabrication and MBE production capacity. This phase is budgeted at approximately
$40 million, $38 million of which we have already spent, and includes an
approximately 6,000 square foot expansion to the clean room and the purchase or
lease and installation of additional production equipment. The completion of the
second phase of the fabrication facility, which we believe will increase maximum
production capacity to approximately 30,000 four-inch wafers per year, is
dependent on a number of factors both within and outside our control and is
currently scheduled to occur during the winter of 2000.
In addition, we intend to expand further our wafer manufacturing capacity
by moving our MBE wafer starting material equipment out of the facility to a new
leased location, reconfiguring the space currently occupied by this equipment
with additional wafer production equipment and hiring additional production
personnel. This phase of expansion, which has a budgeted total cost of $15
million and which we believe will increase maximum production capacity to
approximately 50,000 four-inch wafers per year, is currently scheduled to be
completed in the spring of 2001. We are also studying other means of increasing
our manufacturing capacity, including the construction of additional fabrication
facilities and modifications to our production process; however, no definite
plans have been implemented or approved.
We maintain an inventory of certain standard products based on our internal
forecasts of expected demand for these products. For custom-designed products,
designs of our products are verified both by us and by the customer before
orders for production wafers are placed. Upon receipt of orders from an OEM, we
schedule production based on order size, customer delivery requirements,
production schedules and other production considerations.
We currently use seven vendors located in Asia and one vendor located in
the United States to package and assemble our products. All of these vendors are
certified to applicable ISO 9000 series specifications, which means that their
operations have in each case been determined by independent examiners to comply
with certain internationally developed quality control standards. We qualify and
monitor assembly contractors based on cost and quality. These contractors
typically provide us with per-unit pricing.
We have encountered packaging quality problems with certain of our vendors,
particularly with regard to GaAs products. In particular, we took non-recurring
charges in the fourth quarter of fiscal 1998 of approximately $4.6 million to
cover product returns and the establishment of inventory reserves for products
with packaging-related problems. This packaging problem ultimately was resolved
to our satisfaction and the satisfaction of our customer. We have taken steps to
improve the reliability of packaging quality, including the hiring of a Vice
President of Quality, the expansion of our in-house package testing and
qualification line and the employment of additional packaging engineers to
engage in both package testing and the development of new packaging designs;
however, we cannot be sure that we will not experience additional packaging
quality problems in the future. We believe that we will have to continue to
monitor closely our vendors as our production volumes increase.
In addition to using independent packaging vendors, we plan to begin
assembling and packaging in-house certain RFICs in a "modular" package that, in
addition to one or more RFMD-designed integrated circuits, includes passive
components, such as filters and resistors, that are commonly incorporated into
end-user devices. We have not previously packaged any type of RFIC on a
commercial basis, and this vertical expansion of our business will require
significant investment in equipment and additional personnel and will require us
to develop expertise in new production techniques that are significantly
different from RFIC fabrication processes. We currently have budgeted $12
million for developing our in-house modular packaging capability, and we
currently expect to begin shipping commercial quantities of modular units that
we have packaged ourselves during the first calendar quarter of 2000.
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PRODUCTS AND APPLICATIONS
We offer a broad range of standard and custom-designed RFICs.
Custom-designed products are usually developed for volume production orders from
large OEMs. Custom orders are normally manufactured on an exclusive basis for a
negotiated period. Once exclusivity periods expire, we attempt to convert custom
products into standard products to broaden our customer base and leverage our
design and product expenditures. At March 31, 1999, we offered 158 products, and
50 additional products were in various stages of development. Below is a list of
our current products by category, the number of products in each category, the
semiconductor process technology used to fabricate these products and the types
of OEM devices into which these products are incorporated.
NO. OF FABRICATION
PRODUCT CATEGORY PRODUCTS TECHNOLOGY END USER DEVICES
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Power Amplifiers................................ 5 HBT; MESFET Set-Top Boxes; Cable Modem
Power Amplifiers................................ 43 HBT; Silicon Cellular Handsets; Wireless
Local Loop; Basestations;
Wireless Local Area
Networks
Quadrature Modulators/Demodulators.............. 18 HBT; Silicon Cellular Handsets;
Basestations;
Point-to-Point Links;
Military Radios
Low Noise Amplifiers/Mixers..................... 24 HBT; Silicon Cellular Handsets; Wireless
Microphones
IF Components................................... 11 Silicon Cellular Handsets; Wireless
Meter Reading Systems
Gain Blocks..................................... 33 HBT; Silicon Point-to-Point Links;
Wireless Local Loop
Transceivers.................................... 18 Silicon; MESFET Wireless Security; Cordless
Telephones; Wireless
Meter Reading; Misc.
Consumer Products
Attenuators/VCA................................. 6 Silicon; MESFET Cellular Basestations;
Point-to-Point Links
Power Amplifiers
Power amplifiers provide signal amplification in the transmitter section of
a wireless system in order to boost a signal through the antenna. Power
amplifiers operate at different frequencies, power levels and air interface
standards and generally are classified either as linear amplifiers, which add a
minimum amount of distortion to the shape of the input signal, or non-linear
amplifiers, which are used in analog devices. Power amplifiers are often the
most critical RF component for a number of reasons. They frequently are the most
expensive component and are difficult to design and implement. In addition,
power amplifiers normally use the greatest amount of battery power in a handset,
which impacts talk time, and they generally dissipate the greatest amount of
heat. Our GaAs HBT power amplifiers offer low distortion, small size, high
efficiency, improved linearity and operation from a single polarity power
source.
Quadrature Modulators/Demodulators
Quadrature modulators are devices in the transmitter section of a wireless
system that combine digital information with an RF signal by varying the phase
and amplitude of the signal so that the resulting signal can be transmitted.
Quadrature demodulators reverse this process in the receiver section by taking
received RF signals and recovering the embedded digital information for further
processing.
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Low Noise Amplifiers/Mixers
A LNA is a device in the receiver section of a wireless system that
receives signals from an antenna at extremely low microvolt levels and amplifies
the signals by a factor of approximately 10 to 1,000 times with the addition of
as little "white noise" as possible. In general, the less noise added by a LNA,
the weaker the signal it can process. LNAs are commonly integrated into circuits
with mixers (also referred to as "down-mixers" or "down converters"), and this
combination generally is referred to as a "receiver front end." Mixers accept
the filtered output from the LNA, which is typically at a high frequency and
difficult to process, and mix it with a local oscillator signal to produce a
lower frequency (IF) signal, which is easier to process.
IF Components
In a typical handset, high frequency RF signals are converted into lower
frequency IF signals by the LNA/Mixer and then to baseband in the receive
functions. In the transmit function, baseband inputs (e.g., voice) are converted
from analog to digital form and processed through the IF range to the higher RF
frequency before transmission through the antenna. Our IF devices include
digitally controlled IF amplifiers, which amplify baseband signals after they
have been converted from analog to digital form, and IF amplifiers with
automatic gain control and received signal strength indicators, which are used
for IF-to-baseband conversion in the receive mode.
Gain Blocks
Gain blocks are simple general-purpose amplifiers that boost signals over a
broad frequency range. They are used for amplifier applications whenever noise
is not a concern and whenever a signal's strength has been diminished by
processing through a filter or other component.
Transmitters, Receivers and Transceivers
Single chip transmitters and receivers send and receive wireless signals.
Transceivers are highly integrated circuits that combine transmitters with
receivers into a single device. Because this degree of integration generally
results in some performance compromises, single chip transceivers tend to be
used in cost-sensitive applications where performance is less critical.
Attenuators
An attenuator is a device that reduces the level of an input signal by
controllable amounts. Our attenuators are programmable through use of an
external analog or digital control signal to reduce signals to desired levels
with minimal noise and signal loss when the device is not active. Like gain
blocks, attenuators have many applications both within and outside the wireless
markets.
CUSTOMERS
The following list identifies, by market, our customers that have placed
cumulative orders of greater than $100,000 in the 12 months ended March 31,
1999.
CELLULAR/PCS HANDSETS
Nokia Mobile Phones Ltd.
Siemens A.G.
Philips N.V.
Motorola Inc.
Bosch Telecom, Inc.
LG Information & Communications, Ltd.
NEC Corp.
Hyundai Electronics Industries Co., Ltd.
Sony Electronics, Inc.
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Samsung America Inc.
Internix, Incorporated
Hanwha Telecommunications Co., LDT
Appeal Telecommunications Co. Ltd.
Kyocera America, Inc.
Telson Electronics Co., Ltd.
Denso Wireless Communications Co., Ltd.
Pan Tech Engineering Corporation
Mitel Corporation
Marshall Industries
CELLULAR/PCS BASE STATIONS
Ericsson Mobile Communications
Motorola Inc.
Lucent Technologies
Powerware Technologies, Inc.
SCI Systems, Inc.
Spectrian Corporation
Sanmina Corporation
WIRELESS DATA
Lucent Technologies, Inc.
Research In Motion Limited
OTHER WIRELESS APPLICATIONS
Tellabs Operations, Inc. (Wireless Local Loop)
Lucent Technologies, Inc., SpectraLink Corporation, Hexagram, Inc. (Cordless
Telephones)
Motorola Inc., Celestica, Inc. (Paging; Industrial Radios)
Alcatel Network Systems (Point to Point Radio)
Hoshing Telecom Limited (Child Locators)
Digital Security Controls Ltd. (Wireless Security)
We have agreed in principle with TRW and Nokia to cooperate to develop and
supply Nokia with RFICs that are manufactured using TRW's GaAs HBT processes.
The arrangement contemplates that Nokia and we will negotiate separate
agreements to address the development and supply of each component. Pursuant to
the arrangement, we have agreed to provide Nokia with access to certain RFIC
technologies and to our GaAs HBT wafer fabrication facility, and Nokia has
agreed to provide us with rights to bid for and supply Nokia's requirements for
certain RFICs.
Pursuant to separate agreements resulting from our arrangement with Nokia,
we have developed a number of RFICs and supplied them to Nokia in commercial
quantities. For the 12 months ended March 31, 1999, sales to Nokia were
approximately $112.2 million, representing approximately 73% of our revenue.
Our agreement in principle with TRW and Nokia can be terminated without
penalty by any of the parties for any reason. This arrangement does not obligate
Nokia to purchase any additional products from us, and there can be no assurance
that Nokia will remain a significant customer of ours or that this relationship
will continue.
SALES AND MARKETING
We sell our products worldwide directly to customers as well as through a
network of 13 domestic sales representative firms and 18 foreign sales
representative firms. One sales representative firm, Jittek, accounted for
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about 15% of our revenue during fiscal 1999. We select our domestic and foreign
representatives based on technical skills and sales experience, as well as the
presence of complementary product lines and the customer base served. We provide
ongoing training to our representatives to keep them knowledgeable of our
products. We maintain an internal marketing organization that is responsible for
key account management, application engineering support to customers, developing
sales and advertising literature, such as product announcements, catalogs,
brochures and magazine articles in trade and other publications, and preparing
technical presentations for industry conferences. In June 1999, we opened a
small sales office in the United Kingdom to enhance our ability to serve our
European customers. We expect that beginning in fiscal 2000, we will be
increasing our internal sales force enabling us to provide a greater level of
direct customer support and the ability to deepen our strategic relationships.
We believe that maintaining a close relationship with customers and
providing customers with ongoing technical support is essential to customer
satisfaction in the wireless communications industry. Our marketing application
staff interacts with customers during all stages of design and production,
provides customers with current product application notes and engineering data,
maintains regular contact with customer engineers and assists in the resolution
of technical problems. We assign to our largest customers a contract account
manager who maintains regular contact with the customer to determine its product
needs and concerns. Members of senior management also are involved in managing
relationships with significant customers. We believe that maintaining close
contact with customers improves their level of satisfaction and enables us to
anticipate their future product needs.
STRATEGIC RELATIONSHIP WITH TRW
In June 1996, we entered into a broad strategic relationship with TRW based
on several agreements that evidence an investment by TRW in RFMD, a technology
license from TRW to us and a supply arrangement between the parties. As a part
of this alliance, TRW provided us with $25 million of equity and debt financing
and became a significant shareholder of RFMD. Our key goal in entering into this
alliance was to enable us to construct a four-inch wafer fabrication facility to
manufacture products using GaAs HBT technologies developed by TRW and licensed
to us.
Under our license agreement, TRW has granted us fully paid up,
royalty-free, worldwide licenses with respect to certain of TRW's existing and
future GaAs HBT patent rights and MBE process patent rights, with accompanying
know-how and technical information, to design, develop, manufacture, market,
service and repair certain existing products of ours and any GaAs HBT product in
which the emitter of the GaAs HBT has a width of one to three microns. These
products must be for commercial wireless communications applications and operate
on signals having a frequency of less than 10 GHz. The license with respect to
the GaAs HBT rights became effective in June 1996, and the MBE license became
effective on June 15, 1998, the date agreed upon by the parties as the point at
which our wafer fabrication facility became operational. Subject to TRW's right
to use the licensed technology to provide to customers on an ongoing basis
certain specified foundry services, both licenses are exclusive as to all
persons including TRW, but may be made non-exclusive at the option of TRW if we
fail to meet certain revenue goals.
TRW also granted us non-exclusive licenses to use certain of its existing
GaAs HBT rights and MBE rights for the development and sale of certain of our
existing products for applications other than commercial wireless communications
or that operate on signals having a frequency of 10 GHz or more. The license
agreement provides that TRW will offer to us, on the same terms as are offered
to third parties, certain future non-HBT related technologies that it develops
for a period of 10 years following June 15, 1998, which is the date on which our
wafer fabrication facility became operational. We have agreed to share with TRW
any modifications or improvements that we make in the technology or the products
developed therefrom, and to grant TRW a non-exclusive, royalty-free license to
use any of these modifications or improvements in applications outside our field
of use. The licenses granted under the license agreement are granted without
representation or warranty as to validity or noninfringement. Upon any
termination of the license agreement for default, whether due to our default or
otherwise, our rights to TRW's technologies would cease.
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Under the terms of the supply agreement, we have agreed to purchase from
TRW, and TRW has agreed to sell to us, certain minimum quantities of three-inch
GaAs HBT processed wafers and four-inch GaAs epitaxial wafer starting material
until December 31, 2000. We are currently purchasing from TRW quantities of
wafers in excess of the minimum number required to be delivered by TRW to us
under the supply agreement.
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused primarily on the
development of new integrated circuit products, and also at improving
manufacturing processes and yields. At March 31, 1999, there were 105 persons in
our research and development organization. Because of the relative scarcity of
RFIC design engineers, we have decided to locate some of our design personnel
outside of our Greensboro, North Carolina headquarters. We opened a design
center in Scotts Valley, California in April 1999 that is currently staffed by
12 engineers and a design center in Cedar Rapids, Iowa in June 1999 that is
currently staffed by five engineers, and we anticipate that we may open
additional RFIC design centers in other locations during fiscal 2000.
Our circuit design staff is continually developing RFIC design solutions
for new and emerging wireless applications. Our research and development
activities include not only new circuit designs, but also the development and
refinement of proprietary design tools and models to facilitate new product
development. Moreover, we are continually evaluating test RF circuits under
emerging semiconductor process technologies, such as silicon germanium, to
augment our Optimum Technology Matching(R) program and to meet our customers'
future wireless equipment needs.
In fiscal 1997, 1998 and 1999, we incurred approximately $6.2 million, $8.8
million and $14.2 million, respectively, of research and development expenses.
We do not separately account for RFMD-sponsored and customer-sponsored research
and development expenses.
The market for RFICs is characterized by rapid changes in product designs
and the emergence of new semiconductor technologies used to fabricate higher
performance devices. Because the demand of OEMs for continual improvements in
product performance is expected to increase, we believe that our future success
depends in part on our ability to design RFICs under emerging wafer fabrication
technologies that meet the cost and performance parameters of its customers.
Moreover, we believe we must be able to attract and retain qualified research
and development personnel.
COMPETITION
Competition in the markets for our products is intense. We face competition
from several companies engaged in the business of designing, manufacturing and
selling RFICs, as well as suppliers of discrete products such as transistors,
capacitors and resistors. We have begun to experience competition for GaAs HBT
products and we may face future competition from companies that have or develop
GaAs HBT or other fabrication processes. In addition, our current and potential
competitors include OEMs that have or may develop the ability to produce RFICs
or discrete products internally for their own requirements. Our primary
competitors include Anadigics, Inc., Conexant Systems, Inc., Fujitsu Limited,
Hitachi Ltd., Motorola, NEC Corp., Phillips N.V., Siemens A.G. and Triquint
Semiconductor, Inc.
We believe that competition within the markets for our products is driven
primarily by the ability to design and deliver high performance and price
competitive products in sufficient quantities and in a timely manner.
Competition is also affected by the quality of customer service and technical
support and the ability to design customized products that address each
customer's particular requirements and cost limitations.
Many of our current and potential competitors have entrenched market
positions, established patents, copyrights, trade names, trademarks and
intellectual property rights and substantial technological capabilities.
Further, many of our competitors have significantly greater financial,
technical, manufacturing and marketing resources than we do. Increased
competition could adversely affect our revenue and profitability by causing us
to reduce prices or by reducing demand for our products.
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INTELLECTUAL PROPERTY
It is our practice to seek U.S. patent and copyright protection on our
products and developments, where appropriate, and to protect our proprietary
technology under U.S. and foreign laws affording protection for trade secrets
and for integrated circuit designs. We own two U.S. patents for GaAs HBT power
amplifiers, both of which were issued in 1997 and will expire in 2015.
We rely primarily upon trade secrets, technical know-how and other
unpatented proprietary information relating to our product development and
manufacturing activities. To protect our trade secrets, technical know-how and
other proprietary information, our employees are required to enter into
agreements providing for maintenance of confidentiality and the assignment of
rights to inventions made by them while in our employ. We also have entered into
non-disclosure agreements to protect our confidential information delivered to
third parties in conjunction with possible corporate collaborations and for
other purposes. However, there can be no assurance that these types of
agreements will effectively prevent unauthorized disclosure of our confidential
information, that these agreements will not be breached, that we would have
adequate remedies for any breach or that our trade secrets and proprietary
know-how will not otherwise become known or independently discovered by others.
While we have not been involved in any patent or other intellectual
property rights litigation, there can be no assurance that third parties will
not assert claims against us, our customers or TRW with respect to existing and
future products. Any litigation to determine the validity of any third party's
claims could result in significant expense to us, and divert the efforts of our
technical and management personnel, whether or not the litigation is determined
in our favor. The wireless industry is subject to frequent litigation regarding
patent and other intellectual property rights. Leading companies and
organizations in the wireless industry have numerous patents that protect their
intellectual property rights in these areas. In the event of an adverse result
of any intellectual property rights litigation, we could be required to expend
significant resources to develop non-infringing technology or to obtain licenses
to the technology, which is the subject of the litigation. There can be no
assurance that we would be successful in such development or that any such
license would be available on commercially reasonable terms.
BACKLOG
At March 31, 1999, our backlog was approximately $64.6 million, compared to
approximately $42.8 million at the end of fiscal 1998. We include in backlog all
accepted product purchase orders for which delivery has been specified within
one year. Product orders in our backlog are subject to changes in delivery
schedules or to cancellation at the option of the purchaser without significant
penalty. Our backlog may vary significantly from time to time depending upon the
level of capacity available to satisfy unfilled orders. Accordingly, although
useful for scheduling production, backlog as of any particular date may not be a
reliable indicator of sales for any future period.
EMPLOYEES
At March 31, 1999, we had 423 employees. We believe that our future
prospects will depend, in part, on our ability to continue to attract and retain
skilled technical, marketing and management personnel. Competition for such
personnel is intense, and the number of persons with relevant experience,
particularly in engineering, RFIC design and technical marketing, is limited.
None of our employees is represented by a labor union, and we have never
experienced any work stoppage. We believe that our employee relations are good.
ENVIRONMENTAL MATTERS
By virtue of operating our wafer fabrication facility, we are subject to a
variety of extensive and changing federal, state and local governmental laws,
regulations and ordinances related to the use, storage, discharge and disposal
of toxic, volatile or otherwise hazardous chemicals used in the RFIC
manufacturing process. Any failure to comply with such requirements currently in
effect or subsequently adopted could result in the imposition of fines on us,
the suspension of production or a cessation of operations. In addition, such
requirements could restrict our ability to expand our facilities or require us
to acquire costly equipment or incur other significant expenses to comply with
environmental regulations or clean up discharges. We believe that costs arising
from
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existing environmental laws will not have a material adverse effect on our
financial position or results of operations. There can be no assurance, however,
that the environmental laws will not become more stringent in the future or that
we will not incur significant costs in the future in order to comply with these
laws.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the other information in this Annual Report on Form 10-K,
readers should carefully consider the following important factors. These
factors, among others, in some cases have affected, and in the future could
affect, our financial condition and results of operations and could cause our
future results to differ materially from those expressed or implied in any
forward-looking statements that appear in this Annual Report on Form 10-K or
that we have made elsewhere.
Our Operating Results Fluctuate Significantly and We May Not Be Able to
Maintain Our Existing Growth Rate.
Our revenue, earnings and other operating results have fluctuated
significantly in the past and may fluctuate significantly in the future.
Although we have had significant revenue and earnings growth in recent quarters,
we may not be able to sustain these growth rates. Our future operating results
will depend on many factors, including the following:
- our ability to design, manufacture and deliver our products in a timely
and cost-effective manner;
- our ability to design, manufacture and deliver our products in large
enough volumes to satisfy our customers' requirements;
- the ability of our third party foundries and assemblers to manufacture
and assemble our products in a timely and cost-effective manner that
meets our customers' requirements;
- unexpected poor line, assembly or test yields for our products;
- our ability to expand our production of GaAs HBT wafers at our wafer
fabrication facility;
- demand for our products;
- demand for our customers' products;
- competition; and
- general industry and global economic conditions.
It is likely that our future operating results will be adversely affected
by these or other factors. If our future operating results are below the
expectations of stock market analysts or our investors, our stock price may
decline.
We are Experiencing GaAs HBT Capacity Constraints, and Increasing Production
from Our Wafer Fabrication Facility Is Critical to Our Business.
In June 1998, we completed the first phase of our 64,000 square foot GaAs
HBT wafer fabrication facility located in Greensboro, North Carolina. This
facility and our current efforts to increase its production are crucial to our
strategy of expanding our GaAs HBT manufacturing capacity in order to satisfy
customer demand for our GaAs HBT products, which is currently greater than we
are able to meet.
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We began commercial shipments of products from our facility in September
1998. Production from the facility gradually increased throughout the remainder
of fiscal 1999 and we expect it to continue to increase into fiscal 2000. In
order to increase production at this facility, we must qualify each new RFIC
design with our customers. As parts are brought into production, we must
maintain and improve our line yields, assembly yields and test yields in order
to reach our manufacturing goals. A number of factors will affect the future
success of this facility, including the following:
- our ability to qualify new products in a timely manner;
- demand for our products;
- our production yields;
- our ability to generate revenues in amounts that cover the significant
fixed costs of operating a wafer fabrication facility;
- our relatively limited experience in high volume manufacturing of GaAs
HBT products;
- our ability to hire, train and manage qualified production personnel;
- our compliance with applicable environmental and other laws and
regulations; and
- our inability to use all or any significant portion of our facility for
prolonged periods of time for any reason. For example, a small fire at
our facility last year caused by a chemical reaction damaged a piece of
processing equipment. Fortunately, this did not affect our production.
We are currently in the process of the second phase of construction of our
wafer fabrication facility. The second phase involves expansion of wafer
fabrication and starting material production capacity. This phase is budgeted at
about $40 million and includes about 6,000 square foot expansion to our clean
room and the installation of additional production equipment. This second phase
expansion project is currently expected to be completed during the winter of
2000. In addition, we intend to expand further our wafer manufacturing capacity
by moving our MBE equipment out of the facility to a new leased location,
reconfiguring the space currently occupied by this equipment with additional
wafer production equipment and hiring additional production personnel. This
phase of expansion, which has a budgeted total cost of $15 million, is currently
scheduled to be completed by the spring of 2001. Construction activities like
these are subject to a number of risks, including the following:
- unforeseen environmental or engineering problems;
- unavailability or late delivery of process equipment;
- work stoppages and delays; and
- delays in bringing production equipment on-line.
These and other risks may adversely affect the ultimate cost of these
projects when they are completed and when we are able to exploit these planned
increases in our production capacity.
We are also studying other means of increasing our manufacturing capacity,
including the construction of additional fabrication facilities and
modifications to our production process. No definite plans have been implemented
or approved in this regard, however, and we cannot be sure whether we will be
able to identify additional means of increasing capacity or that any efforts we
make to increase capacity through other means will be successful or
cost-effective. Moreover, we may devote significant resources to analyzing the
feasibility of alternative means of increasing capacity only to determine that
they are not practicable.
We Depend on a Few Large Customers.
Historically, a substantial portion of our revenue has come from large
purchases by a small number of customers. We expect that trend to continue. For
example, for fiscal 1999 our top five customers accounted for 87% of our total
revenue and for fiscal 1998 our top five customers accounted for 70% of our
total revenue and.
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Accordingly, our future operating results depend on the success of our largest
customers and on our success in selling large quantities of our products to
them.
The identity of our largest customers has varied significantly from year to
year. In fiscal 1999, sales to Nokia accounted for 73% of our revenue. In fiscal
1998, sales to Nokia accounted for 42% and sales to LGIC accounted for 13% of
our revenue. In fiscal 1997, sales to Qualcomm Incorporated accounted for 32%
and sales to Samsung accounted for 23% of our revenue.
We typically manufacture custom products on an exclusive basis for one
customer for a negotiated period of time. This factor, along with capacity
constraints, makes it difficult for us to diversify our customer base. The
concentration of our revenues with a few large customers makes us particularly
dependent on factors affecting those customers. For example, if demand for their
products decreases, they may stop purchasing our products and our operating
results will suffer. Most of our customers can cease incorporating our products
into their products with little notice to us and with little or no penalty. If
we lose a large customer and fail to add new customers to replace lost revenue,
our operating results will not recover.
If We Experience Poor Production Yields, Our Operating Results May Suffer.
Our integrated circuit products, especially our GaAs HBT products, are very
complex. Each product has a unique design and each product is fabricated using
semiconductor process technologies that are highly complex. In many cases, the
products are assembled in customized packages. Our customers incorporate our
RFICs into high volume products such as cellular and PCS handsets and they
insist that our products meet their exact specifications for quality,
performance and reliability.
Our products are manufactured on round GaAs or silicon substrates, or
starting material, called wafers. Before our customers can use our products, the
wafers must be processed and cut or sawed into individual die. The die must then
be assembled, or packaged, and then the final product must be tested.
Our manufacturing yield is a combination of:
- line yield, which is the number of usable wafers that result from our
fabrication process;
- assembly yield, which is the number of assembled parts we actually
receive from the packaging house divided by the number of die available
on the wafer; and
- test yield, which is the number of assembled parts that pass all
component level testing divided by the total number of parts tested.
- Our customers also test our RFICs once they have been assembled into
their products. The number of usable RFICs that result from our
production process can fluctuate as a result of many factors, including
the following:
- design errors;
- defects in photomasks used to print circuits on a wafer;
- minute impurities in materials used;
- contamination of the manufacturing environment;
- equipment failure or variations in the fabrication process;
- losses from broken wafers or other human error; and
- defects in packaging.
Because average selling prices for our products tend to decline over time
and because many of our manufacturing costs are fixed, we are constantly trying
to improve our manufacturing yields. For a given level of sales, when our yields
improve, our gross margins improve and when our yields decrease, our unit costs
are higher, our margins are lower, and our operating results are adversely
affected.
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In the past, we have experienced difficulties in achieving acceptable
yields on certain new products, and this has adversely affected our gross
margins and our operating results. For example, during the fourth quarter of
fiscal 1998, we took an unexpected charge of about $4.6 million to cover
defective products that had packaging-related problems. We may experience
similar problems in the future and we cannot predict when they may occur or
their severity. These problems could significantly affect our future operating
results.
We Face Challenges Managing Rapid Growth.
We are experiencing a period of significant growth that will continue to
place a great strain on our management and other resources. We have grown from
131 employees on March 31, 1997 to 423 employees on March 31, 1999. To manage
our growth effectively, we must:
- implement and improve operational and financial systems;
- coordinate the construction, upfit and expansion of our physical
facilities in multiple locations;
- train and manage our employee base; and
- attract qualified people with experience in RF engineering, integrated
circuit design, wafer fabrication, wireless systems and technical
marketing and support.
Competition for these people is intense. We must also manage multiple
relationships with various customers, business partners and other third parties,
such as our foundry and assembly partners. Moreover, we will spend substantial
amounts in connection with our rapid growth and may have additional unexpected
costs. Our systems, networks, software tools, procedures or controls may not be
adequate to support our operations and we may not be able to expand quickly
enough to exploit potential market opportunities. Our future operating results
will also depend on expanding sales and marketing, research and development and
administrative support. If we cannot attract qualified people or manage growth
effectively, our operating results will be adversely affected.
Our Operating Results Are Substantially Dependent on Demand for Our GaAs HBT
Products.
Although we design products using three distinct process technologies, a
substantial portion of our revenue comes from the sale of GaAs HBT products. For
example, during fiscal 1999, 87% of our revenue came from the sale of GaAs HBT
products. We currently expect that this process concentration will continue.
Our dependence on GaAs HBT products could ultimately hurt our operating
results in the future. Competitors have begun to enter the market and offer
their own GaAs HBT products, and direct competition with competitors with GaAs
HBT process technology could adversely affect our selling prices. Also, new
process technologies could be developed that have characteristics that are
superior to GaAs HBT. These and other factors could reduce the demand for GaAs
HBT components or otherwise adversely affect our operating results.
Our Operating Results Are Substantially Dependent on Development of New
Products.
Our future success will depend on our ability to develop new RFIC solutions
for existing and new markets. We must introduce new products in a timely and
cost-effective manner and we must secure production orders from our customers.
The development of new RFICs is a highly complex process, and we have
experienced delays in completing the development and introduction of new
products at times in the past. Our successful product development depends on a
number of factors, including the following:
- the accuracy of our prediction of market requirements and evolving
standards;
- acceptance of our new product designs;
- the availability of qualified RFIC designers;
- our timely completion of product designs; and
- acceptance of our customers' products by the market.
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We may not be able to design and introduce new products in a timely or
cost-efficient manner and our new products may fail to meet the requirements of
the market or our customers. In that case, we likely will not reach the expected
level of production orders, which could adversely affect our operating results.
Even when a design win is achieved, our success is not assured. Design wins
require significant expenditures by us and typically precede volume revenues by
six to nine months or more. The actual value of a design win to us will
ultimately depend on the commercial success of our customers' products.
Our Industry's Technology Changes Rapidly and We Depend on Development and
Growth of Wireless Markets.
We depend on the development and growth of markets for wireless
communications products and services, including cellular and PCS telephony,
wireless LANs, wireless security systems and other wireless applications. We
cannot be sure about the rate at which markets for these products will develop
or our ability to produce competitive products for these markets as they
develop.
We supply RFICs almost exclusively for wireless applications. The wireless
markets are characterized by frequent introduction of new products and services
in response to evolving product and process technologies and consumer demand for
greater functionality, lower costs, smaller products and better performance. As
a result, we have experienced and will continue to experience some product
design obsolescence. We expect our customers' demands for improvements in
product performance will increase, which means that we must continue to improve
our product designs and develop new products using new wafer fabrication
technologies.
For example, we are currently developing products that combine one or more
integrated circuits with one or more passive components, such as filters and
resistors, into a stand-alone modular package. In addition to using an
independent packaging vendor for these products, we plan to assemble and package
some of these products in-house. We have not previously packaged any type of
RFIC on a commercial basis, and this vertical expansion of our business will
require significant investment in equipment and additional personnel and will
require us to develop expertise in new production techniques that are
significantly different from RFIC fabrication processes. We currently have
budgeted $12 million for developing our in-house modular packaging capability,
and we currently expect to begin shipping commercial quantities of modular units
that we have packaged ourselves during the first calendar quarter of 2000. We
cannot be sure, however, that we will successfully develop this in-house
packaging capability or that we will otherwise be able to meet the needs of our
customers for modular products. This development effort presents many technical
challenges and if we are unsuccessful, our operating results could be adversely
affected.
It is likely that a competing process technology will emerge that permits
the fabrication of integrated circuits that are superior to the RFICs we make
under existing processes. If that happens and we cannot design products using
that technology or develop competitive products, our operating results will be
adversely affected.
We Depend Heavily on Our Relationship with Nokia.
We have agreed in principle with TRW and Nokia to cooperate to develop and
supply Nokia with RFICs manufactured using TRW's GaAs HBT processes. The
arrangement contemplates that we will negotiate separate agreements with Nokia
for each component. Also, we have agreed to give Nokia access to some of our
RFIC technologies and to our GaAs HBT wafer fabrication facility, and Nokia has
agreed to give us rights to bid for and supply Nokia's needs for certain RFICs.
Under the separate agreements resulting from our arrangement with Nokia, we
have developed a number of RFICs and supplied them to Nokia in commercial
quantities. In fiscal 1999, sales to Nokia were about $112 million, or 73% of
our revenue. In fiscal 1998, Nokia sales were about $19 million, or 42% of our
revenue.
Our arrangement with Nokia and TRW can be ended without penalty by any of
the parties for any reason. The arrangement does not obligate Nokia to purchase
any additional products from us, and we cannot be sure that Nokia will remain a
significant customer or that our relationship will continue. The loss of Nokia
as a customer for any reason will have a material adverse effect on our
operating results.
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We Depend on TRW for GaAs HBT Wafers and Technology.
Although we have commenced commercial production of GaAs HBT products at
our own facility, we continue to rely heavily on TRW as a supplier for GaAs HBT
wafers. Before September 1998, all of our GaAs HBT products were fabricated at
TRW's facility. For the six months ended March 31, 1999, $98 million of our
revenue came from the sale of GaAs HBT products, but only $48 million of our
revenue was attributable to products produced at our facility.
TRW has agreed to supply to us, and we have agreed to buy from TRW, certain
minimum quantities of GaAs HBT wafers. These obligations continue until December
31, 2000. We are currently purchasing quantities of wafers from TRW in excess of
the amounts they are required to supply us and we currently expect that we will
continue to rely on TRW as a key supplier of GaAs HBT wafers over the remaining
two years of the supply agreement and thereafter. If TRW is unable to
manufacture and deliver to us wafers in the quantities we need on a timely
basis, our operating results will be adversely affected.
We depend on our exclusive license from TRW for its GaAs HBT technology. If
the license is terminated or if it were determined that this technology
infringed on a third party's intellectual property rights, our operating results
would be adversely affected. TRW made no representation to us about whether the
licensed technology infringed on the intellectual property rights of anyone
else. Also, TRW has the right to convert our exclusive license to a
non-exclusive license if we fail to meet certain revenue goals. If we fail to
meet these goals, our operating results could be adversely affected.
We Have a Limited Operating History and Have Had Operating Losses.
We were incorporated in 1991 and were in the development stage through the
year ended March 31, 1995. We had net losses totaling about $14.4 million from
the period of inception through fiscal 1996, profits of $1.7 million in fiscal
1997, a net loss of $0.5 million in fiscal 1998 and profits of $19.6 million in
fiscal 1999. We expect to spend substantial additional amounts to continue
developing our fabrication facility and expanding our operations and to design
and develop new products. Given our history of annual and quarterly operating
losses, our expansion efforts, our dependence on other parties and the
difficulty of predicting demand for our products, among other factors, we cannot
be sure that we will sustain profitability.
We Depend Heavily on Third Parties.
Until September 1998, other companies manufactured all of our products, and
we expect to continue to rely heavily on third parties in the future. We buy a
significant portion of our GaAs HBT products from TRW, which we believe is one
of only two suppliers of commercial quantities of GaAs HBT wafers. We also use
one independent foundry to manufacture our silicon-based products and one
independent foundry to manufacture our GaAs MESFET products. The foundry that
supplies our GaAs MESFET products is owned and operated by one of our
competitors. Access to other foundries for GaAs products could be particularly
difficult to obtain.
We will remain dependent on a small number of independent foundries to
manufacture our products on a timely basis, to achieve acceptable manufacturing
yields and to offer us competitive pricing. If these independent foundries
cannot deliver our products on a timely basis, allocate us sufficient
manufacturing capacity, achieve acceptable yields or offer us competitive
pricing, it would have a material adverse effect on our operating results. We
cannot be sure that we would be able to locate other foundries to make our
products if we lost any of these sources of supply.
We use independent vendors to package all of our integrated circuits. We
have had packaging quality problems with some of these vendors, especially with
GaAs HBT products. We took a non-recurring charge in the last quarter of fiscal
1998 of about $4.6 million to cover product returns and the establishment of
inventory reserves for products with packaging-related problems. During fiscal
1998, we also discovered quality problems with parts packaged by a second vendor
and stopped using that vendor. It is likely that we will have more packaging
problems in the future. A delay or reduction in product shipments or unexpected
product returns because of these problems could have an adverse effect on our
operating results.
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We Operate in a Very Competitive Industry.
Competition in the markets for our products is intense. We compete with
several companies primarily engaged in the business of designing, manufacturing
and selling RFICs, as well as suppliers of discrete products such as
transistors, capacitors and resistors. At least one of our competitors has GaAs
HBT technology and other companies are developing GaAs HBT and new fabrication
processes. In addition, many of our existing and potential customers manufacture
or assemble wireless communications devices and have substantial in-house
technological capabilities. Any of them could develop products that compete with
or replace ours. If one of our large customers decided to design and manufacture
integrated circuits internally, it could have an adverse effect on our operating
results.
We expect competition to increase. This could mean lower prices for our
products, reduced demand for our products and a corresponding reduction in our
ability to recover development, engineering and manufacturing costs. Any of
these developments would have an adverse effect on our operating results.
Many of our existing and potential competitors have entrenched market
positions, considerable internal manufacturing capacity, established
intellectual property rights and substantial technological capabilities. Many of
our existing and potential competitors, including Anadigics, Conexant, Fujitsu,
Hitachi, Motorola, NEC, Philips, Siemensand TriQuint, have greater financial,
technical, manufacturing and marketing resources than we do. We cannot be sure
that we will be able to compete successfully with our competitors.
We Depend Heavily on Key Personnel.
Our success depends in part on keeping key technical, marketing, sales and
management personnel. We do not have employment agreements with any of our
employees. We must also continue to attract qualified personnel. The competition
for qualified personnel is intense, and the number of people with experience,
particularly in RF engineering, integrated circuit design, wafer fabrication,
wireless systems and technical marketing and support, is limited. We cannot be
sure that we will be able to attract and retain other skilled personnel in the
future.
We Are Subject to Risks from International Sales and Operations.
Sales to customers in South Korea accounted for about 13.3% of our revenue
in fiscal 1999 and about 21.3% of our revenue in fiscal 1998. As a result of the
economic instability in Asia, sales to our customers in South Korea in fiscal
1999 initially declined. Recently, we have experienced an increase in orders
from customers in South Korea. We believe this market remains unstable and we
cannot predict whether that trend will continue or reverse. We also cannot
predict whether the turmoil that has affected Asian and other economies will
spread to other parts of the world.
Sales to customers located outside the United States accounted for about
24% of our revenue in fiscal 1996, about 42% of our revenue in fiscal 1997,
about 50% of our revenue in fiscal 1998 and about 59% of our revenue in fiscal
1999. We expect that revenue from international sales will continue to be a
significant part of our total revenue. International sales are subject to a
variety of risks, including risks arising from currency fluctuations and
restrictions, tariffs, trade barriers, taxes and export license requirements.
Because all of our foreign sales are denominated in U.S. dollars, our products
become less price competitive in countries with currencies that are low or are
declining in value against the U.S. dollar. Also, we cannot be sure that our
international customers will continue to accept orders denominated in U.S.
dollars. If they do not, our reported revenue and earnings will become more
directly subject to foreign exchange fluctuations. See Note 2 of Notes to
Financial Statements.
All but one of our circuit assembly vendors are located in Asia. This
subjects us to regulatory, geopolitical and other risks of conducting business
outside the United States. We do business with our foreign assemblers in U.S.
dollars. Our assembly costs increase in countries with currencies that are
increasing in value against the U.S. dollar. Also, we cannot be sure that our
international assemblers will continue to accept orders denominated in U.S.
dollars. If they do not, our costs will become more directly subject to foreign
exchange fluctuations.
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We Rely on Intellectual Property and Could Face Claims of Infringement.
Our success depends in part on our ability to obtain patents, trademarks
and copyrights, maintain trade secret protection and operate our business
without infringing on the proprietary rights of other parties.
Although there are no pending lawsuits against us or notices that we are
infringing anyone's intellectual property rights, we could be notified in the
future that TRW or we are infringing someone's intellectual property rights. We
cannot be sure that we could obtain licenses on commercially reasonable terms or
that litigation would not occur if there were any infringement. If we were
unable to obtain necessary licenses or if litigation arose out of infringement
claims, our operating results could be adversely affected.
In addition to patent and copyright protection, we also rely on trade
secrets, technical know-how and other unpatented proprietary information
relating to our product development and manufacturing activities. We try to
protect this information with confidentiality agreements with our employees and
other parties. We cannot be sure that these agreements will not be breached,
that we would have adequate remedies for any breach or that our trade secrets
and proprietary know-how will not otherwise become known or independently
discovered by others.
We Are Subject to Stringent Environmental Regulation.
We are subject to a variety of federal, state and local requirements
governing the protection of the environment. These environmental regulations
include those related to the use, storage, handling, discharge and disposal of
toxic or otherwise hazardous materials used in our manufacturing processes.
Because the public is focusing more attention on the environmental impact of the
operations of the semiconductor industry, these requirements may become more
stringent in the future. Failure to comply with environmental laws could subject
us to substantial liability or force us to significantly change our
manufacturing operations. In addition, under some of these laws and regulations,
we could be held financially responsible for remedial measures if our properties
are contaminated, even if we did not cause the contamination.
We Face Risks Concerning Year 2000 Issues.
We have evaluated all of our internal software and current products against
Year 2000 concerns, and we believe that our products and business will not be
substantially affected by the advent of the year 2000 and that we have no
significant exposure to liabilities related to the Year 2000 issue for the
products we have sold.
Although we believe our planning efforts are adequate to address our Year
2000 concerns, we cannot be sure that we will not experience negative
consequences and material costs caused by undetected errors or defects in the
technology used in our internal systems, or that the systems of other parties on
which we rely will be made compliant on a timely basis and will not have any
material adverse effect on us. At this time, we are unable to estimate the most
reasonably likely worst-case effects of the arrival of the year 2000 and we do
not have a contingency plan for any unanticipated negative effects.
TRW and Our Management Are Controlling Shareholders.
Our directors and executive officers and their affiliates (including TRW)
beneficially own about 26.9% of RFMD's common stock. TRW, our largest
shareholder, beneficially owns about 23.1% of the common stock. These
shareholders thus can exercise significant influence over all matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions.
TRW has agreed to refrain until June 6, 2002 from taking certain actions
affecting control over us. If a third party offers to acquire all of our stock,
however, TRW will have 30 days to make a counterproposal on the same or better
terms and could have the proposal submitted to our shareholders. This right
could discourage a third party from offering to acquire all of our outstanding
shares.
Our Stock Price Is Subject to Volatility.
The trading price of our common stock could be subject to wide fluctuations
in response to quarterly variations in operating results, adverse business
developments, changes in financial estimates by securities
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analysts, announcements of technological innovations, new products by us or our
competitors, transaction by corporate insiders and other events and factors.
Since completion of our public offering in June 1997, our stock price has
fluctuated widely. Also, the stock market has experienced extreme price and
volume fluctuations based on factors outside our control that have particularly
affected the market prices for many high technology companies. These broad
market fluctuations may materially and adversely affect the market price of our
common stock.
Future Sales of Shares Could Have an Adverse Effect on Market Price.
Sales of substantial amounts of common stock in the public market or the
prospect of such sales could adversely affect the market price for our common
stock and our ability to raise equity capital in the future. As of June 17,
1999, we had outstanding a total of 39,501,598 shares of common stock. Of these
shares, approximately 29,165,884 shares are freely tradable without restriction
or further registration under the Securities Act of 1933, except for any shares
acquired by our "affiliates," as that term is defined in Rule 144 under the
Securities Act. We believe that the holders of the remaining 10,335,714 shares
are affiliates and, accordingly, that their shares may be sold without
registration only in compliance with the Securities Act (including Rule 144). As
of March 31, 1999, options to purchase 3,305,552 shares of common stock were
outstanding under our stock option plans, with a weighted average exercise price
of $7.14 per share and a weighted average remaining contractual life of 8.4
years. Of these, options to purchase 583,762 shares were exercisable at March
31, 1999, at a weighted average exercise price of $1.95 per share.
ITEM 2. PROPERTIES
Our principal administrative facility is located in a building comprising
approximately 25,000 square feet in Greensboro, North Carolina. Pursuant to the
lease agreement under which we lease this building, we exercised an option for
an expansion of the facility through the construction of an adjacent additional
building consisting of approximately 34,000 square feet that was completed in
March 1999. The term of the lease for these facilities is fifteen years from the
date of completion of this expansion. We also lease real estate adjacent to our
principal facility on which our wafer fabrication facility, consisting currently
of approximately 64,000 square feet, has been constructed. The lease for the
fabrication facility has a term expiring in May 2013, with two 10-year renewal
options. We have deposited $3.9 million under an escrow arrangement to secure
our obligations under this lease. The deposited amounts are to be released to us
based upon an agreed-upon amortization schedule; subject to acceleration in the
event we meet specified financial coverage ratios. We currently expect the
deposited amount will be released to us in full by the end of the second quarter
of fiscal 2000 as the result of our meeting the specified financial coverage
ratios. We also lease approximately 17,500 square feet of commercial space in
Greensboro, North Carolina that we use for office space and storage. This
facility is leased under three leases that each expire on December 31, 1999. We
anticipate renewing these three leases pending satisfactory re-negotiation
results.
As part of the execution of the wafer fabrication and MBE capacity
expansion efforts, we have entered into an operating lease for a new 136,000
square foot facility. The lease agreement is for a 15-year lease with options to
renew for two periods of ten years. We have also entered into a lease for
another 75,000 square foot facility that is to be used for packaging and wafer
dicing associated with our modular products. The term of the lease is also for
15 years with two ten-year renewal options. The aggregate annual rentals for
these leases are approximately $0.7 million. We have also entered into lease
agreements for our Scotts Valley and Cedar Rapids design centers. The lease
agreement for the Scotts Valley facility is for a 4-year term with an option to
renew for a 3-year period. The lease agreement for the Cedar Rapids facility is
for a 5-year period with no option to renew. The aggregate annual rentals for
these leases are approximately $143,000.
We own 30 acres of land adjacent to our fabrication facility, on which we
recently began construction of a new 100,000 square foot facility that will
serve as our new headquarters building as well as provide expansion for the
design engineering and marketing groups. This facility is expected to be
completed in December 1999, and we are currently reviewing various financing and
leasing alternatives to finance this project.
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ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on The Nasdaq National Market under the symbol
"RFMD." The table below shows the high and low per-share sales prices of our
common stock for the periods indicated, as reported by The Nasdaq National
Market. We completed our initial public offering of 6,911,100 shares of common
stock in June 1997 at a price of $6.00 per share, and completed a secondary
offering of 4,600,000 shares of common stock in January 1999 at a price of
$30.72 per share. Our common stock split two-for-one on March 31, 1999 by means
of a 100% share dividend payable to holders of record on March 17, 1999, and the
prices below have been adjusted to reflect this split. As of June 17, 1999,
there were 282 holders of record of our common stock.
HIGH LOW
------ ------
Year Ended March 31, 1998
First Quarter (from June 3)................................. $ 9.56 $ 7.25
Second Quarter.............................................. 11.56 8.06
Third Quarter............................................... 9.25 5.25
Fourth Quarter.............................................. 8.44 5.13
For Fiscal Year 1998........................................ 11.56 5.13
Year Ended March 31, 1999
First Quarter............................................... $ 8.19 $ 5.44
Second Quarter.............................................. 11.09 5.25
Third Quarter............................................... 25.31 7.31
Fourth Quarter.............................................. 51.88 22.31
For Fiscal Year 1999........................................ 51.88 5.25
We have never paid dividends on our capital stock. We intend to retain
earnings for use in our business and do not anticipate paying any cash dividends
in the foreseeable future.
On February 4, 1999, we issued 72,318 shares of common stock to an entity
believed to qualify as an accredited investor upon the cashless exercise of
warrants held by such entity to purchase a total of 82,644 shares of common
stock at $4.50 per share. We issued these shares of common stock in reliance on
the exemptions from registration provided by Sections 3(a)(9) and 4(2) of the
Securities Act.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our Financial Statements and Notes thereto included in this
Form 10-K. The statement of operations data for the years ended March 31, 1999,
1998 and 1997, and the selected balance sheet data as of March 31, 1999 and
March 31, 1998, are derived from, and are qualified by reference to, the
Financial Statements and Notes thereto included in this Form 10-K. The statement
of operations data for the years ended March 31, 1996 and 1995, and the selected
balance sheet data as of March 31, 1997, March 31, 1996 and March 31, 1995 are
derived from our historical financial statements, which are not included in this
Form 10-K.
YEAR ENDED MARCH 31,
-------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales................................ $152,114 $44,095 $27,852 $ 8,212 $ 1,254
Engineering revenues......................... 738 1,255 950 1,303 434
-------- ------- ------- -------- -------
Total revenues................................. 152,852 45,350 28,802 9,515 1,688
Operating costs and expenses:
Cost of goods sold........................... 99,325 29,246 15,826 7,471 1,215
Research and development..................... 14,239 8,761 6,178 4,245 2,836
Marketing and selling........................ 10,716 6,220 3,760 1,817 1,180
General and administrative................... 4,787 2,528 1,391 1,226 620
-------- ------- ------- -------- -------
Total operating costs and expenses............. 129,067 46,755 27,155 14,759 5,851
-------- ------- ------- -------- -------
Income (loss) from operations.................. 23,785 (1,405) 1,647 (5,244) (4,163)
Interest expense............................... (1,244) (184) (399) (81) (27)
Other income, net.............................. 1,911 1,066 513 137 68
-------- ------- ------- -------- -------
Income (loss) before income taxes.............. 24,452 (523) 1,761 (5,188) (4,122)
Income tax expense............................. (4,891) -- (109) -- --
-------- ------- ------- -------- -------
Net income (loss).............................. $ 19,561 $ (523) $ 1,652 $ (5,188) $(4,122)
======== ======= ======= ======== =======
Net income (loss) per share:
Basic........................................ $ 0.57 $ (0.02) $ 0.30 $ (4.43) $ (3.52)
======== ======= ======= ======== =======
Diluted...................................... $ 0.53 $ (0.02) $ 0.07 $ (4.43) $ (3.52)
======== ======= ======= ======== =======
Shares used in per share calculation:
Basic........................................ 34,236 27,018 5,556 1,170 1,170
Diluted...................................... 36,868 27,018 22,430 1,170 1,170
======== ======= ======= ======== =======
1999 1998 1997 1996 1995
-------- ------- ------- -------- -------
BALANCE SHEET DATA:
Cash and cash equivalents...................... $147,545 $16,360 $ 2,330 $ 6,638 $ 2,223
Working capital................................ 167,918 34,226 7,313 7,912 2,686
Cash restricted for capital additions.......... 3,860 -- 12,358 -- --
Total assets................................... 275,758 93,364 36,265 13,192 4,343
Long-term debt and capital lease obligations... 12,587 12,524 10,829 153 59
Redeemable convertible preferred stock......... -- -- 28,257 23,325 12,325
Shareholders' equity (deficiency).............. 230,906 66,763 (9,472) (14,357) (9,169)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All statements, trend analysis and other information contained in the
following discussion relative to markets for our products and trends in revenue,
gross margins and anticipated expense levels, as well as other
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statements including words such as "anticipate," "believe," "plan," "estimate,"
"expect" and "intend" and other similar expressions constitute forward-looking
statements. Our Company's business is subject to business and economic risks and
uncertainties, and our actual results of operations may differ materially from
those expressed or implied in the forward-looking statements. The following
discussion and the section entitled "Business -- Additional Factors That May
Affect Future Results" describe some, but not all, of the factors that could
cause these differences.
OVERVIEW
We design, develop, manufacture and market proprietary RFICs for wireless
communications applications such as cellular and PCS, cordless telephony,
wireless local area networks, wireless local loop, industrial radios, wireless
security and remote meter reading. We derive revenue from the sale of standard
and custom-designed products and services. To date, a significant portion of our
revenue has been attributable to the sale of RFICs used in cellular and PCS
handsets. We offer a broad array of products -- including amplifiers, mixers and
modulators/ demodulators and single chip transmitters, receivers and
transceivers -- that represent a substantial majority of the RFICs required in
wireless subscriber equipment. We design products using four distinct process
technologies: GaAs HBT, GaAs MESFET, silicon bipolar transistor and silicon
germanium. Sales of GaAs HBT products represented 89% of our revenue in fiscal
1999, 81% during fiscal 1998, and 85% during fiscal 1997. We expect to continue
to rely heavily on sales of GaAs HBT products.
Until September 1998 we did not have internal manufacturing capabilities
for GaAs HBT products and thus relied exclusively on purchased wafers to meet
customer demand. In September 1998, we began commercial shipments from our GaAs
HBT wafer fabrication facility, which has enabled us to manufacture products
with lower per unit costs than products manufactured from wafers that we
purchase. Internally manufactured products accounted for 31.4% of our total
revenues for fiscal 1999, and we are in the process of increasing production at
our fabrication facility. We are also expanding this facility's total production
capacity in response to demand for our GaAs HBT products by adding additional
production equipment and by relocating certain manufacturing processes to a new
leased facility.
RESULTS OF OPERATIONS
The following table shows our statement of operations data expressed as a
percentage of total revenue for the periods indicated:
FOR THE FISCAL YEAR ENDED
MARCH 31, YEAR-TO-YEAR CHANGES
-------------------------- ---------------------
1999 1998 1997 1998-1999 1997-1998
------ ------ ------ --------- ---------
Total revenues.......................... 100.0 100.0 100.0 237.1 57.5
Operating costs and expenses:
Cost of goods sold.................... 65.0 64.5 54.9 239.6 84.8
Research and development.............. 9.3 19.3 21.4 62.5 41.8
Marketing and selling................. 7.0 13.7 13.1 72.3 65.4
General and administrative............ 3.1 5.6 4.8 89.4 81.7
----- ----- ----- ------- ------
Total operating costs and expenses...... 84.4 103.1 94.3 176.0 72.2
Income (loss) from operations........... 15.6 (3.1) 5.7 1,792.9 (185.3)
Interest expense........................ (0.8) (0.4) (1.4) 576.1 (53.9)
Other income, net....................... 1.3 2.4 1.8 79.3 107.8
----- ----- ----- ------- ------
Income (loss) before income taxes....... 16.0 (1.2) 6.1 4,775.3 (129.7)
Income tax expense...................... (3.2) 0.0 (0.4) -- --
----- ----- ----- ------- ------
Net income (loss)............. 12.8 (1.2) 5.7 3,840.2 (131.7)
===== ===== ===== ======= ======
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REVENUES
Our revenues increased 237.1% during fiscal 1999 versus fiscal 1998
primarily due to strong growth in both the GaAs HBT product line (a 269.2%
increase over fiscal 1998) and the silicon product line (a 187.8% increase over
fiscal 1998). Commercial shipments from our wafer fabrication facility commenced
in September 1998 and contributed $48.0 million (or 31.4%) of total revenues in
fiscal 1999. We are close to reaching production levels from our fabrication
facility of approximately 15,000 four-inch wafers per year. We are increasing
the facility's total capacity to approximately 30,000 four-inch wafers per year
through an expansion of the facility's clean room and the installation of
additional equipment. We plan additional steps that we believe will increase
capacity to approximately 50,000 four-inch wafers per year by the spring of
2001.
Sales to Nokia Mobile Phones Ltd. represented 73% and 44% of revenue for
fiscal 1999 and fiscal 1998, respectively. No other customer accounted for more
than 7% of our fiscal 1999 revenues. Engineering revenues were 0.5% of total
revenues for the year ended March 31, 1999, compared to 2.8% for the previous
year.
Revenues for fiscal 1998 increased 57.5% over fiscal 1997 primarily due to
strong sales growth in GaAs HBT power amplifiers for cellular and PCS handsets,
including shipments of 3.0 volt, high-efficiency GaAs HBT power amplifiers to
Nokia for their series of 3.0 volt handsets.
International shipments accounted for $90.4 million or 59.1% of revenues in
fiscal 1999, compared to $22.7 million, or 50.0% of revenues in fiscal 1998 and
$11.9 million, or 42.0% of revenues, for fiscal 1997. Sales to customers located
in South Korea totaled $20.3 million in fiscal 1999, or 13.3% of revenues,
compared to $9.6 million, or 21.3% of revenues in fiscal 1998. The growth in
sales to our South Korean OEM customers resulted from increased demand for CDMA
handsets that they supply to the South American and Asian markets. Although we
experienced an increase in sales to customers located in South Korea in fiscal
1999, this market remains unstable and we cannot be sure that this trend will
continue or that economic instability in Asia or other parts of the world will
not have a material adverse effect on our operating results.
GROSS PROFIT
In fiscal 1999, our gross profit margins decreased slightly to 35.0% from
35.5% in fiscal 1998 due to a combination of lower average selling prices driven
by volume pricing agreements granted to our largest customer and adverse
assembly and test yields associated with new products, partially offset by lower
costs on purchased wafers under a supply agreement providing for annual price
reductions. In fiscal 1998, gross profit margins decreased to 35.5% from 45.1%
in fiscal 1997 primarily due to a one-time revenue reduction and inventory
write-down due to packaging-related product returns totaling $4.6 million.
We have historically experienced significant fluctuations in gross profit
margins which caused fluctuations in our quarterly operating results and we
cannot be sure that future operating results will not be similarly affected. We
currently expect that our gross profit margins should improve as an increasing
percentage of our GaAs HBT products are fabricated at our wafer fabrication
facility, where production costs per wafer have to date been lower than costs
for products manufactured with purchased wafers. In this regard, our gross
profit margins improved from 32.0% in the first half of fiscal 1999 to 36.7% in
the second half of fiscal 1999. However, we sell products in intensely
competitive markets, and we believe that downward pressure on average selling
prices will continue to occur.
RESEARCH AND DEVELOPMENT
Research and development expenses in fiscal 1999 increased $5.5 million
over fiscal 1998 primarily due to increased salaries and benefits and recruiting
expenses related to increased headcount and additional spending on mask sets and
outside services for both standard and custom-designed products. Research and
development expenses as a percentage of total revenues decreased to 9.3% in
fiscal 1999 from 19.3% in fiscal 1998. Research and development expenses in
fiscal year 1998 compared to fiscal 1997 increased $2.6 million, primarily due
to increased salaries and benefits related to headcount growth and additional
spending on small tools and supplies and other components necessary for
prototype assembly. In addition, amortization and depreciation expenses for
equipment leases and purchases increased. We plan to continue to make
substantial investments in research and
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development and we expect that such expenses will continue to increase in
absolute dollar amounts in future periods. We opened an RFIC design center in
Scotts Valley, California in April 1999 that is currently staffed by 12
employees and a design center in Cedar Rapids, Iowa in June 1999 that is
currently staffed by five employees, and we anticipate that we may open
additional design centers in other locations during fiscal 2000.
MARKETING AND SELLING
Marketing and selling expenses in fiscal 1999 increased $4.5 million over
fiscal 1998, primarily due to increased salaries and benefits related to
increased headcount and to increased expenses associated with advertising,
travel and entertainment expenses, and commissions related to increased sales to
South Korean customers. Marketing and selling expenses as a percentage of
revenues in fiscal 1999 decreased to 7.0% from 13.7% in fiscal 1998. Marketing
and selling expenses in fiscal year 1998 compared to fiscal 1997 increased $2.5
million primarily due to increased salaries and benefits and recruiting expenses
related to increased headcount, increased travel and entertainment expenses, and
increased sales literature expenses. We plan to continue to make substantial
investments in marketing and selling and we expect that such expenses will
continue to increase in absolute dollar amounts in future periods. In June 1999,
we opened a small sales office in the United Kingdom to enhance our ability to
serve our European customers, and we may open additional sales offices in the
United States or elsewhere. We expect that beginning in fiscal 2000, a greater
proportion of our sales and marketing efforts will increasingly be conducted
directly by our employees, and that our reliance on independent sales
representative firms will decline over time. This will result in an absolute
increase in marketing and selling expenses as we build our internal direct sales
force.
GENERAL AND ADMINISTRATIVE
General and administrative expenses in fiscal 1999 increased $2.3 million
over fiscal 1998 primarily due to increased salaries and benefits related to
headcount increases, provision for doubtful accounts and the amortization of our
technology license with TRW. The changes in headcount are the result of staffing
to support an SAP implementation during fiscal year 2000 and increases in human
resources and finance headcount due to larger employee population and increased
business volume. General and administrative expenses as a percentage of revenues
decreased to 3.1% in fiscal 1999 from 5.6% in fiscal 1998. General and
administrative expenses in fiscal year 1998 compared to fiscal 1997 increased
$1.1 million, primarily due to increased salaries and benefits and recruiting
expenses associated with headcount increases and to costs associated with being
a public company.
OTHER INCOME (EXPENSE)
Other income (expense), net in fiscal 1999 reflected net income of $667,000
compared to net income of $882,000 in fiscal 1998. This decrease was
attributable to increased interest expense incurred on borrowings related to our
wafer fabrication facility, which offset the benefit of an increase in interest
income due to higher cash balances from our secondary public stock offering,
which was completed in January 1999. Other income (expense), net in fiscal 1998
increased $768,000 compared to fiscal 1997 primarily due to the investment of
the proceeds of our June 1997 initial public offering.
INCOME TAX EXPENSE
Income tax expense in fiscal 1999 was $4.9 million compared to no provision
in fiscal 1998 and $109,000 in fiscal 1997. Our effective combined income tax
rate was 20.0% in fiscal 1999 and 6.2% in fiscal 1997, which is less than the
combined federal and state statutory rate of approximately 40% due to the use of
net operating loss carryforwards. In fiscal 1998 we did not provide for income
taxes as a result of the loss incurred during the year.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date through sales of equity and debt
securities, bank borrowings, capital equipment leases and revenues from product
sales. We completed our initial public offering in June 1997, and raised
approximately $37.6 million, net of offering expenses. In January 1999, we
completed our secondary
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public offering and raised approximately $133.4 million, net of offering
expenses. As of March 31, 1999, we had working capital of approximately $167.9
million, including $147.5 million in cash and cash equivalents.
Operating activities generated $20.5 million in cash in fiscal 1999. This
was attributable primarily to net income of $19.6 million and an increase in
accounts payable of $8.8 million, partially offset by an increase in accounts
receivable of $16.6 million and in inventories of $2.5 million. Cash used by
operating activities in fiscal 1998 was $14.6 million. This amount was
attributable primarily to a $15.7 million increase in inventories and a $4.6
million increase in accounts receivable. These were partially offset by an
increase in accounts payable of $5.2 million.
The $25.8 million of cash used by investing activities in fiscal 1999 was
related to the purchase of $24.8 million of capital equipment, primarily for use
in our wafer fabrication facility, as well as $1.3 million for the
capitalization of wafer fabrication construction costs. The $19.9 million of
cash used by investing activities in fiscal 1998 was related to expenditures
associated with the construction of our GaAs HBT wafer fabrication facility, and
to wafer fabrication and general corporate capital equipment requirements. The
investment in the wafer fabrication facility is associated with a $40 million
second phase of construction that involves a 6,000 square foot expansion of the
cleanroom and the purchase or lease of additional production equipment. We
currently expect this phase to increase total wafer capacity to approximately
30,000 wafers per year.
At March 31, 1999, we had total long-term capital commitments of $11.1
million with $6.6 million relating to wafer fabrication expansion and $4.5
million for general corporate requirements, including installation of an
enterprise-wide software system. The $6.6 million in long-term capital
commitments relating to the wafer fabrication facility represents continued
investment in the second phase expansion described above, as well as a portion
of an expected additional $15 million investment to increase further wafer
fabrication capacity that will consist of moving our MBE wafer starting
equipment out of the facility to a new leased location, reconfiguring the space
currently occupied by this equipment with additional wafer production equipment
and hiring additional production personnel. We believe this additional
investment in wafer fabrication capacity, which is expected to be completed by
the spring of 2001, will bring our total wafer production capacity to
approximately 50,000 wafers per year. We expect to fund this investment through
a combination of existing cash on hand and capital leases. As part of the
execution of the capacity expansion efforts, we have entered into an operating
lease for a new 136,000 square foot facility. The lease agreement is for a
15-year lease with options to renew for two periods of ten years. We have also
entered into a lease for another 75,000 square foot facility that is to be used
for packaging and wafer dicing associated with our modular products. The term of
the lease is also for 15 years with two ten-year renewal options. The aggregate
annual rentals for these leases are approximately $0.7 million.
The $136.5 million of cash provided by financing activities in fiscal 1999
related primarily to the receipt of $133.4 million in proceeds from our
secondary offering completed in January 1999 and $10.0 million in proceeds from
the exercise of a warrant held by TRW covering 2,000,000 shares of common stock.
The proceeds were partially offset by $4.2 million in repayments of capital
lease obligations and cash restricted for capital additions of $3.9 million. In
connection with the construction of our wafer fabrication facility, in October
1998 we deposited approximately $3.9 million into an escr