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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
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 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7628 THORNDIKE ROAD
GREENSBORO, NORTH CAROLINA 27409-9421
------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(336) 664-1233
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of November 6, 2002, there were 169,171,607 shares of the registrant's common
stock outstanding.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PAGE
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2002 AND 2001...................................3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS
ENDED SEPTEMBER 30, 2002 AND 2001...................................4
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2002
AND MARCH 31, 2002..................................................5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS
ENDED SEPTEMBER 30, 2002 AND 2001...................................6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.........................................................15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............24
ITEM 4. CONTROLS AND PROCEDURES...............................................24
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................24
2
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
--------- ---------
Revenue:
Product sales $ 119,675 $ 98,023
Engineering revenue 60 248
--------- ---------
Total revenue 119,735 98,271
Operating costs and expenses:
Cost of goods sold 73,738 61,902
Research and development 22,570 16,977
Marketing and selling 8,732 6,805
General and administrative 4,777 3,483
Other operating expenses (NOTE 6) 611 6,106
--------- ---------
Total operating costs and expenses 110,428 95,273
--------- ---------
Income from operations 9,307 2,998
Other income (expense):
Interest income 1,624 3,514
Interest expense (4,456) (4,201)
Other, net 44 (530)
--------- ---------
Income before income taxes 6,519 1,781
--------- ---------
Income tax expense (NOTE 8) 34 249
--------- ---------
Net income $ 6,485 $ 1,532
========= =========
Net income per share (NOTE 2):
Basic $ 0.04 $ 0.01
Diluted $ 0.04 $ 0.01
Weighted average shares outstanding used in per share calculation:
Basic 168,551 164,918
Diluted 173,199 173,829
See accompanying Notes to Condensed Consolidated Financial Statements.
3
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
----------- -----------
Revenue:
Product sales $ 223,379 $ 167,550
Engineering revenue 298 773
----------- -----------
Total revenue 223,677 168,323
Operating costs and expenses:
Cost of goods sold 136,242 127,803
Research and development 45,621 32,992
Marketing and selling 17,146 13,370
General and administrative 8,977 6,743
Other operating expenses (NOTE 6) 1,353 11,018
Impairment of long-lived assets (NOTE 7) -- 6,801
----------- -----------
Total operating costs and expenses 209,339 198,727
----------- -----------
Income (loss) from operations 14,338 (30,404)
Other income (expense):
Interest income 3,492 7,456
Interest expense (8,952) (8,212)
Other, net 27 (553)
----------- -----------
Income (loss) before income taxes 8,905 (31,713)
Income tax expense (benefit) (NOTE 8) 71 (4,859)
----------- -----------
Net income (loss) $ 8,834 ($ 26,854)
=========== ===========
Net income (loss) per share (NOTE 2):
Basic $ 0.05 ($ 0.16)
Diluted $ 0.05 ($ 0.16)
Weighted average shares outstanding used in per share calculation:
Basic 168,246 164,705
Diluted 173,866 164,705
See accompanying Notes to Condensed Consolidated Financial Statements.
4
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
SEPTEMBER 30, MARCH 31,
2002 2002
---------------------- ----------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 172,182 $ 157,648
Short-term investments 165,462 186,526
Accounts receivable, net 62,796 56,373
Inventories (NOTE 3) 61,289 38,734
Recoverable income tax 6,329 10,786
Other current assets 4,942 5,903
---------------------- ----------------------
Total current assets 473,000 455,970
Property and equipment, net of accumulated depreciation of $103,496 at
September 30, 2002 and $84,209 at March 31, 2002 227,358 221,679
Goodwill (NOTE 4) 34,525 34,525
Intangible assets, net of amortization of $3,814 at
September 30, 2002 and $2,906 at March 31, 2002 (NOTE 4) 10,846 11,754
Other non-current assets 3,710 5,072
---------------------- ----------------------
Total assets $749,439 $729,000
====================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 24,756 $ 16,909
Accrued liabilities 15,359 14,690
Current obligations under capital leases 1,320 3,319
---------------------- ----------------------
Total current liabilities 41,435 34,918
Long-term debt, net 295,048 294,248
Obligations under capital leases, less current maturities 15 169
Other long-term liability 12,295 9,980
---------------------- ----------------------
Total liabilities 348,793 339,315
Shareholders' equity:
Preferred stock, no par value; 5,000 shares authorized; no shares
issued and outstanding - -
Common stock, no par value; 500,000 shares authorized; 168,973 and
167,768 shares issued and outstanding at September 30, 2002 and
March 31, 2002, respectively 282,576 279,924
Additional paid-in capital 64,665 64,665
Deferred compensation (17,616) (19,652)
Accumulated other comprehensive loss, net of tax (Note 5) (8,622) (6,061)
Retained earnings 79,643 70,809
---------------------- ----------------------
Total shareholders' equity 400,646 389,685
---------------------- ----------------------
Total liabilities and shareholders' equity $ 749,439 $ 729,000
====================== ======================
See accompanying Notes to Condensed Consolidated Financial Statements.
5
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
---------- -----------
Cash flows from operating activities:
Net income (loss) $ 8,834 ($ 26,854)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation 19,655 17,155
Amortization 4,975 2,728
Loss on disposal of equipment and long-term investment 861 641
Impairment on long-lived assets -- 6,801
Tax benefit from exercise of employee stock options -- 3,849
Other (102) --
Changes in operating assets and liabilities:
Accounts receivable, net (6,423) (11,776)
Inventories (22,555) 25,166
Recoverable income taxes 4,457 15,999
Non-current deferred tax asset -- (20,624)
Other assets 973 6,188
Accounts payable and accrued liabilities 8,510 1,122
Other liabilities 41 4,043
--------- ---------
Net cash provided by operating activities 19,226 24,438
Cash flows from investing activities:
Purchase of capital equipment/leasehold improvements (26,069) (22,600)
Proceeds from maturities of securities held-to-maturity -- 17,950
Proceeds from maturities of securities available for sale 172,987 38,921
Purchase of securities available for sale (152,131) (142,629)
Purchase of technology license -- (130)
--------- ---------
Net cash used in investing activities (5,213) (108,488)
Cash flows from financing activities:
Proceeds from exercise of options and employee stock purchases 2,652 5,726
Repayment of capital lease obligations (2,153) (2,447)
--------- ---------
Net cash provided by financing activities 499 3,279
--------- ---------
Net increase (decrease) in cash and cash equivalents 14,512 (80,771)
Effect of exchange rate changes on cash 22 --
Cash and cash equivalents at the beginning of the period 157,648 266,076
--------- ---------
Cash and cash equivalents at the end of the period $ 172,182 $ 185,305
========= =========
Non-cash investing and financing activities:
Change in fair value of cash flow hedge, net of tax ($ 2,273) ($ 5,687)
Available-for-sale investment equity change, net of tax ($ 326) $ 644
Currency translation change, net of tax 38 --
See accompanying Notes to Condensed Consolidated Financial Statements
6
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION The accompanying condensed consolidated financial
statements of RF Micro Devices, Inc. and Subsidiaries (the Company) have been
prepared in conformity with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions, which could differ materially from actual
results. In addition, certain information or footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed, or
omitted, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the financial statements include all
adjustments (which are of a normal and recurring nature) necessary for the fair
presentation of the results of the interim periods presented. For comparative
purposes, certain fiscal 2002 amounts have been reclassified to conform to
fiscal 2003 presentation. These reclassifications had no effect on net income
(loss) or shareholders' equity as previously stated. The results of operations
for interim periods are not necessarily indicative of the results that may be
expected for a full year. These condensed consolidated financial statements
should be read in conjunction with the Company's audited consolidated financial
statements and notes there to included in the Company's Annual Report on Form
10-K for the year ended March 31, 2002.
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The Company uses a 52- or 53-week fiscal year ending on the Saturday closest to
March 31 of each year. The first fiscal quarter of each year ends on the
Saturday closest to June 30 and the second fiscal quarter of each year ends on
the Saturday closest to September 30; however, in this report the Company's
fiscal year is described as ending on March 31 and the first and second quarters
of each fiscal year are described as ending on June 30 and September 30,
respectively.
7
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
2. NET INCOME (LOSS) PER SHARE
The following table sets forth a reconciliation of the numerators and
denominators in the computation of basic and diluted net income (loss) per share
(in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2002 2001 2002 2001
-------- -------- -------- ---------
Numerator for basic and diluted net income (loss) per share:
Net income (loss) $ 6,485 $ 1,532 $ 8,834 ($ 26,854)
======== ======== ======== =========
Denominator for basic net income (loss)
per share - weighted average shares 168,551 164,918 168,246 164,705
Effect of dilutive securities:
Stock options and warrants 4,648 8,911 5,620 --
-------- -------- -------- ---------
Denominator for diluted net income (loss)
per share - adjusted weighted average
shares and assumed conversions 173,199 173,829 173,866 164,705
Basic net income (loss) per share
$ 0.04 $ 0.01 $ 0.05 ($ 0.16)
======== ======== ======== =========
Diluted net income (loss) per
share $ 0.04 $ 0.01 $ 0.05 ($ 0.16)
======== ======== ======== =========
In the computation of diluted net income per share for the three months ended
September 30, 2002 and 2001 and the six months ended September 30, 2002,
outstanding stock options to purchase approximately 13.7 million shares, 2.7
million shares, and 11.3 million shares, respectively, were excluded because the
exercise price of the options was greater than the average market price of the
underlying common stock and the effect of their inclusion would have been
anti-dilutive. In the computation of diluted net loss per share for the six
months ended September 30, 2001, all outstanding stock options and warrants were
excluded because the effect of their inclusion would have been anti-dilutive.
The computation of diluted net income (loss) per share for three months and six
months ended September 30, 2002 and 2001 similarly did not assume the conversion
of the Company's 3.75% convertible subordinated notes due 2005 because the
inclusion would have been anti-dilutive. The notes are convertible at a price of
$45.085 per share and the closing price of the Company's common stock on the
date it committed to sell the notes was $35.50.
8
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. INVENTORIES
Inventories are stated at the lower of cost or market determined using the
average cost method. The components of inventories are as follows (in
thousands):
SEPTEMBER 30, 2002 MARCH 31, 2002
------------------------- -----------------------
Raw materials $ 16,216 $ 16,263
Work in process 43,097 26,136
Finished goods 24,396 21,528
------------------------- -----------------------
83,709 63,927
Inventory reserve (22,420) (25,193)
------------------------- -----------------------
Total inventories $ 61,289 $ 38,734
========================= =======================
4. INTANGIBLES AND GOODWILL
In July 2001, the Financial Accounting Standard Board (FASB) issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). SFAS 142 supersedes APB Opinion No. 17, "Intangible Assets" and is
intended to result in the provision of more meaningful information about
intangible assets. In addition, SFAS 142 eliminates amortization of goodwill and
instead requires that it be tested for impairment at least annually. The Company
adopted SFAS 142 in fiscal 2002 with respect to the intangibles and goodwill
acquired in the RF Nitro Communications, Inc. merger and in the acquisition of
the global positioning system (GPS) development operation of International
Business Machines Corp. (IBM), in accordance with the new standard. The Company
adopted SFAS 142 in the first quarter of fiscal 2003 with respect to existing
intangible technology licenses. The adoption of SFAS 142 in fiscal 2003 did not
have a significant impact on the Company's consolidated financial position,
results of operations or cash flows.
5. OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) for the Company consists of
accumulated unrealized (loss) gain on marketable securities, foreign currency
translation adjustments and the change in fair value of a cash flow hedge
related to the Company's synthetic lease. This amount is included as a separate
component of shareholders' equity. The components of comprehensive income
(loss), net of tax, are as follows for the periods presented (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------- ------- -------- -------
Net income (loss) $ 6,485 $ 1,532 $ 8,834 ($26,854)
Comprehensive income (loss):
Fair value of cash flow hedge (1,167) (1,984) (2,273) (5,687)
Unrealized (loss)gain
on marketable securities (396) 20 (326) 644
Foreign currency 40 -- 38 --
------- ------- -------- --------
Comprehensive income (loss) $ 4,962 ($ 432) $ 6,273 ($31,897)
======= ======= ======= ========
9
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
6. OTHER OPERATING EXPENSE
Other operating expenses for fiscal 2003 include approximately five months of
costs associated with our test, tape and reel facility in Beijing, China. These
costs have been expensed as incurred in accordance with the American Institute
of Certified Public Accountants' Statement of Position 98-5, "Reporting on the
Costs of Start-up Activities." The operating costs of the Beijing facility
transitioned to cost of goods sold in September once the facility was qualified
for production and economic value was obtained. The prior year results included
start-up costs associated with our second wafer fabrication facility, which
qualified for production in the third quarter of fiscal 2002. Accordingly,
associated expenses transitioned from other operating expenses to cost of goods
sold during that quarter.
7. IMPAIRMENT OF LONG-LIVED ASSETS
On April 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS 144). SFAS 144 supersedes Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-Lived Assets to Be Disposed of" (SFAS 121) and establishes a single
accounting model for long-lived assets to be disposed of by sale, and also
resolves implementation issues related to SFAS 121. Adoption of SFAS 144 did not
have a significant impact on the Company's consolidated financial position,
results of operations or cash flows. During the quarter ended June 30, 2001, the
Company recognized an impairment charge totaling $6.8 million related to assets
to be held and used, as well as to assets to be disposed of, which is presented
on the consolidated statements of operations as "Impairment of long-lived
assets."
During the quarter ended June 30, 2001, management identified a customer demand
shift from microwave monolithic integrated circuits (MMICs) to more complex,
highly integrated multi-chip module power amplifiers, which created an
impairment of the $3.1 million carrying value for certain of the Company's MMIC
gravity-fed test handling equipment. The impairment charge for the applicable
equipment totaled $2.8 million, with a $0.3 million residual value remaining.
During the first quarter of fiscal 2003, the Company determined that the plan of
sale criteria in SFAS 144 had not been met for these assets. As a result, the
assets were measured at the lower of the carrying amount (less accumulated
depreciation and impairment loss) or fair value of $0.1 million and the assets
were reclassified from "Assets to be disposed of by Sale" to "Assets to be Held
and Used". The Company's management additionally made a decision during the
quarter ended June 30, 2001 to outsource module production packaging and
transition the Company's packaging line to a dedicated research and development
(R&D) facility, which resulted in a $4.0 million asset impairment charge. As a
result of the transition to an R&D facility, the Company identified certain
excess capacity and determined that the estimated future cash flows for an R&D
line did not support the carrying value of the assets related to the full
capacity initially invested by the Company. The impaired assets are module
assembly packaging equipment for surface mount devices, die attach, wire-bond
and molding processes. The fair market value of these assets was estimated based
on the historical selling prices for used equipment of a similar type and the
carrying values were adjusted accordingly. The asset impairment charge for the
transition to an R&D facility was classified as "Assets to be Held and Used."
10
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
8. INCOME TAXES
Income tax expense for the second quarter of fiscal 2003 was $0.03 million and
$0.07 million for the six months ended September 30, 2002, representing foreign
income taxes on international operations. The Company's effective tax rate for
the second quarter of fiscal 2003 was 0.5%, compared to 14.0% for the second
quarter of fiscal 2002. The Company's effective tax rate was 0.8% for the six
months ended September 30, 2002 compared to a 15.3% effective tax benefit for
the same period ended September 30, 2001. The Company's overall tax rate for the
2003 fiscal year differed from the statutory rate due to adjustments to the
valuation allowance primarily related to utilization of net operating losses
carried forward, rate differences on foreign transactions, and other differences
between book and tax treatment of certain expenditures. The Company's overall
tax rate for fiscal 2002 differed from the statutory rate due to the
non-recognition of the US tax benefits on the domestic net operating losses,
differences between book and tax treatment of certain expenditures, and rate
differences on foreign transactions.
At September 30, 2002, the Company had outstanding net operating loss
carryforwards (NOLs) for domestic tax purposes of approximately $23.0 million.
The federal NOLs will expire in years 2022 and 2023, and state losses will
expire in years 2009-2022, if unused. In accordance with the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," a
valuation allowance of $15.0 million related to domestic operating losses has
been established since it is more likely than not that some portion of the
deferred tax assets may not be realized. This review, along with the timing of
the reversal of the Company's temporary differences and the expiration dates of
the NOLs, were considered in reaching this conclusion.
9. SUBSEQUENT EVENTS
On October 15, 2002, the Company entered into an agreement to acquire Resonext
Communications, Inc. (Resonext), a privately-held company providing complete,
highly integrated silicon complementary metal-oxide-semiconductor (CMOS)
wireless local area network (WLAN) solutions for 802.11a and multi-band
(802.11a/b/g) platforms (Note 10).
11
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
10.COMMITMENTS
JAZZ SEMICONDUCTOR STRATEGIC RELATIONSHIP
On October 15, 2002, the Company entered into a strategic relationship with Jazz
Semiconductor, Inc. (Jazz), a privately-held, radio frequency (RF) and
mixed-signal silicon wafer foundry, for silicon manufacturing and development.
Under the arrangement, the Company obtained a committed, lower cost source of
supply for wafers fabricated utilizing Jazz's silicon manufacturing processes.
In addition, the Company will collaborate with Jazz on joint process development
and the optimization of these processes for fabrication of next-generation
silicon radio frequency integrated circuits (RFICs). As part of its strategic
relationship with Jazz, the Company agreed to invest approximately $60.0 million
in Jazz, $30.0 million of which was invested in October 2002 and $30.0 million
of which is payable in October 2003. The investment represents a minority
interest in Jazz operations, and the Company has one seat on the board of
directors out of nine; however, the Company will not have the ability to
exercise significant influence in the management of Jazz operations. This
investment will be carried at its original cost and accounted for using the cost
method of accounting for investments in accordance with Accounting Principles
Board Opinion No. 18, "The Equity Method of Accounting for Investments in Common
Stock."
ACQUISITION OF RESONEXT COMMUNICATIONS, INC.
The Company has agreed to acquire Resonext and issue $133.0 million in common
stock, subject to a collar on the Company's stock price between $6.00 and $9.50
per share, for all the outstanding shares of capital stock of Resonext,
including the shares issuable upon exercise of outstanding warrants and employee
stock options (Note 9). The collar provides protection for the shareholders of
both companies by limiting the number of shares to be issued by the Company to a
range with a minimum of 14.0 million shares (equivalent to $9.50 per share) and
a maximum of 22.2 million shares (equivalent to $6.00 per share). Share prices
either above or below the collar do not prevent the transaction from occurring.
The equivalent share price will be determined when the transaction is closed
(based on a trailing 20-trading day average price). The transaction is subject
to the approval of Resonext's shareholders and other closing conditions and
currently is expected to close during the Company's fiscal quarter ending
December 31, 2002.
STRATEGIC ALLIANCE WITH AGERE
The Company entered into a strategic alliance with Agere Systems Inc. (Agere) in
May 2001, pursuant to which the Company agreed to invest approximately $58.0
million over two years to upgrade manufacturing clean room space and purchase
semiconductor manufacturing equipment to be deployed within Agere's Orlando,
Florida manufacturing facility, of which $16.0 million had been invested as of
September 30, 2002. The alliance was designed to provide the Company a
guaranteed source of supply and favorable pricing of silicon wafers. On January
23, 2002, Agere announced that it was seeking a buyer for its Orlando wafer
fabrication operation. The Company is engaged in discussions with Agere
regarding the terms of its alliance with Agere and the effect of this potential
sale. The Company cannot predict the outcome of these discussions or what form
the alliance will take in the future but currently does not believe that these
developments will have a material adverse effect on the Company's business,
financial condition or results of operations.
12
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
10. COMMITMENTS (continued)
SYNTHETIC LEASE
In August 1999, as modified effective December 1999 and August 2001, the Company
entered into a $100.0 million synthetic lease with a financial institution. A
synthetic lease is an asset-based financing structured to be treated as an
operating lease for accounting purposes, but as a capital lease for tax
purposes. Prior to December 31, 1999, the synthetic lease transaction was
largely secured by cash collateral. The modification effective December 31, 1999
resulted in the release of the cash collateral, and the synthetic lease is now
secured by substantially all of the Company's personal property assets. The
modification in August 2001 resulted in expansion of financial covenants, which
require the maintenance of minimum levels of tangible net worth, liquidity and
debt service coverage and prohibit the payment of dividends. The Company's $30.0
million investment in Jazz on October 15, 2002 resulted in a violation of
certain restrictive covenants under the synthetic lease documents. In addition,
the Company has determined that it will not be in compliance with a consolidated
total leverage ratio covenant under the lease documents and must report such
noncompliance to the lender contemporaneously with the filing of this quarterly
report. To address these actual and potential defaults, the Company has obtained
a temporary conditional waiver from the lenders, which waiver expires on
November 20, 2002. Pending the expiration of this waiver, the Company is
considering a number of options, including: (1) negotiating an amendment to the
lease documents to modify certain covenants and make other changes; (2) securing
a new lease or other debt facility to retire the synthetic lease and refinance
the remaining liability thereunder; or (3) paying off the remaining amount of
the synthetic lease with available cash on hand. The outstanding liability
related to the synthetic lease is approximately $86.0 million as of the date of
this quarterly report. No assurance can be given that an acceptable amendment
can be negotiated with the lender or that replacement financing can be secured
in a timely manner or on acceptable terms. The Company has sufficient liquidity
to retire the synthetic lease facility if it chooses to do so.
In fiscal 2001, the Company entered into an interest rate swap cash flow hedge
to reduce the impact of interest rate changes under the lease on the Company's
results of operations. The derivative financial instrument is recorded on the
Company's balance sheet at its fair value of $8.3 million based on the valuation
of an outside firm as of September 30, 2002, and is included in other long-term
liabilities and accumulated other comprehensive loss (Note 5). If the Company
elects to pay off the synthetic lease, this $8.3 million liability will no
longer qualify for hedge accounting and will be removed from the Company's
balance sheet and recognized as a loss for financial reporting purposes on the
Company's statement of operations during the corresponding period in which the
pay-off occurs. The pay-off of the $8.3 million liability would be expected to
lower the Company's reported interest expense in future periods. The interest
expense related to the interest rate swap cash flow hedge was $1.4 million for
the quarter ended September 30, 2002.
The lease has a term expiring November 3, 2004. At the end of the term, the
lease can be extended upon the agreement of the parties or the Company may buy
out the lease. The interest rates or yield rates embedded in the lease (and used
to calculate lease payments) are either:
o The "Eurodollar Rate" (described below) plus margins varying from 150 basis
points to 325 basis points per annum (based on certain quarterly financial
covenant testing and depending on whether the underlying source of funding
is in the form of a promissory note or an equity certificate), or
13
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
10. COMMITMENTS (continued)
SYNTHETIC LEASE (CONTINUED)
o At the Company's election and under certain other circumstances where
funding based on the Eurodollar Rate is not available, the "ABR Rate"
(described below), plus margins varying from 25 basis points to 125 basis
points per annum (based on certain quarterly financial covenant testing and
depending on whether the underlying source of funding is in the form of a
promissory note or an equity certificate).
The Eurodollar Rate is a rate of interest determined under the lease documents
by reference to one or more sources for the London inter-bank offered rate, or
LIBOR. The ABR Rate is a rate of interest determined under the lease documents
equal to the greater of (a) the prime lending rate of the primary lender or its
successor (as determined under the lease documents) or (b) the federal funds
effective rate (as determined under the lease documents) plus 0.5%.
The Company also has provided for a contingent residual value guarantee in
relation to the synthetic lease. This guarantee provides that in the event the
assets are sold to a third party at the end of the lease term, the Company
unconditionally promises to pay to the lessor the lesser of (1) the deficiency
balance, which is equal to the excess, if any, of the cost of the assets over
the aggregate sale price paid by the third party, or (2) the maximum residual
guarantee amount, which is equal to 85% of the "Property Cost" (aggregate
outstanding loans and holder advances) for all of the assets subject to the
synthetic lease. Amortization equal to 1.7111% per month of the equipment
portion of the synthetic lease reduces the asset cost and thus the Company's
contingent residual value guarantee.
11. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" (SFAS 145). The Company adopted
SFAS 145 for financial statements issued on or after May 15, 2002. Adoption of
SFAS 145 did not have a significant impact on the Company's consolidated
financial position, results of operations or cash flows.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that
relate to our plans, objectives, estimates and goals. Words such as "expect,"
"anticipate," "intend," "plan," "believe," and "estimate," and variations of
such words and similar expressions, identify such forward-looking statements.
The Company's business is subject to numerous risks and uncertainties, including
the following:
o Variability in quarterly operating results;
o The rate of growth and development of wireless markets;
o The risks associated with the operation of our molecular beam epitaxy,
the operation of our test, tape and reel facilities both foreign and
domestic and the operation of our wafer fabrication facilities;
o Our ability to manage rapid growth and to attract and retain skilled
personnel;
o Variability in production yields, raw material availability, and
manufacturing capacity constraints;
o Dependence on a limited number of customers;
o Dependence on our gallium arsenide (GaAs) heterojunction bipolar
transistor (HBT) products;
o Ability to reduce costs by converting our second four-inch GaAs HBT
wafer fabrication facility into a six-inch facility, improving yields
and increasing capacity utilization;
o Dependence on third parties; and
o Risks arising from currency fluctuations, tariffs, trade barriers,
taxes and export license requirements associated with our foreign
operations.
These and other risks and uncertainties, which are described in more detail in
our most recent Annual Report on Form 10-K filed with the Securities and
Exchange Commission, could cause the actual results and developments to be
materially different from those expressed or implied by any of these
forward-looking statements.
15
RESULTS OF OPERATIONS
The following table sets forth our unaudited consolidated statement of
operations data expressed as a percentage of total revenue for the periods
indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2002 2001 2002 2001
------- ------- ------- -------
Revenue 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses
Cost of goods sold 61.6 63.0 60.9 75.9
Research and development 18.8 17.3 20.4 19.6
Marketing and selling 7.3 6.9 7.7 7.9
General and administrative 4.0 3.5 4.0 4.0
Other operating expenses 0.5 6.2 0.6 6.6
Impairment of long-lived assets -- -- -- 4.0
------- ------- ------- -------
Total operating costs and expenses 92.2 96.9 93.6 118.0
Income (loss) from operations 7.8 3.1 6.4 (18.0)
Interest income 1.3 3.6 1.6 4.4
Interest expense (3.7) (4.3) (4.0) (4.9)
Other, net -- (0.5) -- (0.3)
------- ------- ------- -------
Income (loss) before income taxes 5.4 1.9 4.0 (18.8)
Income tax benefit -- (0.3) -- 2.9
------- ------- ------- -------
Net income (loss) 5.4% 1.6% 4.0% (15.9)%
======= ======= ======= ========
16
REVENUE
Revenue for the second quarter of fiscal 2003 increased 21.8% to $119.7 million,
compared to $98.3 million for the same quarter in fiscal 2002. For the six
months ended September 30, 2002, revenue increased 32.9% to $223.7 million,
compared to $168.3 million for the same period in fiscal 2002. The increases in
year over year were due primarily to strong growth in power amplifier and small
signal sales in response to demand from the handset industries, and product
revenue diversification in wireless local area network (WLAN). WLAN revenue in
the second quarter of fiscal 2003 increased to $8.0 million compared to $0.4
million in the same quarter of fiscal 2002. WLAN revenue increased to $14.0
million in the six months ended September 30, 2002 compared to $0.7 million for
the six months ended September 30, 2001. Revenues increased year over year
despite continued pressure on average selling prices for modules and microwave
monolithic integrated circuits (MMICs).
International shipments were $94.0 million and accounted for 78.5% of revenue in
the second quarter of fiscal 2003, compared to $65.3 million, or 66.5% of
revenue, in the second quarter of fiscal 2002. For the six months ended
September 30, 2002 international shipments were $168.9 million, or 75.5% of
revenue, up from $110.9, or 65.9% of revenue, for the six months ended September
30, 2001. Sales to customers located in Asia totaled $62.3 million, or 52.1% of
revenue, for the second quarter of fiscal 2003, compared to $50.0 million, or
50.9% of revenue, for the second quarter of fiscal 2002. Year-to-date shipments
to Asia totaled $108.0 million, or 48.3% of revenue, in fiscal 2003 and $86.9
million, or 51.6% of revenue, in fiscal 2002. The establishment of our sales and
customer support centers in Taipei, Taiwan and Seoul, South Korea has
contributed to our absolute sales dollar increase in the Asian markets.
GROSS PROFIT
Gross profit for the three months ended September 30, 2002 increased to $46.0
million, or 38.4% of revenue, compared to $36.4 million, or 37.0% of revenue, in
the second quarter of the prior year. For the six months ended September 30,
2002, gross profit increased to $87.4 million, or 39.1% of revenue, compared to
$40.5 million, or 24.1% of revenue, for the same period ended September 30,
2001. The three months ended and six months ended September 30, 2002 increases
in gross profit were primarily attributable to increased unit volume and
capacity utilization, and favorable production yields. The adjustment to
inventory reserves of $15.3 million recorded in the first quarter of fiscal 2002
due to an anticipated reduction in sales of MMICs, which declined in fiscal 2003
additionally contributed to the increase for the six months ended September 30,
2002. The overall increase in gross profit was impacted by the decline in
average selling prices for modules and MMICs.
We have historically experienced significant fluctuations in gross profit
margins, which have caused fluctuations in our quarterly operating results, and
we cannot be certain operating results will not be similarly affected in the
future. Our test, tape and reel facility in Beijing, China transitioned from
other operating expenses to cost of goods sold during September 2002 once the
facility was qualified for production and economic value was obtained. The
second quarter gross profit included one month of operation cost related to our
Beijing facility. The total of our Beijing facility operation cost will be
included in our cost of goods sold going forward which could affect our margins.
We expect continued downward pressure on margins due to a decline in average
selling prices. Management believes this decline can be mitigated by continued
cost reduction efforts including converting our second four-inch GaAs HBT wafer
fabrication facility into a six-inch facility, higher levels of product
integration, yield improvement plans and increased capacity utilization.
RESEARCH AND DEVELOPMENT
Research and development expenses in the second quarter of fiscal 2003 were
$22.6 million, or 18.8% of revenue, compared to $17.0 million, or 17.3% of
revenue, for the three months ended September 30, 2001. For the six months ended
September 30, 2002, research and development expenses were $45.6 million, or
20.4% of revenue, compared to $33.0, or 19.6% of revenue, for the same period in
fiscal 2002. The
17
increases year over year were primarily attributable to increased headcount and
related personnel expenses including salaries, benefits, and equipment. Spending
on development wafers, mask sets and prototyping also increased as a result of
continued module development and associated work on cost reductions and yield
improvement techniques. During the third quarter of fiscal 2002, we acquired RF
Nitro Communications, Inc. (RF Nitro), a privately-held company focused on the
commercialization of gallium nitride (GaN). We also acquired the global
positioning system (GPS) development operation of International Business
Machines Corp. (IBM), which provided us with advanced GPS technology and access
to IBM's chipscale packaging technology. The RF Nitro and GPS acquisitions
contributed to the increased headcount and related personnel expenses for the
quarter and resulted in additional amortization expense from the acquired
intangible assets. We plan to continue to make investments in research and
development and expect that such expenses will continue to increase in absolute
dollars in future periods.
MARKETING AND SELLING
Marketing and selling expenses for the second quarter of fiscal 2003 were $8.7
million, compared to $6.8 million for the second quarter of fiscal 2002. For the
six months ended September 30, 2002, marketing and selling expenses increased to
$17.1 million, compared to $13.4 million for the six months ended September 30,
2001. The absolute dollar increases year over year in fiscal 2003 compared to
fiscal 2002 were primarily attributable to increased headcount, related
personnel expenses including salaries, benefits, and equipment, and increased
sales commissions associated with the increase in revenue. The RF Nitro and GPS
acquisitions contributed slightly to the increased headcount, related personnel
expenses and additional amortization expense from the acquired intangible
assets. Marketing and selling expenses as a percentage of revenue were 7.3% and
6.9% for the three months ended September 30, 2002 and 2001, respectively, and
7.7% and 7.9% for the six months ended September 30, 2002 and 2001,
respectively. We plan to continue to make investments in marketing and selling
and expect that such expenses will continue to increase in absolute dollars in
future periods.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the quarter ended September 30, 2002
were $4.8 million, or 4.0% of revenue, compared to $3.5 million, or 3.5% of
revenue, for the quarter ended September 30, 2001. For the six months ended
September 30, 2002, general and administrative expenses were $9.0 million, or
4.0% of revenue, compared to $6.7 million, or 4.0% of revenue, in the same
period of fiscal 2002. The year over year increases in absolute dollars were
primarily due to increased headcount and related personnel expenses including
salaries, benefits, and equipment. Other increases in fiscal 2003 included
recruiting expenses related to the appointment of two new board members, bank
charges for letters of credit expenses related to the expansion in Asian
markets, and insurance premiums.
OTHER OPERATING EXPENSE
Other operating expenses for the second quarter of fiscal 2003 were $0.6 million
compared to $6.1 million in the prior year. For the six months ended September
30, 2002, other operating expenses were $1.4 million, compared to $11.0 million
for the same period in fiscal 2002. The year over year decreases in fiscal 2003
from fiscal 2002 were primarily attributable to start-up costs associated with
our second wafer fabrication facility, which were incurred in the first and
second quarters of fiscal 2002. The second wafer fabrication facility qualified
for production in the third quarter of fiscal 2002. Accordingly, associated
expenses transitioned from other operating expenses to cost of goods sold during
that quarter. Fiscal 2003 included start-up costs associated with our test, tape
and reel facility in Beijing, China through August 2002. The operating costs of
the Beijing facility transitioned to cost of goods sold during the last month of
the second quarter once the facility was qualified for production and economic
value was obtained. These initial other operating costs have been expensed as
incurred in accordance with the American Institute of Certified Public
Accountants' Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities." We do not expect any additional other operating expenses in fiscal
2003.
18
INTEREST INCOME
For the quarter ended September 30, 2002, interest income was $1.6 million,
compared to $3.5 million for the same quarter for the prior year. Interest
income for the six months ended September 30, 2002 and 2001 was $3.5 million and
$7.5 million, respectively. Interest income decreased due to lower prevailing
interest rates, driven by the Federal Reserve cuts to the federal funds rate.
INTEREST EXPENSE
Interest expense was $4.5 million for the three months ended September 30, 2002,
compared to $4.2 million for the second quarter of the prior year. Interest
expense for the six months ended September 30, 2002 and 2001 was $9.0 million
and $8.2 million, respectively. The increase in interest expense was primarily
due to the interest rate swap that modifies the interest characteristics of our
synthetic lease from a variable to a fixed rate. As variable rates decline, our
interest expense related to the swap increases.
INCOME TAX
Income tax expense for the second quarter of fiscal 2003 was $0.03 million and
$0.07 million for the six months ended September 30, 2002, representing foreign
income taxes on international operations. Our effective tax rate for the second
quarter of fiscal 2003 was 0.5%, compared to 14.0% for the second quarter of
fiscal 2002. Our effective tax rate was 0.8% for the six months ended September
30, 2002 compared to a 15.3% effective tax benefit for the same period in fiscal
2002. The overall tax rate for the three months and six months ended September
30, 2002 differed from the statutory rate due to adjustments to the valuation
allowance primarily related to utilization of net operating losses carried
forward, rate differences on foreign transactions, and other differences between
book and tax treatment of certain expenditures. Our fiscal 2002 overall tax rate
differed from the statutory rate due to the non-recognition of the US tax
benefits on the domestic net operating losses, differences between book and tax
treatment of certain expenditures, and rate differences on foreign transactions.
At September 30, 2002, we had outstanding net operating loss carryforwards
(NOLs) for domestic tax purposes of approximately $23.0 million. The federal
NOLs will expire in years 2022 and 2023, and state losses will expire in years
2009-2022, if unused. In accordance with the Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," a valuation allowance of $15.0
million related to domestic operating losses has been established since it is
more likely than not that some portion of the deferred tax assets may not be
realized. This review, along with the timing of the reversal of our temporary
differences and the expiration dates of the NOLs, were considered in reaching
this conclusion.
19
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date through sales of equity and debt
securities, bank borrowings, capital equipment leases and cash from operations.
Through public and Rule 144A securities offerings, we have raised approximately
$462.0 million, net of offering expenses. As of September 30, 2002, our working
capital was $431.6 million, including $172.2 million in cash and cash
equivalents, compared to working capital at March 31, 2002 of $421.1 million.
Operating activities for the first six months of fiscal 2003 generated $19.2
million in cash, compared to $24.4 million in the first six months of fiscal
2002. This year over year decrease was primarily attributable to cash used of
$22.6 million due to a planned inventory build-up of certain products to
facilitate meeting forecasted demand and delivery schedules, and in-transit
inventory required to stock the production line at our test, tape and reel
facility in Beijing, China. In comparison, cash provided by changes in
inventories in the first six months of fiscal 2002 was $25.2 million, which
included a $15.3 million inventory reserve adjustment. The year over year
decrease in cash provided by changes in inventories was partially offset by an
increase in net income of $35.7 million. Adjustments to reconcile net income
(loss) for non-cash operating items decreased cash provided from operating
activities by $5.7 million year over year due primarily to decreases in
impairment of long-lived assets and tax benefits from exercise of employee stock
options. Cash provided by changes in accounts payable and liabilities in fiscal
2003 was $8.5 million, compared to cash provided of $1.1 million in fiscal 2002.
The increase in cash provided by changes in accounts payable was primarily due
to timing of accruals and invoice payments.
Net cash used in investing activities for the six months ended September 30,
2002 was $5.2 million, compared to $108.5 million in the prior year. Higher
proceeds from maturities of securities available-for-sale of $173.0 million
compared to $39.0 million in fiscal 2002 was the primary change in cash used.
Net cash provided by financing activities for the six months ended September 30,
2002 was $0.5 million, compared to cash provided of $3.3 million for the six
months ended September 30, 2001. This decrease is attributable to a reduction in
net proceeds from the exercise of options and employee stock purchases from $5.7
million in fiscal 2002 to $2.7 million in fiscal 2003.
COMMITMENTS
STRATEGIC RELATIONSHIP WITH JAZZ SEMICONDUCTOR. We entered into a strategic
relationship with Jazz Semiconductor (Jazz) in October 2002, pursuant to which
we agreed to invest approximately $60.0 million in Jazz. We transferred $30.0
million in cash in the third quarter of fiscal 2003 and expect to pay the
remaining $30.0 million twelve months after closing. We currently have
sufficient liquidity to pay the remaining $30.0 million.
ACQUISITION OF RESONEXT COMMUNICATIONS, INC On October 15, 2002, we agreed to
acquire Resonext and issue $133.0 million in common stock, subject to a collar
on our stock price between $6.00 and $9.50 per share, for all the outstanding
shares of capital stock of Resonext, including the shares issuable upon exercise
of outstanding warrants and employee stock options. The collar provides
protection for the shareholders of both companies by limiting the number of
shares to be issued by us to a range with a minimum of 14.0 million shares
(equivalent to $9.50 per share) and a maximum of 22.2 million shares (equivalent
to $6.00 per share). Share prices either above or below the collar do not
prevent the transaction from occurring. The equivalent share price will be
determined when the transaction is closed (based on a trailing 20-trading day
average price). The transaction is subject to the approval of Resonext's
shareholders and other closing conditions and currently is expected to close
during our fiscal quarter ending December 31, 2002.
STRATEGIC ALLIANCE WITH AGERE SYSTEMS, INC. We entered into a strategic alliance
with Agere Systems Inc. (Agere) in May 2001, pursuant to which we agreed to
invest approximately $58.0 million over two years to upgrade manufacturing clean
room space and purchase semiconductor manufacturing equipment to be
20
deployed within Agere's Orlando, Florida manufacturing facility. This alliance
was designed to provide us a guaranteed source of supply and favorable pricing
of silicon wafers. On January 23, 2002, Agere announced that it was seeking a
buyer for its Orlando wafer fabrication operation. We are engaged in discussions
with Agere regarding the terms of our alliance and the effect of this potential
sale. We cannot predict the outcome of these discussions or what form the
alliance will take in the future, but our management currently does not believe
that these developments will have a material adverse effect on our business,
financial condition or results of operations.
SYNTHETIC LEASE In August 1999, as modified effective December 1999 and August
2001, we entered into a $100.0 million synthetic lease with a financial
institution. A synthetic lease is an asset-based financing structured to be
treated as an operating lease for accounting purposes, but as a capital lease
for tax purposes. Prior to December 31, 1999, the synthetic lease transaction
was largely secured by cash collateral. The modification effective December 31,
1999 resulted in the release of the cash collateral and the synthetic lease is
now secured by substantially all of our personal property assets. The
modification in August 2001 resulted in expansion of financial covenants, which
require the maintenance of minimum levels of tangible net worth, liquidity and
debt service coverage and prohibits the payment of dividends. Our $30.0 million
investment in Jazz on October 15, 2002 resulted in a violation of certain
restrictive covenants under the synthetic lease documents. In addition, we
determined that we will not be in compliance with a consolidated total leverage
ratio covenant under the lease documents and must report such noncompliance to
the lender contemporaneously with the filing of this quarterly report. To
address these actual and potential defaults, we obtained a temporary conditional
waiver from the lenders, which waiver expires on November 20, 2002. Pending the
expiration of this waiver, we are considering a number of options, including:
(1) negotiating an amendment to the lease documents to modify certain covenants
and make other changes; (2) securing a new lease or other debt facility to
retire the synthetic lease and refinance the remaining liability thereunder; or
(3) paying off the remaining amount of the synthetic lease with available cash
on hand. The outstanding liability related to the synthetic lease is
approximately $86.0 million as of the date of this quarterly report. No
assurance can be given that an acceptable amendment can be negotiated with the
lender or that replacement financing can be secured in a timely manner or on
acceptable terms. We have sufficient liquidity to retire the synthetic lease
facility if we choose to do so.
In fiscal 2001, we entered into an interest rate swap cash flow hedge to reduce
the impact of interest rate changes under the lease on our results of
operations. The derivative financial instrument is recorded on our balance sheet
at its fair value of $8.3 million based on the valuation of an outside firm as
of September 30, 2002, and is included in other long-term liabilities and
accumulated other comprehensive loss. See Note 5 of Notes to Condensed
Consolidated Financial Statements. If we elect to pay off the synthetic lease,
this $8.3 million liability will no longer qualify for hedge accounting and will
be removed from our balance sheet and recognized as a loss for financial
reporting purposes on our statement of operations during the corresponding
period in which the pay-off occurs. The pay-off of the $8.3 million liability
would be expected to lower our reported interest expense in future periods. The
interest expense related to the interest rate swap cash flow hedge was $1.4
million for the quarter ended September 30, 2002.
The lease has a term expiring November 3, 2004. At the end of the term, the
lease can be extended upon the agreement of the parties or we may buy out the
lease. The interest rates or yield rates embedded in the lease (and used to
calculate lease payments) are either:
o The "Eurodollar Rate" (described below) plus margins varying from 150 basis
points to 325 basis points per annum (based on certain quarterly financial
covenant testing and depending on whether the underlying source of funding
is in the form of a promissory note or an equity certificate), or
o At our election and under certain other circumstances where funding based
on the Eurodollar Rate is not
21
available, the "ABR Rate" (described below) plus margins varying from 25
basis points to 125 basis points per annum (based on certain quarterly
financial covenant testing and depending on whether the underlying source
of funding is in the form of a promissory note or an equity certificate).
The Eurodollar Rate is a rate of interest determined under the lease documents
by reference to one or more sources for the London inter-bank offered rate, or
LIBOR. The ABR Rate is a rate of interest determined under the lease documents
equal to the greater of (a) the prime lending rate of the primary lender or its
successor (as determined under the lease documents) or (b) the federal funds
effective rate (as determined under the lease documents) plus 0.5%.
We also have provided for a contingent residual value guarantee in relation to
the synthetic lease. This guarantee provides that in the event the assets are
sold to a third party at the end of the lease term, we unconditionally promises
to pay to the lessor the lesser of (1) the deficiency balance, which is equal to
the excess, if any, of the cost of the assets over the aggregate sale price paid
by the third party, or (2) the maximum residual guarantee amount, which is equal
to 85% of the "Property Cost" (aggregate outstanding loans and holder advances)
for all of the assets subject to the synthetic lease. Amortization equal to
1.7111% per month of the equipment portion of the synthetic lease reduces the
asset cost and thus our contingent residual value guarantee.
CONVERTIBLE DEBT During fiscal 2001, we completed the private placement of
$300.0 million aggregate principal amount of 3.75% convertible subordinated
notes due 2005. The net proceeds from this offering were $291.3 million and are
intended for general corporate purposes, including capital expenditures and
working capital. In addition, we may use a portion of the net proceeds to
acquire or invest in complementary businesses, products or technologies if the
opportunity arises. In fiscal 2003, we expect to pay interest of $11.3 million,
of which we have already paid $5.6 million.
CAPITAL COMMITMENTS At September 30, 2002, we had long-term capital commitments
of approximately $7.1 million, consisting of approximately $0.6 million for
construction and equipment in our facility in Beijing, China, $1.4 million for
equipment in our second wafer fabrication facility, $2.2 million for our
molecular beam epitaxy (MBE) facility, $1.1 million for equipment in our test,
tape and reel facility in Greensboro, North Carolina, $0.6 million for our
research and design centers, and the remainder for general corporate
requirements.
FUTURE SOURCES OF FUNDING
We expect to fund our commitments through a combination of cash on hand, capital
leases and other forms of financing. Our future capital requirements may differ
materially from those currently anticipated and will depend on many factors,
including, but not limited to, market acceptance of and demand for our products,
volume pricing concessions, capital improvements to new and existing facilities,
technological advances and our relationships with suppliers and customers. We
believe our cash requirements will be adequately met from the combination of the
debt offering in the second quarter of fiscal 2001 and cash from operations
during fiscal 2003. However, if existing resources and cash from operations are
not sufficient to meet our future requirements, or if we perceive favorable
opportunities, we may seek additional debt or equity financing or additional
credit facilities. We filed a $500.0 million shelf registration statement
providing for the offering from time to time of debt securities, common stock,
preferred stock, depositary shares, warrants and subscription rights with the
Securities and Exchange Commission on April 4, 2002. We do not have any current
plans to issue any securities under this registration statement. We cannot be
sure that any additional financing will not be dilutive to holders of our common
stock. Further, we cannot be sure that additional equity or debt financing, if
required, will be available on favorable terms.
22
RELATED PARTY TRANSACTIONS
During the six months ended September 30, 2002, we used an airplane owned by
Adelaide Limited, LLC (Adelaide). William J. Pratt, a member of the Board of
Directors and Chief Technical Officer, is the manager and sole member of
Adelaide. We paid $0.1 million in connection with our use of the airplane.
Management believes that the terms of these transactions were as favorable as
could have been obtained from a non-affiliated entity. Management intends to
continue to utilize this airplane.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk has not changed significantly for the risks disclosed
in Item 7A of the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 2002.
ITEM 4. CONTROL AND PROCEDURES
Within 90 days prior to the date of this report, the Company's Chief Executive
Officer and the Chief Financial Officer evaluated the effectiveness of the
Company's disclosure controls and procedures in accordance with Rule 13a-14
under the Exchange Act. Based on their evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that the Company's disclosure controls
and procedures enable the Company to record, process, summarize and report in a
timely manner the information that the Company is required to disclose in its
Exchange Act reports.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation referred to above.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of shareholders was held on July 23, 2002. At the meeting,
our shareholders elected five directors for one-year terms and until their
successors are duly elected and qualified. Votes cast by our shareholders at the
meeting were as follows:
- -------------------------- ------------------------- ---------------------
NOMINEES FOR DIRECTOR SHARES VOTED IN FAVOR SHARES WITHHELD
- -------------------------- ------------------------- ---------------------
Erik H. van der Kaay 151,064,926 1,612,994
- -------------------------- ------------------------- ---------------------
David A. Norbury 151,215,274 1,462,646
- -------------------------- ------------------------- ---------------------
Albert E. Paladino 150,714,317 1,963,603
- -------------------------- ------------------------- ---------------------
William J. Pratt 123,787,726 28,890,194
- -------------------------- ------------------------- ---------------------
Walter H. Wilkinson, Jr 151,072,144 1,605,776
- -------------------------- ------------------------- ---------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
10.1* Amended and Restated Preferred Stock Purchase Agreement, dated
October 15, 2002, between Jazz Semiconductor, Inc. and RF Micro
Devices, Inc.
99.1 Certification of Periodic Report by David A. Norbury, as Chief
Executive Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
24
99.2 Certification of Periodic Report by William A. Priddy, Jr., as
Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
* The registrant has requested that certain portions of this exhibit be
given confidential treatment.
(b) Reports on Form 8-K
During the quarter ended September 30, 2002, the Company filed no reports on
Form 8-K.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RF Micro Devices, Inc.
Dated: November 12, 2002
/S/ WILLIAM A. PRIDDY, JR.
--------------------------
WILLIAM A. PRIDDY, JR.
Vice President, Finance and Administration
and Chief Financial Officer
Dated: November 12, 2002
/S/ BARRY D. CHURCH
-------------------
BARRY D. CHURCH
Corporate Controller
(Principal Accounting Officer)
26
CERTIFICATIONS
I, David A. Norbury , certify that:
1. I have reviewed this quarterly report on Form 10-Q of RF Micro Devices, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 12, 2002
/S/ DAVID A. NORBURY
--------------------
DAVID A. NORBURY
Chief Executive Officer
27
CERTIFICATIONS
I, William A. Priddy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RF Micro Devices, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 12, 2002
/S/ WILLIAM A. PRIDDY, JR.
--------------------------
WILLIAM A. PRIDDY, JR.
Vice President, Finance and Administration
and Chief Financial Officer
28