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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
- OR -
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended August 31, 2001
Commission File No. 0-24414
RF Monolithics, Inc.
(Exact name of Registrant as specified in its charter)
______________________________________________________
Delaware 75-1638027
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification)
4347 Sigma Road, Dallas, Texas 75244
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-2903
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK .001 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of RF Monolithics, Inc. Common Stock held by
nonaffiliates based on the last reported sale price on the NASDAQ composite tape
on November 15, 2001, was $ 8,746,030. Shares of Common Stock held by each
officer and director and by each person who owns 5% or more of the outstanding
Common Stock of the Company have been excluded because such persons may be
deemed to be affiliates.
Common Stock outstanding at November 15, 2001: 7,068,671 shares, par value
$0.001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A, which will be filed with the Commission on or about
December 14, 2001, is incorporated by reference into Part III of this report.
RF MONOLITHICS, INC.
FORM 10-K
YEAR ENDED AUGUST 31, 2001
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business ................................................................... 2
Item 2. Properties ................................................................. 12
Item 3. Legal Proceedings .......................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders ........................ 12
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters ....... 13
Item 6. Selected Financial Data .................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
And Results of Operations .................................................. 15
Item 8. Financial Statements and Supplementary Data ................................ 24
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure ....................................................... 24
PART III
Item 10. Directors and Executive Officers of the Registrant ......................... 24
Item 11. Executive Compensation ..................................................... 24
Item 12. Security Ownership of Certain Beneficial Owners and Management ............. 24
Item 13. Certain Relationships and Related Transactions ............................. 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............ 24
PART I.
ITEM 1. BUSINESS
RF Monolithics, Inc. (RFM or the Company) was organized in 1979 as a Texas
corporation and converted to a Delaware corporation in 1994. RFM designs,
develops, manufactures and markets a broad range of radio frequency (RF)
component and module products in two areas: communications products, which
include frequency control modules and filters; and low-power products which
include low-power components and Virtual Wire(R) Short-range Radio products. The
Company's products are based on surface acoustic wave (SAW) technology and are
manufactured as discrete devices to perform specific functions and as integrated
modules to meet system performance requirements.
The Company focuses its product development in the frequency range of 50
megahertz (MHz) to 1.5 gigahertz (GHz). The Company markets its line of more
than 500 resonators, filters, clocks, oscillators, transmitters and receivers to
distributors, electronic manufacturing service companies (EMS) and original
equipment manufacturers (OEMs) world-wide. RFM's customers include Delphi
Automotive Systems, Flextronics International Inc., Insight Electronics, Lear
Corporation, Nokia Telecommunications, Nortel Networks Corporation, Siemens AG,
Solectron Corporation, and TRW Automotive Electronics.
Background
The Company believes that a significant market opportunity for more
widespread adoption of SAW technology is emerging. As electronic applications
increase in data speed and frequency, there will be an increasing demand for
improved performance and functionality, greater precision, reduced size, lower
power consumption and greater reliability. The Company believes that these
dynamics are creating frequency control opportunities that are not effectively
addressed by traditional RF approaches.
The Company believes that its SAW-based products, coupled with its RF
design and manufacturing expertise, offer electronics manufacturers certain
fundamental advantages over alternative technologies. As electronic applications
ranging from automotive remote keyless entry (RKE) to digital cellular phones to
computers migrate to higher operating frequencies with tighter tolerances and
more stringent performance specifications, demand for RF modules and SAW
discrete components is expected to increase.
SAW-technology-based discrete components, modules and RF systems combine a
complex mix of software-controlled design rules, wafer fabrication, hybrid
assembly and packaging processes to meet stringent customer and governmental
compliance requirements. The earliest SAW applications were developed for
high-level military systems for electronic warfare and volume consumer products
such as TVs and VCRs. The unique features of SAW technology provide flexible
solutions to systems designers defining tomorrow's emerging applications across
multiple market segments.
Markets and Applications
The Company focuses on specific market opportunities where the Company
believes that its SAW technology solutions coupled with its RF design expertise
address current and emerging market and application requirements. The Company's
products are incorporated into application designs in five primary markets: the
automotive, distribution, industrial, consumer and telecommunications market.
Automotive
The automotive industry utilizes SAW-based components in transmitter and
receiver designs for RKE applications. Emerging applications utilizing
transmitter and receiver functions include the tire
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pressure monitoring and immobilized theft-deterrent systems. The automotive
industry continues to develop new and improved safety features. With recent
regulation requiring some form of tire pressure monitoring for new vehicles by
November 2003, the run-flat-tire pressure monitoring application is receiving
considerable visibility. The Company believes that SAW devices are stable and
resistant to shock, vibration and moisture, thus providing the characteristics
required for this application. Satellite Radio is another significant
application. Digital modulation used in satellite radio systems is spectrally
more efficient than traditional analog AM or FM. Current proposed digital
standards, within the same bandwidth, are achieving near CD quality audio.
Automotive electronic applications continue to grow with the unending drive
toward smaller size, reduced cost and improved system performance as evidenced
by some of the emerging multiplexing design schemes. The Company's Low-power
Components, Virtual Wire(R) Short-range Radio products and Filters meet these
market requirements. This market is subject to severe price competition.
Distribution
Several of the Company's products, particularly in the Low-power product
group, have widespread potential uses and have standardized characteristics that
make them ideal for sales through distribution. In addition, the Company's
distributors have the technical expertise and experienced personnel required to
help potential customers design their products that utilize the RFM products.
Distributors also provide service to customers with special requirements for
delivery and lead-time. Distribution contracts govern sales to distributors and
substantially limit the amounts that distributors may return to the Company for
stock rotation. The Company's largest distributors are Insight Electronics Inc.
in North and South America and various Acal Electronics companies in Europe.
Industrial
The industrial market includes applications such as security systems, RF ID
tags, meter reading and bar code reading devices, medical systems and custom
data link equipment. The Company believes that the meter reading application has
the potential for explosive growth. As the deregulation of utility companies
gains momentum, the need to access data remotely becomes critical to the utility
providers. The need to transfer more and more data with low power consumption
seems ideally suited for the Company's Virtual Wire(R) Short-range Radio
products. Industrial security is another application with a large growth
potential. Low-power Components, Virtual Wire(R) Short-range Radio products and
Filters may all be designed into industrial applications.
Consumer
The consumer market is currently a relatively small market for the
Company's products. However, it is one that is believed to have significant
growth potential in the area of home security, internet appliances, garage
doors, cable TV and sports shoes. Both Low-power Components and Virtual Wire(R)
Short-range Radio products may all be designed into consumer applications.
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Telecommunications
The Company believes that a number of dynamics within the wireless
communications market are opening new applications for SAW technology. The
deployment of digital cellular telephone systems, such as European Global System
for Mobile Communications (GSM), Code Division Multiple Access (CDMA), Global
Positioning Systems (GPS), Enhanced Digital Global Evolution (EDGE), Wideband
Code Division Multiple Access (WCDMA) and Wireless Local Area Network (WLAN) has
been initiated worldwide. Digital modulation requires SAW filters that minimize
distortion and conform to international cellular telephone standards. The
Company believes that markets for SAW technology products are expanding rapidly.
Other markets such as wireless Internet access and broadband multimedia will
continue to use SAW based products. The Company believes as broadband wireless
communication systems demand more performance to support Internet requirements,
bandwidth becomes the key element that allows information to flow efficiently.
This creates a requirement to minimize systems noise present in broadband
wireless communication and provide clean timing to maximize throughput around
the system's backbone. Analog communications, test instrumentation, computer
timing and military applications also create markets for SAW based frequency
control products where timing integrity and elimination of system noise in
circuits are critical. The Company has introduced a surface mount version of its
optical timing products based upon its patented technology that the Company
believes is well suited for the Dense Wave Division Multiplex ("DWDM") internet
application.
4
Products
The Company's products are organized into two groups: the
Communications Products Group, which include frequency control modules and
filters; and the Low-power Products Group, which include Low-power Components
and Virtual Wire(R) Short-range Radio modules.
Communications Product Group
Frequency Control Modules:
The Company's frequency control modules consist of frequency source
products for both analog and digital applications. These products provide added
value to the SAW components manufactured by the Company. Each module
incorporates one or more discrete SAW devices with standard and custom
integrated circuits and related passive components. The Company manufactures
clocks and oscillators that use its resonators and coupled-resonator filters to
eliminate tuning coils for signal filtering and stabilization. Specialized SAW
devices are incorporated in voltage-controlled sources to allow frequency
variability along with very good phase noise for both analog and digital
applications.
High-frequency clocks. The Company's high-frequency clock modules are
used in high bandwidth optical network systems. The Company's "Diff Sine" clocks
allow the network to realize improved performance by providing a highly stable
frequency source which results in very low timing variations from one cycle to
the next (commonly referred to as "jitter") and good symmetry across each cycle.
Most customers in this rapidly growing application prefer surface mount (SMT)
packages.
Oscillators. The Company produces commercial and military
fixed-frequency and voltage-controlled SAW oscillators. These products are
supplied in SMT or leaded metal packages and used in applications such as
microwave radios, identification friend or foe (IFF) transponders for commercial
and military avionics and precision instrumentation.
Optical timing products. The Company has recently introduced a new line
of oscillators that target the Optical Dense Wave Division Multiplex (DWDM)
market that utilizes the Company's patented technology. The initial versions are
in dual inline package (DIP) style (leaded) packages. A surface mount version is
now also available. These products are targeted for customers in the optical
network market, including high-speed routers and the OC768 backbone system.
Filters:
The Company was the pioneer in several SAW technologies and has the
design capability for major SAW filter structures including the following: 1)
High Loss Bi-directional Filter; 2) Medium Loss Single Phase Uni-directional
Transducer (SPUDT) Filter; and 3) Low Loss Coupled Resonator Filter, including
in-line (or longitudinally) coupled resonator filter and proximity (or
transversally, or wave-guide) coupled resonator filter.
In response to the new demand from wireless communications, the Company
has focused on intermediate frequency (IF) SAW filters based on new SAW
structures that provide the best performance, e.g., slanted (or fan shape, or
taper) SPUDT filter, and resonant SPUDT (or RSPUDT) filter, etc. The Company,
through its relationships with offshore manufacturers, can also offer a variety
of RF filters.
5
Low-power Product Group
Low-power Components:
Resonators. The Company's resonators are used in low-power wireless
transmitter and receiver applications, including automotive remote keyless entry
systems, wireless security systems, remote meter reading and related products.
The Company offers SAW resonators in volume, and they are supplied in both
three-lead metal packages (TO-39) and SMT packages. The market for low-power
resonators is intensely competitive and has experienced price erosion, rapid
technological change and product obsolescence. As a result, the Company has
experienced continued price competition for these products.
Coupled-Resonator Filters. Coupled-resonator filters are well suited
for certain frequency stabilization applications, such as the frequency control
clock modules, and as input filters for the hybrid receiver modules and output
filters for the hybrid transmitter modules manufactured by the Company. The
Company provides coupled resonator filters in leaded and surface mount packages.
Virtual Wire(R) Short-range Radio Products:
The Company's second-generation hybrid transmitter (TX), receiver (RX)
and transceiver (TR) modules are the primary products included in Virtual
Wire(R) Short-range Radio products. The Company's Transceiver module, based on
its patented Amplifier Sequenced Hybrid (ASH) technology, offers two-way data
communication in a single small module, with performance identical to the
separate TX and RX (hybrid receiver) modules, at a lower total cost.
These products feature small size, very low-power consumption,
excellent RF performance and provide the system designer flexibility and fast
time-to-market for emerging applications. The breadth of frequency ranges cover
both North American and international frequency bands for low-power data
transmission. The receiver's ASH architecture provides exceptional performance
with extremely low harmonic radiation, allowing customers ease of international
standards certification.
The Virtual Wire(R) Short-range Radio product offerings also include
complete transceiver design and development kits that provide the system
designer with minimal RF experience the ability to apply wireless, two-way data
transfer to emerging applications. The application market for Virtual Wire(R)
Short-range Radio products includes remote bar code data entry, remote meter
reading, point of sale terminals, medical monitor systems, home automation, data
link equipment and wireless thermostats. The Company believes that markets for
wireless products will continue to expand and that ASH technology has all the
characteristics required to become an industry standard for short range wireless
applications.
Manufacturing
The manufacturing of the Company's products is a highly complex and
precise process that is sensitive to a wide variety of factors, including the
level of contaminants in the manufacturing environment, impurities in the
materials used and the performance of manufacturing personnel and production
equipment. Each of these devices is subject to contamination until it is
enclosed or sealed within its final package, and almost all operations, prior to
enclosure, welding or sealing, are performed in controlled clean-room
environments. In the past, the Company has experienced, from time to time,
product shipment delays and lower-than-expected production yields. The Company
has experienced, and may in the future experience, a delay in transferring
products from engineering to volume manufacturing status. The manufacturing
process could result in shipment delays or loss of production yields that will
materially and adversely increase the cost of manufacturing. The Company's
manufacturing operations are in Dallas, Texas and the Company has contractual
relationships with two manufacturers in the Philippines. The two manufacturers
are Automated
6
Technology (Phil.) Inc. and Cirtec Electronics Corporation. The Company expects
to add additional partners in fiscal 2002. As a result of the Company's
substantial reliance on a single domestic manufacturing location, and with both
offshore contract manufacturers located in the Philippines, damage occurring to
any facility, whether by act of nature, major economic or political change, or
otherwise, may have a material adverse effect on the Company's manufacturing
operations.
The Company's customers demand an increasing level of quality. Despite
the fact that the Company has achieved QS 9000 and ISO 9001 certification and
its offshore partners have either achieved or are in the process of achieving
certification, the Company could fail to maintain these needed improvements and
quality levels in its operations. If these standards are not maintained, the
Company's operating results could be materially and adversely affected. The
Company has experienced sudden increases in demand which have put pressure on
its manufacturing facilities to increase capacity in order to meet this demand.
In addition, new products sometimes require different manufacturing processes
than the Company currently possesses. The Company has devoted the bulk of its
capital expenditures to increase capacity and improve its manufacturing
processes and has been aggressive in securing increased manufacturing capacity
through offshore manufacturing alliances. The Company may not be able to
continue to increase its manufacturing capacity and improve its manufacturing
processes in a timely manner to take advantage of increased market demand.
Over the past several years, the Company completed an expansion of its
factories, adding facilities and new automated processing equipment. In fiscal
year 2001, the Company transitioned some of its assembly manufacturing to
offshore alliances. As a result, its TO39 and SMT assembly facilities have been
or will be closed. The Company incurred $1.0 million fixed asset restructuring
charge relating to this. The Company believes its remaining capabilities,
together with its various offshore alliances are sufficient to meet demand for
the next several quarters. However, additional demand could make it necessary to
increase capacity, seek additional alliances or adopt its capabilities to new
products. The Company may not be able to achieve these improvements in a timely
manner. To the extent the Company does not achieve acceptable yields or
experiences product shipment delays as a result of problems associated with the
expansion of offshore capacity, the Company's operating results could be
materially and adversely affected. Also, the Company's transition to offshore
assembly has created additional complexity in its logistics. Any interruption in
delivery services back and forth to the offshore partners has the potential to
interrupt sales, as was experienced in September of 2001. The Company is
reviewing its inventory policies to mitigate the impact of a short-term
interruption. However, a long-term interruption in delivery services would have
a material adverse effect on Company operations.
The Company divides its manufacturing operations into three key areas:
wafer fabrication, domestic assembly, and offshore assembly. Assembly includes
two production areas that correspond to the two distinct types of packages being
manufactured: (1) module devices; and (2) SMT components.
Wafer Fabrication
Fabrication of deposited and patterned wafers takes place in a
clean-room environment. Thin aluminum films are precisely deposited onto
three-inch and four-inch diameter quartz substrates that are subsequently etched
with very small (micron and submicron) patterned structures. Each patterned
device is called a die, and there may be from 40 to 3,000 die on a single
three-inch or four-inch wafer. All wafer fabrication currently takes place at
the Company's Dallas location. The Company is currently seeking additional
sources of supply in offshore locations to act as a backup or provide new
capability for new products.
7
Domestic Assembly
Module manufacturing consists of multiple devices, one or more of which
is a SAW. The Company's products assembled in module manufacturing include
transceivers and frequency control modules.
The Company's SMT products contain SAW die. The Company's manufacturing
process is based on arrays which allow for automated processing of up to 400
devices at a time. Since this represents a unique manufacturing process, some of
the equipment has been custom-designed for the Company and provides several
unique applications of existing manufacturing technology.
Offshore Assembly
The Company has manufacturing arrangements with Automated Technology,
Inc. and Cirtek Electronics Corporation. Both organizations are highly
experienced in hermetic semiconductor manufacturing and are knowledgeable of the
unique aspects of SAW component assembly and test. Assembly and test of the
Company's low-power components and filters occur at these locations. The Company
has entered into an agreement with Morioka Seiko Instruments, Inc., a wholly
owned subsidiary of Seiko Instruments, Inc. (Seiko), for assembly of its Virtual
Wire(R) products. The addition of Seiko provides the Company with production
partners for all of its high volume products. The Company expects Seiko to be in
full production by its third fiscal quarter of fiscal 2002.
Source of Components/Labor
While the Company uses standard components whenever possible, certain
of the components used in the SAW devices and modules are made to the Company's
specifications. This is particularly true for specialized manufacturers from
whom the Company purchases several RF integrated circuits and ceramic arrays.
These companies include Maxim Integrated Products and Kyocera America Inc. The
Company has experienced delays and quality control problems with certain of its
single-source suppliers in the past. Although the Company is attempting to
obtain second-source suppliers, the Company believes it will continue to be
dependent upon single-source suppliers for the foreseeable future. As part of
its agreement with its offshore alliances, the responsibility for securing
certain raw materials will be transferred to them. While the ultimate suppliers
may not change, this will enhance the Company's cash flow, as it will not be
required to purchase and have on hand those raw materials to support production.
During periods in the past, the Company has experienced difficulty in
securing the additional labor resources necessary to meet rising demand for
products. The Company anticipates the transition to offshore production will
result in significant additional manufacturing capacity.
Delays in delivery, quality problems or the inability of the Company or
its manufacturing alliances to obtain the components and labor resources
required to manufacture the Company's products on a cost-effective basis could
have a material adverse effect on the Company's business and results of
operations.
Sales and Marketing
The Company distributes its products in the United States through
manufacturers' representatives managed by the Company's area sales management
team (internal sales force.) Additionally, the Company has authorized a major
North American distributor to stock and sell all the Company's products.
International sales are handled through manufacturers' representatives,
manufacturers' representatives acting as distributors and direct sales
management. Despite these sales efforts, the Company may not be able to increase
or maintain demand for its products.
8
The Company's international sales are currently denominated in U.S.
currency. Recently, the Company's European customers have expressed an interest
in buying products denominated in Euros. The Company is investigating a way to
respond to this request. An increase in the value of the U.S. dollar relative to
foreign currencies could make the Company's products more expensive and,
therefore, potentially less competitive in those markets. Additional risks
inherent in the Company's international business activities generally include
unexpected changes in regulatory requirements, tariffs and other trade barriers,
costs and risks of localizing international operations, potentially adverse tax
consequences, repatriation of earnings and the burdens of complying with a wide
variety of foreign laws. Such factors could have a material adverse effect on
the Company's future results of operations.
In 2001, one customer, Insight Electronics Inc., accounted for 10.5% of
sales compared to a high of 9.7% for one customer in 2000. The top 10 customers
accounted for approximately 50% and 49% of total sales in 2001 and 2000,
respectively. Sales to distributors accounted for 22% of the sales in both
fiscal 2001 and fiscal 2000. Sales to major customers have fluctuated in the
past and may continue to fluctuate in the future. The Company believes the
diversity of its product offerings and customer base is a strategic strength
that enables it to better withstand changes in demand from individual customers.
The Company enters into select, custom product development programs. These
development programs can last from six months to 18 months. The scope of these
programs include initial engineering of the RF function under development
through assisting in the interface of the RF and digital hardware. The Company
is engaged in an increasing number of these programs. The Company cannot predict
when or if a particular customer's program will be designed and reach volume
production status. In addition, many of the Company's products are subject to
regulations. Customers may require their products to be certified with various
regulatory agencies. The Company offers its customers various types of
assistance in obtaining certification. The Company's customers may not obtain
required certifications in a timely manner or at all. Delays in obtaining
certification could result in significant losses of potential Company sales.
Competition
The markets for the Company's products are intensely competitive and are
characterized by price erosion, rapid technological change and product
obsolescence. In most of the markets for the Company's products, the Company
competes with very large vertically integrated, international companies,
including AVX, EPCOS Electronic Parts and Components, and Murata Manufacturing
Co., that have substantially greater financial, technical, sales, marketing,
distribution and other resources, and broader product lines than the Company.
The Company's competitors who have greater financial resources or broader
product lines may be able to engage in sustained price reductions in the
Company's primary markets to gain market share. One competitor recently has
engaged in these tactics. The Company also expects increased competition from
existing competitors as well as competition from a number of companies that
currently use SAW expertise largely for internal requirements. In addition, the
Company experiences increased competition from companies that offer alternative
solutions such as phase locked loop technology, which combines a semiconductor
with a traditional crystal. The Company believes competitors may duplicate the
Company's products, which would cause additional pressure to selling prices and
which could adversely affect market share.
The Company believes that its ability to compete in its target markets
depends on factors both within and outside the Company's control, including
timing and success of new product introductions by the Company and its
competitors, the availability of manufacturing capability, the Company's ability
to support decreases in selling price through reduction in cost of sales, the
pace at which the Company's customers incorporate the Company's products into
their end user products and general economic conditions.
9
Research and Development
The Company's research and development efforts are primarily aimed at
deriving new, proprietary, innovative SAW device structures and SAW-based hybrid
modules that uniquely address market needs. These developments also include
process improvements in wafer fabrication involving better line width and metal
thickness control as well as improvements in device packaging.
The Company employs a sizable number of individuals in engineering, and
product and process development, including design engineers and scientists.
These individuals are responsible for new products and new processes from
inception to the commencement of volume manufacturing. The Company believes that
the efforts of this group help to ensure that the Company's products provide an
optimum system solution for the customer and are manufacturable at a competitive
cost.
From time to time, the Company has entered into agreements with customers
to develop specific SAW devices for inclusion in the customer's end product.
Pursuant to such agreements, the nonrecurring engineering (NRE) cost associated
with such development work, which is treated by the Company as cost of
technology development sales, is generally reimbursed by the customer. Total
technology development (or NRE) sales during fiscal years 2001 and 2000 were
$759,000 and $386,000, respectively. Costs related to these sales were included
in the Company's cost of sales during these years. The Company considers the
development of new products essential to maintaining and increasing sales.
Proprietary Rights
The Company relies on a combination of patents, copyrights and
nondisclosure agreements in order to establish and protect its proprietary
rights. The Company holds 36 patents that it has received for various inventions
that include both the SAW devices that are in the circuit and the RF circuit
itself. An additional 4 patents are pending. The Company's policy is to file
patent applications to protect technology, inventions and improvements that are
important to its business. The Company is currently in negotiations to license
the ASH technology to potential partners. It is not certain when, if ever, those
negotiations will result in significant income to the Company.
Patents may not be issued from any of the Company's pending applications.
In addition, claims that are allowed from existing or pending patents may not be
sufficiently broad to protect the Company's technology. While the Company
intends to protect its intellectual property rights vigorously, patents held by
the Company may be challenged, invalidated or circumvented. The Company believes
the patents will provide competitive advantages to the Company.
The Company also seeks to protect its trade secrets and proprietary
technology, in part, through confidentiality agreements with employees,
consultants and other parties. These agreements could be breached and the
Company may not have adequate remedies for any breach. Further, the Company's
trade secrets could otherwise become known to or independently developed by
others. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as the laws of the United
States.
The electronics industry is characterized by uncertainty and
conflicting intellectual property claims. The Company has in the past and may in
the future become aware of the intellectual property rights of others that it
may be infringing. The Company may be notified that it is infringing on other
patents and/or other intellectual property rights of third parties. In the event
of such alleged infringement, a license to the technology in question may not be
available on commercially reasonable terms, if at all. In addition, litigation
could occur and the outcome of such litigation might be adverse to the Company.
The failure to obtain necessary licenses or other rights, the occurrence of
litigation arising out of such claims or an adverse
10
outcome from such litigation could have a material adverse effect on the
Company's business. In any event, patent litigation is expensive, and the
Company's results of operations could be materially adversely affected by such
litigation, regardless of its outcome.
Regulations
The Company is subject to a variety of federal, state and local laws, rules
and regulations related to the use, storage, emission, treatment, disposal,
transportation and exposure of others to certain toxic, volatile and other
hazardous chemicals used in the Company's manufacturing process. The failure to
comply with present or future regulations could result in fines being imposed on
the Company, suspension of production or a cessation of operations. Such
regulations could also require the Company to acquire costly equipment, to make
changes to its manufacturing process, or to incur substantial other expenses to
comply with environmental regulations. Any past or future failure by the Company
to control the use of, or to restrict adequately the discharge of, hazardous
substances could subject the Company to future liabilities and could have a
material adverse effect on the Company's business, operating results and
financial condition.
Employees
As of August 31, 2001, the Company had a total of 335 employees. With the
exception of an employee located in each of the sales locations in Europe,
Georgia, Minnesota and California, all of the employees of the Company are based
at the Company's headquarters in the metropolitan area of Dallas, Texas. The
Company's future success depends to a significant degree upon the continued
service of its key technical and senior management personnel and its continuing
ability to attract and retain highly qualified technical and managerial
personnel. Competition for such personnel can be intense. The Company may not be
able to retain or continue to attract key managerial and technical employees.
Failure to retain or continue to attract key managerial and technical employees
could have a material adverse effect on the Company's business results and
operations. None of the Company's employees are represented by a labor union.
The Company has not experienced any work stoppages and considers its relations
with its employees to be good. The Company anticipates the transition to
offshore production will result in significant additional manufacturing
capacity, which will mitigate the impact of labor shortages.
Potential Fluctuations in Results of Operations; Order Trends and Backlog
The Company's quarterly and annual results have been and will continue to
be affected by a wide variety of factors that have had in the past and in the
future could have a material adverse effect on the Company's business and
results of operations during any particular period. These factors include the
level of orders that are received and can be shipped in a quarter, the
rescheduling or cancellation of orders by its customers, competitive pressures
on selling prices, changes in product or customer mix, availability and cost of
raw materials, availability of labor resources, the ability of the Company to
manufacture a sufficient volume of products in a cost-effective manner,
fluctuations in manufacturing yield, availability of wafer fabrication and
assembly manufacturing capacity, loss of any strategic relationship, the ability
to introduce new products and technologies on a timely and cost-effective basis,
new product introductions by the Company's competitors, market acceptance of
products of both the Company and its customers, supply constraints for other
components incorporated into its customers' products, foreign currency
fluctuations, delays in customer orders or payments or interruptions in
operations and the level of expenditures for research and development, sales,
and general and administrative functions.
11
Historically, the electronics industry has experienced sudden and
unexpected economic downturns. The Company's results of operations are subject
to such downturns. In addition, the Company's operating expenses are largely
fixed and difficult to change quickly should sales not meet the Company's
expectations, thus magnifying the adverse effect of any such revenue shortfall.
The Company believes that period-to-period comparisons of its financial results
should not be relied upon as an indication of future performance.
The Company's backlog at August 31, 2001 was approximately $17.1
million as compared to $17.1 million as of August 31, 2000. The Company includes
in its backlog all purchase orders scheduled for delivery within the subsequent
12 months. The Company's backlog, although useful for scheduling production,
does not represent actual sales and should not be used as a measure of future
sales. All orders in backlog are subject to cancellation prior to 30 days before
shipment without penalty at the option of the customer and to changes in
delivery schedules. The Company's backlog is also subject to fluctuations.
Backlog as of any particular date may not be a reliable measure of sales for any
future period.
Except for the historical information contained herein, the preceding
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the sections entitled "Legal Proceedings," "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this report.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing, research and
development, and manufacturing facilities are located in the metropolitan area
of Dallas, Texas, in two adjacent buildings totaling approximately 93,000 square
feet. One building, totaling approximately 63,000 square feet, is leased through
July 2003. The second building, totaling approximately 30,000 square feet, is
also leased through July 2003. The Company believes that its existing facilities
are adequate for its current requirements and that the current properties are
suitable and productive for the currently intended purposes. Although the
majority of its current properties are utilized, there is some room for
expansion. In addition, the Company is working with offshore alliances to
utilize their properties. Should additional space be needed, there can be no
assurance that it will be commercially available on reasonable terms. The
Company has written down or written off the leasehold improvements related to
the facilities that will no longer be needed due to the offshore transition. The
Company has not made a decision to dispose of one of the leased buildings that
contains the improvements.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) National Market System
(symbol RFMI). The following table sets forth the high and low sales prices of
the Company Common Stock for each quarter of fiscal 2001 and 2000 as furnished
by NASDAQ. These prices reflect prices between dealers, without retail markups,
markdowns or commissions, and may not necessarily represent actual transactions.
Price Range
-----------------------------------------------------
2001 2000
------------------------ ----------------------
Quarter Ended High Low High Low
---- --- ---- ---
November 30 8.6250 4.3130 11.0625 5.5625
February 29/28 6.7500 2.6250 27.3750 5.4375
May 31 5.5000 2.3130 15.0000 8.6250
August 31 4.7500 3.0800 16.0000 7.4375
The Company has not paid dividends on its Common Stock during the past two
most recent fiscal years and presently intends to continue this policy in order
to retain earnings for use in its business.
The number of stockholders of the Company's Common Stock as of November 15,
2001 was approximately 200 (which number does not include the number of
stockholders whose shares are held of record by a brokerage house or clearing
agency, but rather includes such brokerage house or clearing agency as one
record holder).
The last sales price for RFM's Common Stock, as reported by NASDAQ on
November 15, 2001, was $2.3879.
13
ITEM 6. SELECTED FINANCIAL DATA
Year Ended August 31,
---------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands, except gross profit margin & earnings per share amounts)
Statement of Operations Data:
Sales $ 51,771 $ 47,256 $ 51,297 $ 55,172 $ 47,692
Cost of sales 45,597 43,250 35,950 33,549 28,136
-------- -------- -------- -------- --------
Gross profit 6,174 4,006 15,347 21,623 19,556
Gross profit margin % 11.9% 8.5% 29.9% 39.2% 41.0%
Research and development 3,852 4,700 5,697 5,081 4,169
Sales and marketing 5,748 6,047 5,415 5,646 5,842
General and administrative 3,184 3,546 3,092 2,889 3,391
Restructuring 1,399 - - - -
Litigation - 301 - 641 -
-------- -------- -------- -------- --------
Total operating expenses 14,183 14,594 14,204 14,257 13,402
-------- -------- -------- -------- --------
Income (loss) from operations (8,009) (10,588) 1,143 7,366 6,154
Other income (expense), net (1,559) (634) (145) 14 (142)
-------- -------- -------- -------- --------
Income (loss) before income taxes (9,568) (11,222) 998 7,380 6,012
Income tax (benefit) expense 3,673 (3,614) 269 2,620 2,205
-------- -------- -------- -------- --------
Net income (loss) $(13,241) $ (7,608) $ 729 $ 4,760 $ 3,807
======== ======== ======== ======== ========
Earnings (Loss) per share:
Basic $ (1.97) $ (1.26) $ 0.13 $ 0.86 $ 0.70
======== ======== ======== ======== ========
Diluted $ (1.97) $ (1.26) $ 0.12 $ 0.80 $ 0.66
======== ======== ======== ======== ========
Weighted average common shares outstanding:
Basic 6,712 6,046 5,783 5,551 5,379
======== ======== ======== ======== ========
Diluted 6,712 6,046 5,932 5,978 5,790
======== ======== ======== ======== ========
Balance Sheet Data (at August 31):
Cash, cash equivalents and short-term investments $ 332 $ 4,085 $ 5,188 $ 5,613 $ 5,969
Working capital 12,673 13,025 17,386 17,286 14,674
Total assets 38,352 45,767 48,508 44,790 37,360
Long-term debt 9,927 68 68 815 1,911
Stockholders' equity 20,056 30,386 35,499 34,166 27,995
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS
RFM designs, develops, manufactures and markets a broad range of radio
frequency components and modules. The Company's products are organized into two
groups: the Communications Products Group and the Low-power Products Group. The
Communications Products Group includes frequency control modules and filter
products. The Low-power Products Group includes Low-power Components, as well as
Virtual Wire(R) Short-range Radio products. The Company's products are based on
SAW technology, and the Company's strategy is to leverage its radio frequency
design skills and its packaging technology to provide SAW-based solutions to the
current and emerging needs of the electronics industry. The Company's products
include more than 500 resonators, filters, oscillators, transceivers,
transmitters and receivers. The Company's average selling prices within these
product lines generally range from $.40 to $10 for low-power products and from
$2 to $100 for communications products.
RESULTS OF OPERATIONS
The following discussion relates to the financial statements of the Company
for the fiscal year ended August 31, 2001 (current year or fiscal 2001), in
comparison to the fiscal year ended August 31, 2000 (prior year or fiscal 2000),
as well as the fiscal year ended August 31, 1999 (fiscal 1999). In addition,
there is discussion of the financial statements for the three months ended
August 31, 2001 (fourth quarter), in comparison to the three months ended August
31, 2000 (comparable quarter of the prior year), as well as the three months
ended May 31, 2001 (previous quarter).
The following table sets forth, for the years ended August 31 (i) the
percentage relationship of certain items from the Company's statements of
operations to total sales and (ii) the percentage change in these items from
year to year:
Percentage of Sales Year-to-Year Change
2000 1999
to to
2001 2000 1999 2001 2000
---- ---- ---- ---- ----
Sales 100% 100% 100% 10% (8)%
Cost of sales 88 92 70 5 20
------ ------ ------ ------ ------
Gross profit 12 8 30 54 (74)
Research and development 8 10 11 (18) (18)
Sales and marketing 11 13 11 (5) 12
General and administrative 6 7 6 (10) 15
Restructuring 3 - - - -
Litigation - 1 - (100) -
------ ------ ------ ------ ------
Total operating expenses 28 31 28 (3) 3
------ ------ ------ ------ ------
Income (loss) from operations (16) (23) 2 24 (1,026)
Other income (expense), net (3) (1) - 146 337
------ ------ ------ ------ ------
Income (loss) before income taxes (19) (24) 2 15 (1,224)
Income tax (benefit) expense 7 (8) 1 202 (1,443)
------ ------ ------ ------ ------
Net income (loss) (26)% (16)% 1% (74)% (1,144)%
====== ====== ====== ====== ======
15
Sales
The following table sets forth the components of the Company's sales and
percentage relationship of the components to total sales for the periods
indicated:
Year Ended August 31,
2001 2000 1999
-------------------- -------------------- -------------------
% % %
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in thousands)
Product sales:
Low-power Product Group:
Low-power components $31,376 61% $31,376 66% $35,317 69%
Virtual Wire(R) radio produc 10,058 19 7,269 15 7,456 15
------- ------- ------- ------- ------- -------
Subtotal 41,434 80 38,645 81 42,773 84
Communications Products Group:
Frequency control modules 3,187 6 2,365 5 3,622 7
Filters 6,391 12 5,860 13 4,669 9
------- ------- ------- ------- ------- -------
Subtotal 9,578 18 8,225 18 8,291 16
------- ------- ------- ------- ------- -------
Total product sales 51,012 98 46,870 99 51,064 100
Technology development sales 759 2 386 1 233 -
------- ------- ------- ------- ------- -------
Total sales $51,771 100% $47,256 100% $51,297 100%
======= ======= ======= ======= ======= =======
Sales increased 10% in fiscal 2001 as compared to fiscal 2000. The
Company's base Low-power Components business remained constant, but all the
other product lines combined increased almost 27%, primarily due to an increased
number of units sold of those products. In the past several years, the Company
has concentrated its product development and sales promotion efforts on the
Virtual Wire(R), frequency control and filter product lines. The increase in
sales in fiscal 2001 is a result of increased market acceptance of the new
products that have been developed for those product lines.
Sales previously decreased 8% in fiscal 2000 as compared to fiscal 1999,
primarily due to a decrease in number of units sold of Low-power Component
products. Low-power Components sales decreased 11% in fiscal 2000 as a result of
a decrease in the number of units shipped, primarily due to a change in the
Company's sales policy largely occurring in the Company's first quarter. The
Company decided not to offer special promotions programs to increase its turns
business because of the impact the programs have had on the Company's long-term
gross margins. This decision decreased sales in all product lines in the first
quarter, but particularly Low-power components. In addition, average selling
prices for Low-power Components products declined 7% from the prior year due to
continuing competitive pressures.
During fiscal 2000 and fiscal 2001, however, the average selling prices for
Low-power Component products stabilized due to the Company's decision to
discontinue special promotions programs and various other efforts by the
Company. The Company believes that the markets for its Low-power Component
products are still competitive and have attracted large international
competitors, particularly for the automotive segment. This increase in
competition has resulted in lower average selling prices. The Company
16
believes that the lower average selling prices may continue to offset results
from an increase in the number of additional units sold. Therefore, sales for
Low-power Components may not increase or maintain the same level in future
periods.
Sales for Virtual Wire(R) Short-range Radio products increased 38% in
fiscal year 2001, while they decreased 3% in fiscal 2000. In both years, sales
were favorably impacted by an increase in the number of units sold for these
products as they achieved greater acceptance in the marketplace. In the prior
year, average selling prices for these products decreased 22% as the products
reached higher volume price points, which resulted in a small overall decrease
in sales. During the year, the Company completed the transition of customers
from the first generation version to the second generation version of these
products. The second generation version of the products are designed to be more
cost effective and provide additional performance. The Company intends to
continue working with its customers to develop new applications using Virtual
Wire(R) Short-range Radio products. The timing of any sales resulting from such
new applications is dependent upon the customers' product development and
product introduction cycles. It is difficult to predict when, or if, these new
products will have a significant impact on the Company's sales.
Filter sales increased 9% in fiscal 2001, compared to an increase of 26% in
fiscal 2000, primarily as a result of an increase in the number of units sold in
each year. The Company has increased its engineering resources in this area and
has developed new products. The increase in number of units sold reflects
success in several of these programs. The Company expects to continue investing
in development of new Filter products and believes the rapidly growing wireless
communications markets they serve represent a positive growth opportunity.
Filter products have a long development and introduction cycle and there can be
no assurance as to when or if this focus on Filter products will have a
significant impact on the Company's sales.
Frequency Control Module sales increased 35% in fiscal 2001 compared to a
decrease of 35% in fiscal 2000. The increase in fiscal 2001 was primarily due to
the introduction of a new line of optical timing products based upon patented
technology that targets the Optical Dense Wave Division Multiplex (DWDM)
marketplace. The Company believes that products serving the optical network
market represent a positive growth opportunity and introduced a surface mount
version of these products in the fourth quarter. However, the optical timing
products are primarily directed at the telecommunications market which has
suffered a general economic downturn in the past year and it is not certain when
or if these new products will have a significant impact on the Company's sales.
The reduction in sales in fiscal 2000 was primarily due to a reduced number of
units sold for several types of older products and the Company expects that
demand for these older products may not return to former levels or may continue
to decline.
The Company's top five customers accounted for approximately 32%, 36%, and
32% of the Company's total sales in fiscal 2001, 2000 and 1999, respectively.
Distribution related customers accounted for approximately 22%, 22% and 21% of
the Company's total sales in fiscal 2001, 2000 and 1999, respectively. One
customer accounted for 10% or more of total sales in fiscal 2001, while no
customers accounted for 10% or more for fiscal years 2000 and 1999. Insight
Electronics is the Company's domestic distributor and accounted for 10.5% of
total sales in fiscal year 2001. The Company's sales strategy is to seek
diversification in its customer base; however, due to the very competitive
nature of the markets in which it competes, the Company is not certain it will
be able to continue to achieve this diversification.
International sales (primarily in Europe and Asia) were approximately 52%,
62% and 57% of the Company's total sales during fiscal years 2001, 2000 and
1999, respectively. The Company considers all product sales with a delivery
destination outside North America to be international sales. These sales are
denominated primarily in U.S. currency, although some European customers will
require the Company to price in Euros in calendar year 2002. The Company intends
to continue its focus on international sales and anticipates that international
sales will continue to represent a significant portion of its business.
International sales are subject to fluctuations as a result of local economic
conditions and competition, and
17
the Company cannot predict whether it will continue to derive a significant
portion of its business from international sales.
While the Company has achieved sales increases in prior periods, there can
be no assurance that this can be achieved in future periods. The Company's
success is highly dependent on achieving technological advances in its product
design and manufacturing capabilities at both the Dallas and offshore locations,
as well as its ability to sell its products in a competitive marketplace that
can be influenced by outside factors such as economic and regulatory conditions.
Competition from alternative technologies or from competitors duplicating the
Company's technologies may adversely affect selling prices and market share.
Gross Profit Margin
Gross profit margin increased to 11.9% in fiscal 2001, compared to 8.5% in
fiscal 2000, and 29.9% in fiscal 1999. The increase in current year gross margin
resulted from the initial impact of the Company's program to reduce
manufacturing costs. There are several elements to the cost reduction program.
The first element is the move of volume assembly operations offshore to contract
manufacturing alliances. The Company believes a successful offshore
manufacturing program could result in a material reduction in manufacturing
costs. During the current fiscal year, considerable progress has been made
toward this goal. By the end of the fourth quarter of fiscal 2001, the Company's
offshore manufactures assembled more than 50% of all shipments, measured by
revenue. The Company expects that the balance of the low-power component
production will be moved offshore by the end of the first quarter of fiscal year
2002. In addition, the Company entered into a manufacturing service contract
with Morioka Seiko Instruments, Inc., a wholly owned subsidiary of Seiko
Instruments, Inc., for assembly of its Virtual Wire(R) products. The Company
expects the Seiko manufacturing arrangement to be in full production by the
third quarter of fiscal year 2002. At that time, the Company expects most of its
shipments to be from offshore sources.
The second element of the cost reduction program is to reduce costs in the
Company's Dallas operations. The Company reduced its Dallas workforce, including
contract labor, 41% during fiscal 2001 and expects further reductions by the end
of November 2001. Most of the reductions were related to the transition to
offshore manufacturing. The majority of this reduction occurred late in the
fourth quarter of fiscal 2001, so the anticipated favorable impact will be in
fiscal year 2002.
The last element of the cost reduction program is to transition the
Company's Virtual Wire(R) customers to more cost-effective second-generation
products. This was largely completed by the fourth quarter of fiscal 2001. The
Company incurred a great deal of cost in making this transition. Largely due to
this conversion, both the current year and the prior year cost of sales included
approximately $1.2 million in special inventory charges related to elimination
of product lines and transition to offshore manufacturing.
The Company believes that the net result of the cost reductions completed
or planned will result in an improvement in gross margins to 20% or more of
sales in the first fiscal quarter of fiscal 2002. Given the complexities of the
manufacturing processes involved, however, there can be no assurance that the
offshore program will be successful.
The decline of gross margins in fiscal year 2000 from 29.9% to 8.5% was the
result of three factors. First, the sales prices for the Low-power Component
products declined due to competitive pressures in the market place. This decline
in average selling price was not matched by a decrease in per unit manufacturing
costs. In the first quarter of fiscal 2000, the Company changed its sales
strategy to no longer offer special promotions programs to increase its turns
business. This change has had the effect of stabilizing prices for its Low-power
Component products. Currently, these products are still sold in a very
competitive market and it is not certain that a strategy to seek stable prices
will allow the Company to increase or even maintain its
18
sales levels. If selling prices need to be reduced to maintain sales levels, it
is not certain if the Company can reduce per unit manufacturing costs in future
periods to the same extent as the decrease in selling prices. If that were to
occur, gross margins would be materially and adversely impacted. The second
factor causing decreased margins was a decline in sales volume in fiscal year
2000 that resulted in higher fixed overhead costs as a percentage of sales. In
addition, the Company added equipment and other manufacturing overhead costs to
increase the capacity in its facilities to handle both new products and an
increased volume of its older products. As a result, overhead costs as a
percentage of sales increased significantly in fiscal 2000. A significant target
of the Company's ongoing cost reduction program is to reduce fixed manufacturing
costs. If that were not successful, overhead costs would remain at high levels
and could increase as a percentage of sales. The last factor resulting in lower
margins was $1.2 million in special charges to Cost of Sales in the first
quarter of fiscal year 2000, primarily related to the transition to new
products.
The Company has in the past experienced sudden increases in demand, which
have put pressure on its manufacturing facilities to increase capacity to meet
this demand. In the current year for instance, the Company experienced some
difficulty in securing the additional labor resources necessary to meet rising
demand. In addition, new products sometimes require different manufacturing
processes than the Company currently possesses. The Company has converted the
majority of its assembly manufacturing requirements to offshore contractors. The
Company may not be able to increase its manufacturing capacity, the
manufacturing capacity of its assembly contractors, or improve its manufacturing
processes in a timely manner so as to take advantage of increased market demand.
Failure to do this would result in a loss of potential sales in the periods
impacted.
Research and Development
Research and development expenses decreased approximately $850,000 in
fiscal 2001 and $1 million in fiscal 2000. The current year's decrease was
caused by the following factors. First, an additional $100,000 in costs were
reclassified to Cost of Sales related to technology development sales contracts
which increased in fiscal 2001 and 2000. Second, personnel costs have been
reduced, primarily due to reallocations from engineering design functions to
manufacturing process engineering and manufacturing management functions to
improve manufacturing output and efficiency and to support the offshore
transition. Third, expenses in fiscal 2000 included approximately $200,000 in
tooling depreciation expense that did not recur in fiscal 2001.
The reduction in research and development expense in fiscal 2000 was
primarily due to an unusually high level of expenses that occurred in fiscal
year 1999. Included in these expenses were approximately $300,000 related to the
introduction of a new packaging process and approximately $550,000 related to
the costs of the transceiver product introduction. Since these unusual costs did
not recur in fiscal 2000, this also accounted for the majority of the decrease
compared to 1999. In addition, in fiscal 2000 there was an increase of
approximately $150,000 in engineering costs included in Cost of Sales related to
an increase in technology development sales. The Company believes that the
continued development of its technology and new products is essential to its
success and is committed to continuing its investment in research and
development. The Company expects its investments in research and development to
remain approximately the same or increase in absolute dollars over the next
several quarters.
Sales and Marketing
In fiscal 2001, sales and marketing expenses decreased approximately
$300,000 (5%) from the prior year, due primarily to a change in the Company's
program to reduce commission rates. Sales and marketing expenses increased
approximately $630,000 (12%) in fiscal 2000 compared to fiscal 1999. The
increase in fiscal 2000 was due to an increase in sales commission expense
resulting from the Company's efforts to increase sales by expanding the
geographic and account responsibilities of its sales representative firms. Over
the past several years the Company has conducted an ongoing review of its sales
representation program and feels it now has an optimum coverage and rate
structure. Sales and marketing expenses were 11% of sales in
19
fiscal 2001, which is the same as they were in fiscal 1999. The Company expects
to incur comparable sales and marketing expenses in absolute dollars over the
next several quarters, with the exception of sales commission expenses that will
fluctuate in line with sales levels.
General and Administrative
General and administrative expenses decreased approximately $360,000 (10%)
in fiscal year 2001 after increasing approximately $450,000 (15%) in fiscal
2000. The increase in 2000 was primarily attributable to approximately $600,000
in employee severance costs. Comparable charges in 2001 are classified as
restructuring costs. General and administrative expenses were 6% of total sales
in fiscal 2001 and were the same in fiscal 1999. The Company recently reduced
general and administrative expenses and expects they will continue to decline
slightly or remain constant in absolute dollars over the next several quarters.
Restructuring
Restructuring expenses were approximately $1.4 million in fiscal 2001
compared to zero in the prior two years. Restructuring expenses consist of the
following. First, a fixed asset charge of $1 million was taken to write down or
write off fixed assets that will no longer be required due to the decision to
close a portion of the Dallas operations. Second, a charge of $400,000 was taken
to cover the severance costs of employees whose positions have been or will be
eliminated by the manufacturing restructuring. The Company anticipates the
related manufacturing changes will be fully implemented by the end of the first
quarter of fiscal 2002.
Litigation
Litigation expense, which amounted to zero in fiscal 2001 and $301,000 in
fiscal 2000, primarily consists of expenses related to the resolution of several
unrelated legal issues. All of the matters have been resolved and the Company
does not anticipate similar expenses in future periods, except for immaterial
expenses incurred in the ordinary course of its operations.
Other Income (Expense)
During the current year the Company refinanced its operations with a
banking agreement that resulted in the purchase of equipment that was formerly
leased. The additional debt and interest expense incurred from this purchase
were partially offset by lower manufacturing expenses due to the elimination of
related equipment rental expense. Other expense primarily consisted of interest
expense on the Company's debt, including amendment fees, and increased
approximately $900,000 in the current year due to the increase in debt. Other
expense increased approximately $500,000 in fiscal 2000 compared to fiscal 1999
due to increased indebtedness, resulting in an increase in interest expense. The
Company expects that borrowings will remain at comparable levels over the next
several quarters resulting in a stable level of other expense, except for any
reduction in interest rates due to a reduction in the prime rate as provided in
the bank agreement.
Income Tax Expense (Benefit)
FAS 109 requires companies to establish a valuation allowance against
deferred tax assets unless their realization is more likely than not based upon
historical data. In fiscal year 2001, the Company experienced its second
consecutive year of losses which included various restructuring charges that
occurred in the fourth quarter. In consideration of those loss years and the
uncertain economic environment, the Company decided to fully reserve, in a
noncash charge, all tax benefits that had been recorded, which amounted to
approximately $5.6 million at the end of the third quarter. Therefore, the
Company's tax provision for the fiscal year was a $3.7 million expense, compared
to a $3.6 million benefit in the prior year. The potential tax savings from the
loss carryforwards are still available to the Company however. Therefore, income
in future periods for the foreseeable future will largely be shielded from
taxation. This will improve both reported earnings and cash flow in the future.
20
Earnings per Share
The net loss for the current year was $13.2 million, compared to a $7.6
million loss in the prior year and net income of $729,000 in fiscal 1999. The
Company's diluted loss per share for fiscal 2001 was $1.97 per share, compared
to $1.26 per share for fiscal 2000 and net income of $.12 per share for fiscal
1999. The current year earnings per share includes the effect of all the special
charges that occurred in the fourth quarter of the current year.
Fourth Quarter of Fiscal 2001
Unaudited quarterly financial data is presented in Note 13 of the
accompanying financial statements.
Sales for the fourth quarter of $12.5 million decreased approximately 4%,
compared to $13.0 million in the comparable quarter of the prior year. Sales
were also down approximately 17% compared to the previous third quarter in which
the Company had a record $15.1 million in sales. The sales decrease in the
current year was primarily due to a decrease in the number of units sold in the
Company's product lines and reflects the general downturn in the economy. Sales
of filter products to telecommunication customers were down 55% from the
previous quarter. The Company believes the impact of the general economic
downturn could cause sales for the next quarter to be down another 10% to 15%.
The Company also believes the diversity of its product offering and customer
base moderates to a great extent the impact of economic changes on any
particular industry or market.
Gross profit margins were 5.2% in the fourth quarter, compared to 15.5% for
the comparable quarter of the prior year and 18.6% from the previous quarter.
Included in the quarter were approximately $1.2 million in special inventory
charges to write off or reserve inventory resulting from the Company's decision
to restructure its manufacturing facilities. Without this special reserve, the
gross margin for the quarter would have been approximately 14.8% and comparable
to the prior year. The reduction in gross margin from the previous quarter was
due to relatively high fixed overhead costs being spread over a smaller sales
volume. A key element of the Company's cost reduction program is a reduction in
fixed overhead costs. A large amount of cost reduction took place late in the
fourth quarter and the Company believes gross margins in the first quarter of
fiscal 2002 may increase to 20% of sales or more, although there is no assurance
that this will happen.
Operating expenses for the fourth quarter were approximately $4.3 million
for the current quarter, compared to approximately $3.9 million for the
comparable quarter of the prior year and $3.2 million for the previous quarter.
Current quarter expenses included $1.4 million in restructuring charges and
accounts for the increases over the prior periods noted. The prior year's fourth
quarter included a $301,000 charge for litigation and unusual legal expenses
that did not recur, and the previous quarter included a much larger amount of
sales commissions than the current quarter, due to a much higher level of sales.
The Company expects that operating expenses will continue to decline slightly in
the next quarter as its cost reduction program has additional effect.
The pre-tax loss for the fourth quarter was approximately $4.2 million
compared to a loss of $2.1 million in the comparable quarter of the prior year.
On a proforma basis, which excludes the special charges, the pre-tax loss for
the fourth quarter would have been approximately $1.6 million, which reflects
increased gross margins and reduced operating expenses from recent quarters that
had similar sales volume. The Company expects this improvement to continue as
margins improve and operating expenses decline. Diluted loss per share was $1.40
in the fourth quarter, compared to a loss of $.20 for the comparable quarter of
the prior year and $.08 for the previous quarter. Without the unusual expenses
in the quarter, the loss for the current quarter would have been $.15 per
diluted share.
21
FINANCIAL CONDITION
Financing Arrangements
In December 2000, the Company entered into an agreement with a commercial
bank for a credit facility consisting of a $13.5 million revolving credit
facility and a $3 million term note. Included in the revolving credit facility
is an $8 million loan that is supported by the Export/Import bank (Exim bank).
Both facilities terminate on December 31, 2003. The proceeds of these new loans
and the sale of approximately $3.6 million in short term investments were used
to pay off approximately $6.9 million under the prior revolving credit facility,
as well as $8.8 million in obligations related to an equipment-collateralized
operating lease facility. As a result, the Company completely satisfied its
obligations to its former bank and acquired approximately $8.3 million in
capital assets that had formerly been utilized under operating leases.
The structure of the banking agreement ties amounts borrowed under the
agreement to a borrowing base consisting of certain receivables, inventory, and
fixed assets. Essentially all the assets of the Company, tangible and
intangible, are pledged as collateral under both facilities. The term loan
requires equal monthly payments of principal totaling $50,000 plus interest
which began in January 2001. The interest rate for both facilities is 2% over
the lender's prime rate. As part of the agreement, the bank was given a ten-year
warrant to purchase 30,000 shares of the Company's common stock at $5.00 per
share. This credit facility contains financial covenants relating to various
matters, including but not limited to minimum net worth, quarterly and monthly
earnings, and limitations on changes in corporate structure, and restrictions on
dividends and capital spending. On three occasions, the Company has amended the
banking agreements to relax those covenants for one-time fees in the aggregate
amount of $205,000. As of August 31, 2001, the Company was in compliance with
the amended covenants. Although the Company believes that it will continue to
meet the covenants, there is no assurance that this will occur. Should there be
a future covenant violation without a waiver on favorable terms, there could be
a significant adverse impact on the Company's operations.
In December 2000 the Company entered into an agreement to raise
approximately $2,000,000 in cash by the sale of common stock and warrants to
purchase common stock. The sale consisted of 533,332 units. Each unit was sold
at a price of $3.75 and consisted of one share of common stock and a three-year
warrant to purchase one share of common stock at $7.50. The agreement called for
certain restrictions on the sale or further acquisition of stock by the
investors, as well as the right to require registration in the future. The
proceeds of the sale of this stock will be used to support the operations of the
Company.
Cash Flows
Liquidity at August 31, 2001 consisted primarily of approximately $332,000
of cash and approximately $1 million available under the banking agreement. Net
cash used in operating activities was $1.6 million in the year-to-date period of
fiscal 2001 as compared to net cash used in operating activities of $3.1 million
for the year-to-date period of fiscal 2000. The $1.5 million improvement from
year to year was primarily due to a reduction in the net loss adjusted for
noncash items, which was a net use of cash of $3.2 million in fiscal 2001,
compared to $5.2 million in fiscal year 2000. This improvement is a result of
the Company's cost reduction program which is targeted to improve gross margins
and operating expenses. In each year the use of cash to finance a net loss was
partially offset by a reduction in working capital. The reduction in working
capital was $1.5 million in the current year and $2.1 million in the prior year.
The Company plans to maintain a positive cash flow from operations for
fiscal 2002 as it did in the fourth quarter of fiscal 2001 when cash flow from
operations was a positive $2 million. The fourth quarter, however, benefited
from a $3.7 million reduction in working capital due to an intensive management
effort. The Company does not expect working capital reductions of this magnitude
to continue. However, the Company believes that improvements in net income and
the significant amount of depreciation projected will result in positive cash
flow from operations. This should allow the Company to operate in a normal
manner for the next fiscal year, despite a relatively low amount of cash
reserves. However, there can be no assurance that this will be achieved.
22
Cash used in investing activities was $5.3 million for the current year,
primarily as a result of approximately $9.2 million in capital expenditures
which consisted of $8.3 million that had formerly been leased and $900,000 of
new items. This was partially financed by the net sale of $3.5 million in
short-term investments. Cash used in investing activities was $0.6 million in
the prior year due to $1.5 million in capital expenditures offset by a net sale
of $1.0 million in short-term investments. The Company expects to acquire up to
$1 million of capital equipment by the end of fiscal 2002, consisting primarily
of equipment needed for its wafer fabrication manufacturing facilities. Due to
its offshore manufacturing initiative, the Company does not expect to require
significant additions to its assembly facilities or equipment.
Net cash generated from financing activities was $6.8 million in 2001 and
$3.5 million in 2000. In the current year, approximately $4.1 million was raised
from a net increase in borrowings and $2.7 million in sales of stock (from the
equity agreement mentioned above), stock options and the employee stock purchase
plan. Under the Company's banking agreement, all receipts on trade receivables
are applied to loans that are outstanding and the Company borrows funds to
support its activities according to its borrowing base. As a result, repayments
on debt and borrowings are large relative to sales. In the prior year, $1.1
million was raised in a net increase in borrowings and $2.4 million in sales of
stock.
As of the August 31, 2001, the Company had approximately $1.0 million
available under its banking agreement based upon the borrowing base at that
time. In addition, approximately $3.6 million more may become available under
the banking agreement if the Company's borrowing base were to increase
sufficiently to support increased borrowing. However, there can be no assurance
that this will happen. While the Company is completing the transition of its
assembly operation to offshore sources, there could be a working capital short
fall, particularly in December 2001. The Company believes that cash generated
from operations, if any, its cash balances and the amounts available under its
credit facility will be sufficient to meet the Company's operating cash
requirements through the fiscal year 2002. To the extent that these sources of
funds are insufficient to meet the Company's capital or operating requirements,
the Company may be required to raise additional funds. No assurance can be given
that additional financing will be available or, if available, that it will be
available on acceptable terms. Should that occur, there could be a significant
adverse impact on the Company's operations.
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, the preceding
discussions in this report contain forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the sections entitled "Business," "Legal Proceedings", "Selected Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this report.
This report and other presentations made by RFM contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Although RFM believes that in making any such statements its
expectations are based on reasonable assumptions, any such statement involves
uncertainties and is qualified in its entirety by reference to the following
important factors, among others, that could cause the actual results of RFM to
differ materially from those statements: (i) timely development, acceptance and
pricing of new products; (ii) timely implementation of manufacturing processes
and transition to offshore manufacturing; (iii) ability to obtain production
material and labor; (iv) the potential transition to value-added products; (v)
the impact of competitive products and pricing; (vi) general industry trends;
(vii) general economic conditions as they affect RFM's customers and
manufacturing partners; and (viii) availability of required financing on
favorable terms. The Company does not assume any obligation to update any
forward-looking information contained in this document.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in Appendix A attached
hereto and incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is found under the heading Nominees
and the heading Executive Officers of the Registrant in the definitive proxy
statement to be filed by RF Monolithics, Inc. with the Securities and Exchange
Commission (Commission) on or about December 14, 2001, in connection with the
2002 Annual Meeting.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is found under the heading Executive
Compensation in the definitive proxy statement to be filed with the Commission
by RF Monolithics, Inc. on or about December 14, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is found under the heading Security
Ownership of Certain Beneficial Owners and Management in the definitive proxy
statement to be filed by RF Monolithics, Inc. with the Commission on or about
December 14, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is found under the heading Certain
Transactions in the definitive proxy statement to be filed by RF Monolithics,
Inc. with the Commission on or about December 14, 2001.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL statement SCHEDULES and REPORTS ON FORM 8-K
(a) 1. Financial Statements. Financial statements are attached as Appendix A to
this report. The index to the financial statements is found on page F-1
of Appendix A.
24
(a) 2. Financial Statement Schedules. All schedules are omitted since the
Required information is not present or is not present in amounts
sufficient to require a submission of the schedules, or because the
information required is included in the financial statements and notes
thereto.
(a) 3. Exhibits. See Exhibit Index in part (c), below.
(b) The Company did not file any reports on Form 8-K during the quarter
ended August 31, 2001.
(c)
Exhibit
Number Description
3.1 Restated Certificate of Incorporation of Registrant. (2)
3.2 Bylaws of Registrant. (2)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen Stock Certificate. (2)
4.3 Rights Agreement dated as of December 20, 1994. (15)
4.4 First Amendment to Rights Agreement dated August 14, 1996.
(16)
4.5 Second Amendment to Rights Agreement dated December 11,
2000. (18)
4.6 Form of Unit Subscription Agreement for Common Stock and
Warrants between the Registrant and certain investors dated
December 11, 2000. (19)
4.7 Form of Common Stock Purchase Warrant between Registrant and
certain investors. (19) Form of Registration Rights
Agreement between Registrant and certain investors dated
4.8 December 11, 2000. (19)
10.1 Form of Indemnity Agreement entered into by the Registrant
and each of its officers and directors. (1)
10.2 1982 Incentive Stock Option Plan, as amended and related
grant forms. (1)
10.3 1982 Supplemental Stock Option Plan, as amended and related
grant forms. (1)
10.4 1986 Incentive Stock Option Plan, as amended and related
grant forms. (1)
10.5 1986 Supplemental Stock Option Plan, as amended and related
grant forms. (1)
10.6 Form of Employee Stock Purchase Plan. (1)
10.7 Form of Employee Stock Purchase Plan Offering. (1)
10.8 Non-Employee Director's Stock Option Plan. (2)
10.9 Form of Non-Employee Director's Stock Option. (1)
10.10 Lease Agreement between the Registrant and Jeff Yassai. (2)
10.11 Lease Agreement between the Registrant and JFC Growth Fund,
Ltd. (2)
10.12 Transfer Agreement between the Registrant and Peter V.
Wright, dated October 31, 1990. (1)
10.13 Agreement regarding payment due under the October 31, 1990,
Transfer Agreement between the Registrant and Peter V.
Wright, dated March 30, 1994. (1)
10.14 Letter Agreement by and between the Registrant and Comerica
Bank - Texas, dated January 1, 1994. (1)
10.15 Promissory Note between the Registrant and Comerica Bank -
Texas, dated December 1, 1994. (3)
10.16 Promissory Note between the Registrant and Comerica Bank -
Texas, dated March 1, 1995. (4)
10.17 Master Lease Agreement between Registrant and Banc One
Leasing Corporation, dated November 3, 1995. (5)
10.18 Form of Restrictive Stock Bonus Agreement to be entered
November 30, 1995. (6)
10.19 Loan Letter Agreement and Promissory Note between the
Registrant and Bank One, Texas, N.A. dated March 8, 1996.
(7)
25
10.20 Promissory Note between the Company and Gary A. Andersen
dated March 28, 1996. (7)
10.21 Change of Control Agreement between the Company and Gary A.
Andersen and Sam L. Densmore dated December 18, 1995. (7)
10.22 Separation and Consulting Agreement between the Company and
Gary A. Andersen dated August 13, 1996. (8)
10.23 Form of Change of Control Agreement for certain officers.
(9)
10.24 Separation and Consulting Agreement between the Company and
Chris G. Conlin dated June 10, 1998. (10)
10.25 Form of Restricted Stock Bonus Agreement. (11)
10.26 1999 Equity Incentive Plan. (11)
10.27 Form of Notice of Grant of Stock Options and Grant
Agreement. (11)
10.28 Promissory Note between the Company and James P. Farley
dated November 30, 1999. (12)
10.29 Promissory Note between the Company and Darrell Ash dated
November 30, 1999. (12)
10.30 Separation Agreement between the Company and Sam L. Densmore
dated November 11, 1999. (12)
10.31 Waiver and Third Amendment to Loan Agreement, dated as of
February 29, 2000, among RF Monolithics, Inc., Banc One
Leasing Corporation, and Bank One, Texas, National
Association. (13)
10.32 Promissory Note, dated February 29, 2000, in the principal
amount of $7,500,000, executed and delivered by RF
Monolithics, Inc. to Bank One, Texas, National Association.
(13)
10.33 Waiver and Amendment to Master Lease Agreement dated as of
February 29, 2000, by and between RF Monolithics, Inc. and
Banc One Leasing Corporation. (13)
10.34 Collateral Pledge Agreement dated as of May 31, 2000, by RF
Monolithics, Inc. in favor of Bank One, Texas, National
Association. (14)
10.35 Waiver and Fourth Amendment to Loan Agreement, dated as of
May 31, 2000, among RF Monolithics, Inc., Banc One Leasing
Corporation, and Bank One, Texas, National Association. (14)
10.36 Promissory Note, dated May 31, 2000, in the principal amount
of $7,500,000, executed and delivered by RF Monolithics,
Inc. to Bank One, Texas, National Association. (14)
10.37 Waiver and Amendment to Master Lease Agreement dated as of
May 31, 2000, by and between RF Monolithics, Inc. and Banc
One Leasing Corporation. (14)
10.38 Separation Agreement between the Company and Thomas
Phillips, Jr. dated July 14, 2000. (17)
10.39 Consulting Agreement between the Company and Tom Garrett
dated June 28, 2000. (17)
10.40 Promissory Note, dated May 12, 1999, in the principal amount
of $19,500.00, executed and delivered by RF Monolithics,
Inc. to David Kirk. (17)
10.41 Consulting Agreement between the Company and Michael
Bernique dated June 23, 1999. (17)
10.42 Credit and Security Agreement between Registrant and Wells
Fargo Business Credit, Inc. dated as of December 8, 2000.
(19)
10.43 Revolving Note between Registrant and Wells Fargo Business
Credit, Inc. dated as of December 8, 2000. (19)
10.44 Term Note between Registrant and Wells Fargo Business
Credit, Inc. dated as of December 8, 2000. (19)
26
10.45 Registration Rights Agreement between Registrant and Wells Fargo
Business Credit, Inc. dated as of December 8, 2000. (19)
10.46 Warrant Agreement between Registrant and Wells Fargo Business
Credit, Inc. dated as of December 8, 2000. (19)
10.47 Credit Agreement between Registrant and Wells Fargo Bank
Minnesota, N.A. dated as of December 8, 2000. (19)
10.48 Revolving Note between Registrant and Wells Fargo Bank
Minnesota, N.A. dated as of December 8, 2000. (19)
10.49 Export-Import Bank of the United States Working Capital
Guarantee Program Borrower's Agreement dated as December 8,
2000. (19)
10.50 Promissory Note, dated January 29, 2001, in the principle amount
of $41,768.74, executed and delivered by RF Monolithics, Inc. to
David T. Somerville.(19)
10.51 Manufacturing Agreement between Registrant and Automated
Technology (Phil.) Inc. Electronics Corporation dated February
22, 2001. (20)
10.52 Manufacturing Agreement between Registrant and Cirtek
Electronics Corporation dated March 23, 2001. (20)
10.53 First Amendment to Credit and Security Agreement between
Registrant and Wells Fargo Business Credit, Inc. dated March 30,
2001. (20)
10.54 First Amendment to Credit and Security Agreement between
Registrant and Wells Fargo Bank Minnesota, N.A. dated March 30,
2001. (20)
10.55 Amendment 1 to manufacturing agreement between Registrant and
Cirtek Electronics Corporation dated June 1, 2001. (20)
10.56 Manufacturing and Technical Support Agreement between Registrant
and Morioka Seiko Instruments Inc. dated June 11, 2001. (20)
10.57 Second Amendment to Credit and Security Agreement between
Registrant and Wells Fargo Business Credit, Inc. dated August
23, 2001. (21)
10.58 Second Amendment to Credit and Security Agreement between
Registrant and Wells Fargo Bank Minnesota, N.A. dated August 23,
2001. (21)
10.59 Amendment 1 to manufacturing agreement between Registrant and
Automated Technology (Phil.) Inc. Electronics Corporation dated
July 19, 2001. (21)
11.1 Computation of net income per share. (21)
23.1 Consent of Deloitte & Touche LLP, Independent Auditors. (21)
24.1 Power of Attorney. See page 29.
(1) Previously filed as an exhibit to the Registration Statement on
Form S-1, as amended (Registration No. 33-78040) and incorporated
herein by reference.
(2) Previously filed as an exhibit to the Annual Report on Form 10-K
for the year ended August 31, 1994, and incorporated herein by
reference.
(3) Previously filed as an exhibit to the Quarterly Report on Form 10-Q
for the quarter ended November 30, 1994, and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Quarterly Report on Form 10-Q
for the quarter ended February 28, 1995, and incorporated herein by
reference.
(5) Previously filed as an exhibit to the Annual Report on Form 10-K
for the year ended August 31, 1995, and incorporated herein by
reference.
(6) Previously filed as an exhibit to the Quarterly Report on Form 10-Q
for the quarter ended November 30, 1995, and incorporated herein by
reference.
(7) Previously filed as an exhibit to the Quarterly Report on Form 10-Q
for the quarter ended February 29, 1996, and incorporated herein by
reference.
27
(8) Previously filed as an exhibit to the Annual Report on Form 10-K
for the year ended August 31, 1996, and incorporated herein by
reference.
(9) Previously filed as an exhibit to the Annual Report on Form 10-K
for the year ended August 31, 1997, and incorporated herein by
reference.
(10) Previously filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended May 31, 1998, and incorporated herein
by reference.
(11) Previously filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended May 31, 1999, and incorporated herein
by reference.
(12) Previously filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended November 30, 1999, and incorporated
herein by reference.
(13) Previously filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended February 29, 2000, and incorporated
herein by reference.
(14) Previously filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended May 31, 2000, and incorporated herein
by reference.
(15) Previously filed as an exhibit to the Form 8-K file December 29,
1994, and incorporated herein by reference.
(16) Previously filed as an exhibit to the Form 8-K file December 19,
1996, and incorporated herein by reference.
(17) Previously filed as an exhibit to the Annual Report on Form 10-K
for the year ended August 31, 2000, and incorporated herein by
reference.
(18) Previously filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended November 30, 2000, and incorporated
herein by reference.
(19) Previously filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended February 28, 2001, and incorporated
herein by reference.
(20) Previously filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended May 31, 2001, and incorporated herein
by reference.
(21) Filed as an exhibit to this Annual Report on Form 10-K.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel, the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 28th day of
November, 2001.
RF MONOLITHICS, INC.
By: /s/ DAVID KIRK
-------------------------------------
David Kirk
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears on the following page constitutes and appoints Morton PLLC and David
Kirk, respectively, his attorneys-in-fact for him in any and all capacities, to
sign any amendments to this Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that the
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of RF
Monolithics, Inc. and in the capacities indicated on the 28th day of November,
2001.
/s/ DAVID KIRK /s/ CORNELIUS C. BOND, JR.
- -------------------------------- -------------------------------
David Kirk Cornelius C. Bond, Jr.
CEO, President & Director Director
/s/ JAMES P. FARLEY /s/ DEAN C. CAMPBELL
- -------------------------------- -------------------------------
James P. Farley Dean C. Campbell
VP Finance and Controller Director
/s/ MICHAEL R. BERNIQUE /s/ FRANCIS J. HUGHES, JR.
- -------------------------------- -------------------------------
Michael R. Bernique Francis J. Hughes, Jr.
Chairman Director
29
APPENDIX A
FINANCIAL STATEMENTS
RF MONOLITHICS, INC.
INDEX TO FINANCIAL STATEMENTS -
ITEM 8 OF FORM 10-K
- -----------------------------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES:
Consolidated Balance Sheets as of August 31, 2001 and 2000 F-3
Consolidated Statements of Operations for the Years Ended August 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
for the Years Ended August 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows for the Years Ended
August 31, 2001, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of RF Monolithics, Inc.:
We have audited the accompanying consolidated balance sheets of RF Monolithics,
Inc. and subsidiary (collectively referred to as the Company) as of August 31,
2001 and 2000, and the related consolidated statements of operations,
stockholders' equity and comprehensive income (loss), and cash flows for each of
the three years in the period ended August 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of RF Monolithics, Inc. and subsidiary
as of August 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended August 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
October 16, 2001
F-2
RF MONOLITHICS, INC.
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2001 AND 2000
(In Thousands)
- --------------------------------------------------------------------------------
2001 2000
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 332 $ 542
Short-term investments -- 3,543
Trade receivables, less allowance of $210 and $320 in 2001 and 2000 8,305 9,868
Inventories 11,618 11,176
Prepaid expenses and other 787 1,111
Income taxes receivable -- 1,342
Deferred tax benefit -- 756
-------- --------
Total current assets 21,042 28,338
PROPERTY AND EQUIPMENT - Net 16,748 14,063
DEFERRED TAX BENEFIT -- 2,782
OTHER ASSETS - Net 562 584
-------- --------
TOTAL $ 38,352 $ 45,767
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit and current portion of notes payable $ 1,400 $ 6,898
Capital lease obligations - current portion 57 30
Accounts payable - trade 4,718 5,602
Accounts payable - construction and equipment 165 469
Accrued expenses and other liabilities 2,029 2,314
-------- --------
Total current liabilities 8,369 15,313
LONG-TERM DEBT - Less current portion:
Notes payable 9,927 --
Capital lease obligations -- 68
-------- --------
Total long-term debt 9,927 68
COMMITMENTS AND CONTINGENCIES (Notes 7, 12 and 13) -- --
STOCKHOLDERS' EQUITY:
Preferred stock: $.001 par value, 5,000,000 shares authorized; 0 issued
in 2001 and 2000 -- --
Common stock: $.001 par value, 20,000 shares authorized; 7,068 and
6,208 shares issued in 2001 and 2000, respectively 7 6
Additional paid-in capital 32,767 30,562
Common stock warrants 800 --
Treasury stock, 36 common shares at cost (227) (227)
Retained earnings (deficit) (12,767) 474
Unearned compensation (524) (359)
Accumulated other comprehensive loss -- (70)
-------- --------
Total stockholders' equity 20,056 30,386
-------- --------
TOTAL $ 38,352 $ 45,767
======== ========
See notes to consolidated financial statements
F-3
RF MONOLITHICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31, 2001, 2000, AND 1999
(In Thousands, Except Per-Share Amounts)
- --------------------------------------------------------------------------------------
2001 2000 1999
SALES $ 51,771 $ 47,256 $ 51,297
COST OF SALES (45,597) (43,250) (35,950)
-------- -------- --------
GROSS PROFIT 6,174 4,006 15,347
OPERATING EXPENSES: 3,852 4,700 5,697
Sales and marketing 5,748 6,047 5,415
General and administrative 3,184 3,546 3,092
Restructuring 1,399 - -
Litigation - 301 -
-------- -------- --------
Total 14,183 14,594 14,204
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS (8,009) (10,588) 1,143
OTHER INCOME (EXPENSE):
Interest income 83 249 268
Interest expense (1,557) (866) (420)
Other (85) (17) 7
-------- -------- --------
Total (1,559) (634) (145)
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (9,568) (11,222) 998
INCOME TAX EXPENSE (BENEFIT) - Current and deferred 3,673 (3,614) 269
-------- -------- --------
NET INCOME (LOSS) $(13,241) $ (7,608) $ 729
======== ======== ========
EARNINGS (LOSS) PER SHARE :
Basic $ (1.97) $ (1.26) $ 0.13
======== ======== ========
Diluted $ (1.97) $ (1.26) $ 0.12
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 6,712 6,046 5,783
======== ======== ========
Diluted 6,712 6,046 5,932
======== ======== ========
See notes to consolidated financial statements.
F-4
RF MONOLITHICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED AUGUST 31, 2001, 2000, AND 1999
(In Thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Additional Retained
Common Stock Paid-in Stock Warrants Treasury Earnings
Shares Amount Capital Shares Amount Stock (Deficit)
BALANCE, AUGUST 31, 1998 5,696 $ 6 $ 26,862 - $ - $ - $ 7,353
Common stock options exercised, including tax benefit 48 - 275 - - - -
Forfeiture of common stock grants (4) - (26) - - - -
Amortization of unearned compensation - - - - - - -
Issuance of common stock under the Purchase Plan (Note 8) 61 - 485 - - - -
Issuance of common stock under 1997 Equity Incentive
Plan (Note 8) 74 - 447 - - - -
Treasury stock transactions - - - - - (227) -
Change in unrealized gain (loss) on investments - - - - - - -
Net income - - - - - - 729
----- ---- -------- --- ------ ------ --------
BALANCE, AUGUST 31, 1999 5,875 $ 6 $ 28,043 - - $ (227) $ 8,082
===== ==== ======== === ====== ====== ========
Common stock options exercised, including tax
benefit (Note 8) 262 - 2,044 - - - -
Forfeiture of common stock grants (8) - (50) - - - -
Amortization of unearned compensation (Note 8) - - - - - - -
Issuance of common stock under the Purchase Plan (Note 8) 69 - 350 - - - -
Issuance of common stock under 1997 Equity Incentive
Plan (Note 8) 10 - 79 - - - -
Issuance of stock options to non-employees (Note 8) - - 96 - - - -
Change in unrealized loss on investments - - - - -
Net loss - - - - - - (7,608)
----- ---- -------- --- ------ ------ --------
BALANCE, AUGUST 31, 2000 6,208 $ 6 $ 30,562 - $ - $ (227) $ 474
===== ==== ======== === ====== ====== ========
Common stock issuances (Note 8):
Bank Equity Agreement 533 1 1,909 - - - -
Restricted stock under the 1997 Equity Incentive Plan 121 - 406 - - - -
Stock options exercised, including tax benefit 87 - 186 - - - -
Employee Stock Purchased Plan 135 - 486 - - - -
Forfeiture of restricted stock grants (16) - (86) - - - -
Issuance of compensatory stock options - - 19 - - - -
Common stock warrants issued:
With Bank Equity Agreement - - (715) 533 715 - -
With notes payable (Note 6) - - - 30 85 - -
Amortization of unearned compensation - - - - - - -
Change in unrealized loss on investments - - - - - - -
Net loss - - - - - - (13,241)
----- ---- -------- --- ------ ------ --------
BALANCE, AUGUST 31, 2001 7,068 $ 7 $ 32,767 563 $ 800 $ (227) $(12,767)
===== ==== ======== === ====== ====== ========
Accumulated
Other Comprehensive
Unearned Comprehensive Income
Compensation Income (Loss) Total (Loss)
BALANCE, AUGUST 31, 1998 $ (75) $ 20 $ 34,166 -
Common stock options exercised, including tax benefit - - 275 -
Forfeiture of common stock grants 26 - - -
Amortization of unearned compensation 91 - 91 -
Issuance of common stock under the Purchase Plan (Note 8) - - 485 -
Issuance of common stock under 1997 Equity Incentive
Plan (Note 8) (447) - - -
Treasury stock transactions - - (227)
Change in unrealized gain (loss) on investments - (20) (20) (20)
Net income - - 729 729
-------- ------------ -------- -------------
BALANCE, AUGUST 31, 1999 $ (405) $ - $ 35,499 $ 709
======== ============ ======== =============
Common stock options exercised, including tax
benefit (Note 8) - - 2,044 -
Forfeiture of common stock grants 50 - - -
Amortization of unearned compensation (Note 8) 171 - 171 -
Issuance of common stock under the Purchase Plan (Note 8) - - 350 -
Issuance of common stock under 1997 Equity Incentive
Plan (Note 8) (79) - - -
Issuance of stock options to non-employees (Note 8) (96) - - -
Change in unrealized loss on investments - (70) (70) (70)
Net loss - - (7,608) (7,608)
-------- ------------ -------- -------------
BALANCE, AUGUST 31, 2000 $ (359) $ (70) $ 30,386 $ (7,678)
======== ============ ======== =============
Common stock issuances (Note 8):
Bank Equity Agreement - - 1,910 -
Restricted stock under the 1997 Equity Incentive Plan (406) - - -
Stock options exercised, including tax benefit - - 186 -
Employee Stock Purchased Plan - - 486 -
Forfeiture of restricted stock grants 86 - - -
Issuance of compensatory stock options (19) - - -
Common stock warrants issued:
With Bank Equity Agreement - - - -
With notes payable (Note 6) - - 85 -
Amortization of unearned compensation 174 - 174 -
Change in unrealized loss on investments - 70 70 70
Net loss - - (13,241) (13,241)
-------- ------------ -------- -------------
BALANCE, AUGUST 31, 2001 $ (524) - $ 20,056 $ (13,171)
======== ============ ======== =============
See notes to consolidated financial statements.
F-5
RF MONOLITHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 2001, 2000, AND 1999
(In Thousands)
- -----------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
OPERATING ACTIVITIES:
Net income (loss) $ (13,241) $ (7,608) $ 729
Noncash items included in net income (loss):
Deferred income taxes 3,538 (2,891) (12)
Depreciation and amortization 6,362 5,203 4,328
Reduction in provision for doubtful accounts 110 155 82
Amortization of unearned compensation 174 171 90
Decrease in other assets (90) (203) (49)
--------- --------- --------
Net income (loss) adjusted for noncash transactions (3,147) (5,173) 5,168
--------- --------- --------
Cash provided by (used in) operating working capital:
Trade receivables 1,453 818 435
Inventories (442) 417 (3,079)
Prepaid expenses and other 324 97 (232)
Accounts payable - trade (884) 1,298 905
Accrued expenses and other liabilities (259) (56) (64)
Income tax receivable 1,342 (491) (851)
Income taxes payable (26) 29 (439)
--------- --------- --------
Net cash provided by (used in) operating working capital 1,508 2,112 (3,325)
--------- --------- --------
Net cash provided by (used in) operating activities (1,639) (3,061) 1,843
--------- --------- --------
INVESTING ACTIVITIES:
Purchase of short-term investments (1,538) (6,199) (5,980)
Proceeds from sale of short-term investments 5,081 7,172 6,858
Acquisition of property and equipment (9,247) (1,536) (4,712)
Proceeds from disposition of property and equipment 382 - -
--------- --------- --------
Net cash used in investing activities (5,322) (563) (3,834)
--------- --------- --------
FINANCING ACTIVITIES:
Borrowings on notes payable 51,577 2,298 3,100
Repayments of notes payable (47,148) (505) (500)
Repayments of capital lease obligations (41) (317) (647)
Repayments of accounts payable - construction and equipment (304) (375) (22)
Proceeds from common stock and warrants issued 2,667 2,393 760
Common stock acquired under the Repurchase Program - - (227)
--------- --------- --------
Net cash provided by financing activities 6,751 3,494 2,464
--------- --------- --------
INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS (210) (130) 473
CASH AND CASH EQUIVALENTS:
Beginning of year 542 672 199
--------- --------- --------
End of year $ 332 $ 542 $ 672
========= ========= ========
SUPPLEMENTAL INFORMATION:
Interest paid $ 1,092 $ 745 $ 443
========= ========= ========
Income taxes (refunded) paid $ (1,268) $ (799) $ 1,524
========= ========= ========
Noncash investing and financing activities - property and
equipment acquisitions by capital leases $ 27 $ 68 $ 53
========= ========= ========
See notes to consolidated financial statements.
F-6
RF MONOLITHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - RF Monolithics, Inc. designs, develops, manufactures and
markets a broad range of radio frequency (RF) component and module
products in two areas: communications and low-power products. The
Company's products, which are based on surface acoustic wave (SAW)
technology, address the growing requirements in the electronics markets
for miniaturization, reduced power consumption, increased precision, and
greater reliability and durability. These products are incorporated into
application designs in five primary markets: the automotive, distribution,
industrial, consumer and telecommunications markets, and are sold
primarily in North America, Europe and Asia. The Company's manufacturing
operations are in Dallas, Texas and at two assembly partners in the
Philippines.
Consolidated Financial Statements include the accounts of RF Monolithics,
Inc. and its wholly owned subsidiary, RFM Export, Inc. (referred to
collectively as the "Company"). Significant intercompany balances and
transactions are eliminated in consolidation.
Financial Statement Preparation requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingencies as of the date of the financial statements and
revenues and expenses for the period. Actual results could differ
significantly from those estimates. Differences from those estimates are
recognized in the period they become known.
Revenues are recognized when products are shipped. That is the point at
which legal title passes to the customer. The standard terms and
conditions are FOB the Company's factory. The Company permits the return
of defective products and accepts limited amounts of product returns in
other instances. Accordingly, the Company provides allowances for the
estimated amounts of these returns at the time of revenue recognition.
Cash Equivalents represent liquid investments with maturities at the date
of acquisition of three months or less.
Short-Term Investments at August 31, 2000, represent primarily government
and corporate obligations with original maturities at the date of
acquisition of three or more months, which are classified as
held-to-maturity and stated at cost. Because of the nature of the
investments, the Company believes that there is very little credit risk in
them.
Inventories are stated at the lower of cost (first-in, first-out method)
or market.
Property and Equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are provided using the
straight-line method over the following estimated useful lives: machinery
and equipment, three to seven years or the related capital lease term if
shorter; leasehold improvements, three to eight years not exceeding the
lease term; computer software, three years; and office furniture, five
years.
Other Assets include legal costs of obtaining patents. These costs are
amortized over the estimated useful lives of the respective patents, which
are based on the related technology, ranging from three to seventeen
years.
F-7
Impairment of Long-lived Assets is evaluated in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed
Of," which requires an entity to review long-lived tangible and intangible
assets for impairment and recognize a loss if expected future undiscounted
cash flows are less than the carrying amount of the assets; such losses
are measured as the difference between the carrying value and the
estimated fair value of the assets. The estimated fair value is determined
based on expected discounted future cash flows. See Note 15 regarding
restructuring charges related to impairment of tangible assets. There were
no impairment charges related to intangible assets.
Financial Instruments that potentially subject the Company to an interest
and credit risk consist of cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and debt instruments,
the carrying value of which are a reasonable estimate of their fair values
due to their short maturities or variable interest rates.
Research and Development Costs are expensed as incurred. These costs do
not include nonrecurring engineering costs related to contract technology
development sales, which are included in cost of sales.
Deferred Income Taxes are provided under the asset and liability method
for temporary differences in recognition of income and expense for tax and
financial reporting purposes.
Basic Earnings (Loss) per Share is computed by dividing the net earnings
(loss) by the weighted average shares of common stock outstanding during
the period. Diluted earnings per share is similar to basic earnings per
share except that it is based on the weighted average number of common and
potentially dilutive shares (149,000 in 1999), from dilutive stock options
and warrants to purchase common stock outstanding during each year. The
dilutive effect of the options and warrants to purchase common stock are
excluded from the computation of diluted net loss per share, if their
effect is antidilutive. The number of common stock equivalents excluded
from the diluted net loss per share computation at August 31, 2001 and
2000, because they were antidilutive, were as follows:
2001 2000
Common stock options 1,612,287 1,450,463
Common stock warrants 563,332 -
--------- ---------
Total 2,175,619 1,450,463
========= =========
Stock-Based Compensation arising from stock option grants is accounted for
by the intrinsic value method under Accounting Principles Board (APB)
Opinion No. 25. Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation, requires expanded
disclosures of stock-based compensation arrangements with employees and
encourages (but does not require) compensation cost to be measured based
on the fair value of the equity instrument awarded. As permitted by SFAS
No. 123, the Company will continue to apply APB Opinion No. 25 to its
stock-based compensation awards to employees and will disclose the
required pro forma effect on net income and earnings per share (Note 8).
New Accounting Standards - SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137 and 138,
establishes standards for measuring, classifying and reporting all
derivative financial instruments in the financial statements. SFAS No. 133
is effective for the Company beginning the first quarter of fiscal year
2001. The Company currently does not use any derivative financial products
for hedging or speculative purposes and, as a result, there was no impact
on the financial statements on implementing this standard.
F-8
In June 2001, SFAS No.141 ("SFAS 141"), "Business Combinations", was
issued. SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The adoption of SFAS 141 did not have an
impact on the Company's financial statements.
In June 2001, SFAS No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets", was issued, which requires, among other things, the
discontinuance of goodwill amortization. In addition, the standard
includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of
existing recognized intangibles, reclassification of certain intangibles
out of previously reported goodwill and the identification of reporting
units for purposes of assessing potential future impairments of goodwill.
SFAS 142 also requires the Company to complete a transitional goodwill
impairment test six months from the date of adoption. The Company will
adopt SFAS No. 142 on September 1, 2002 and does not believe that the
adoption of SFAS 142 will have a significant impact on its financial
statements.
In June 2001, SFAS No.143 ("SFAS 143"), "Accounting for Asset Retirement
Obligations", was issued, which address financial accounting and reporting
for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It also applies to legal
obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of
lessees. The Company will adopt SFAS No. 143 on September 1, 2002 and does
not believe that the adoption of SFAS 143 will have a significant impact
on its financial statements.
In August 2001, SFAS No. 144 ("SFAS 144"), "Accounting for the Impairment
or Disposal of Long-Lived Assets", was issued, which address the financial
accounting and reporting for the impairment of long-lived assets. This
statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a segment of a business. The Company
will adopt SFAS No. 144 on September 1, 2002 and does not believe that the
adoption of SFAS 144 will have a significant impact on its financial
statements.
2. INVENTORIES
Inventories consist of the following (in thousands):
2001 2000
Raw materials and supplies $ 4,761 $ 6,362
Work in process 3,792 2,631
Finished goods 3,065 2,183
-------- --------
Total $ 11,618 $ 11,176
======== ========
F-9
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
2001 2000
Machinery and equipment $ 36,194 $ 25,729
Equipment under capital leases 97 2,753
Construction in progress 157 1,059
Leasehold improvements 5,262 5,854
Computer software 2,561 2,531
Office furniture 405 405
-------- ---------
Total $ 44,676 $ 38,331
Less accumulated depreciation and amortization (including $15
and $1,917 in 2001 and 2000, respectively, for capital leases) 27,928 24,268
-------- ---------
Property and equipment - net $ 16,748 $ 14,063
======== =========
Construction in progress includes equipment and other assets not yet
placed in service primarily related to increasing the capacity of the
manufacturing facilities.
4. OTHER ASSETS
Other assets consist of the following (in thousands):
2001 2000
Patents, less accumulated amortization of $528
and $451 in 2001 and 2000 respectively $ 291 $ 222
Patent deposits 61 171
Other 210 191
-------- ---------
Total $ 562 $ 584
======== =========
5. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following (in
thousands):
2001 2000
Accrued payroll and compensation $ 852 $ 1,159
Other accrued expenses 1,174 1,126
======== =========
Total $ 2,026 $ 2,285
======== =========
F-10
6. NOTES PAYABLE
Notes payable at August 31, 2001 and 2000, consist of the following (in
thousands):
2001 2000
Note payable under $13,500 revolving credit line and $3,000 term loan
facility that expires on December 31, 2003, bearing interest at prime
plus 2% (8.5% on August 31, 2001), collateralized by all accounts
receivable, inventory and equipment and subject to certain covenants
generally related to net worth, net income and capital
expenditures, net of unamortized discount of $64 at August 31, 2001 $11,327 $ -
Note payable under $6,898 revolving line-of-credit facility that expired
December 31, 2000, bearing interest at 2% over the bank's prime floating
rate or LIBOR $ - $ 6,898
------- -------
Total 11,327 6,898
Less current portion 1,400 6,898
------- -------
Long-term portion $ 9,927 $ -
======= =======
Revolving Line of Credit Facility - The Company's revolving line of credit
facility (the "Revolving Facility") with an outstanding balance of
$6,900,000 at August 31, 2000 was scheduled to expire on December 31,
2000. In December 2000, prior to expiration of the Revolving Facility the
Company entered into a new Security and Loan Agreement (the "Agreement")
with a commercial bank. The Company used to proceeds from the Agreement
and the sale of approximately $3,600,000 in short-term investments to pay
the outstanding balance on the Revolving Facility in December 2000 and to
satisfy obligations of $8,800,000 related to an equipment-collateralized
operating lease facility (leased assets were purchased for $8,300,000).
Revolving Line of Credit and Term Loan Facility - On December 8, 2000, the
Company entered into a new Security and Loan Agreement (the "Agreement")
for a total credit facility consisting of a revolving line-of-credit
facility up to $13,500,000, limited to the available borrowing base, which
is based on the levels of eligible accounts receivable and inventory, as
defined in the Agreement and a term loan facility of $3,000,000. At August
31, 2001 the balances outstanding on the revolving line of credit and term
loan were $8,826,000 and $2,565,000 respectively. Both facilities expire
on December 31, 2003, however the term loan facility requires monthly
payments of $50,000. Interest is payable monthly for both facilities. In
connection with the Agreement, the Company entered into a warrant purchase
agreement with the lender and issued warrants to purchase 30,000 shares of
the Company's common stock at an exercise price of $3.75 per share. The
warrants expire in 10 years and the fair value assigned to these warrants
of $85,000 was accounted for as a debt discount and is being amortized
over the period of the Agreement. Amortization totaling $21,000 was
expensed in 2001. At August 31, 2001 there was $1,000,000 available under
the Agreement. Expected installments to maturity are as follows (in
thousands):
Fiscal year ending August 31:
2002 $ 1,400
2003 1,400
2004 (Loan facilities terminate December 31, 2003) 8,527
=======
Total credit facility installments $11,327
=======
F-11
7. LEASES AND OTHER COMMITMENTS
The Company has entered into non-cancelable capital and operating lease
agreements for its manufacturing facility and certain equipment. Rent
expense under the operating leases in 2001, 2000, and 1999 was $1,461,000,
$2,595,000, and $1,828,000, respectively. Minimum future rental
commitments under the capital and operating leases at August 31, 2001 are
as follows (in thousands):
Capital
Lease Operating
Obligations Leases
Fiscal year ending August 31:
2002 $ 57 $ 692
2003 - 577
2004 - 6
2005 - -
2006 - -
------- ------
Total minimum payments 57 $1,275
======
Less amounts representing interest -
-------
Total present value of net minimum
lease payments at August 31, 2001 57
Less current portion 57
-------
Long-term portion $ -
=======
8. CAPITAL STOCK
Preferred stock - Preferred stock of 5,000,000 shares with $.001 par value
is authorized; none was issued at August 31, 2001 and 2000. Rights,
preferences and other terms of the preferred stock will be determined by
the Board of Directors at the time of issuance.
Common stock sales and grants - In August 2001, the Company granted 12,568
shares of restricted common stock under the 1997 Equity Incentive Plan
("1997 Plan"), valued at $46,502 in exchange for consulting services to be
performed over a twelve-month period under contracts with three
individuals. If the services are not completed as stated under the
consulting contracts the unvested shares revert back to the Company. This
right expires on August 10, 2002. The Company recorded $46,502 as unearned
compensation at the date of grant, which will be amortized over the
service period of the contract.
In August 2001, the Company granted 8,000 shares of restricted common
stock under the 1997 Plan to key employees of the Company. Based on a
share price of $3.16 per share at the measurement date, the Company
recorded unearned compensation of $25,280. The Company's right to
reacquire one-fourth of the shares granted expires on August 23, 2002,
2003, 2004, and 2005, respectively.
In August 2001, the Company granted 74,000 shares of restricted common
stock under the 1997 Plan to executive employees of the Company. Based on
a share price of $3.16 per share at the measurement date, the Company
recorded unearned compensation of $233,840. The vesting period is
quarterly over a two year period and is contingent on Company performance
goals related to revenue and income.
F-12
In December 2000, the Company sold 533,332 unregistered shares of common
stock to a group of investors for $2,000,000 ($3.75 per share), net of
expenses of $90,000. Two of the investors are members of the Company's
board of directors. These two board members purchases 56,666 shares under
the same terms and conditions as the entire placement. The 56,666 shares
were issued out of the 1997 Equity and Incentive Plan at the $3.75 per
share price. The stock purchase agreement called for certain restrictions
on the sale or further acquisition of stock by the investors, as well as
the right to require registration in the future. The proceeds of the sale
of this stock will be used to support the operations of the Company.
Attached to the common stock were warrants to purchase 533,332 shares of
the Company's common stock at an exercise price of $7.50 per share and are
exercisable for three years from the date of grant. The Company determined
the value of the warrants to be $715,000 based on the Black-Scholes model.
In December 2000, the Company granted 26,000 shares of restricted common
stock under the 1997 Plan to key employees of the Company. Based on a
share price of $3.875 per share at the measurement date, the Company
recorded unearned compensation of $100,750. The shares vest over a four
year period and any unvested shares revert back to the Company. During
2001, certain employees who were originally granted 5,000 shares
terminated their employment with the Company. Compensation expense related
to these common stock grants was approximately $14,000 in 2001.
In January 2000, the Company granted 10,400 shares of restricted common
stock under the 1997 Plan to consultants of the Company. Based on a share
price of $7.56 per share the Company recorded unearned compensation of
$78,650. The shares vest over a four year period and any unvested shares
revert back to the Company. During 2000, one consultant who was originally
granted 2,400 shares completed his contract with the Company. The Company
allowed this consultant to retain all rights in the previously unvested
shares and revalued the unvested portion of these shares. Compensation
expense related to these common stock grants was approximately $15,000 and
$26,000 in 2001 and 2000, respectively.
In April 1999, the Company granted 73,700 shares of its restricted common
stock under the 1997 Plan to key employees of the Company. Based on a
share price of $6.06 per share at the measurement date, the Company
recorded unearned compensation of $446,800. The shares vest over a four
year period and any unvested shares revert back to the Company. During
2000 and 2001, certain employees who were originally granted 16,800 and
13,925 shares, respectively, terminated their employment with the Company
and forfeited 10,925 and 8,475 shares of unvested restricted stock in 2001
and 2000, respectively. In 2000, the Company allowed certain terminating
employees to retain 6,200 previously unvested shares. These unvested
shares were revalued on the date of termination and the Company recorded
compensation expense. Compensation expense related to these common stock
grants was approximately $64,000, $124,000 and $34,000 in 2001, 2000 and
1999, respectively.
In January 1995 the Company granted 51,700 shares of restricted common
stock under the 1997 Plan to key employees of the Company. Based on a
share price of $7.00 per share at the measurement date, the Company
recorded unearned compensation of $361,900. The shares vest over a four
year period and any unvested shares revert back to the Company.
Compensation expense related to these common stock grants was
approximately $16,000 and $56,000 in 2000 and 1999, respectively.
F-13
Stock Options - In 1999, the Company adopted the 1999 Incentive Stock
Option Plan (the "1999 Plan"). The Company initially authorized for grant
200,000 shares of common stock, and in fiscal 2000 and 2001, increased
this amount to 401,200 and 701,200, respectively. Under the terms of the
1999 Plan, incentive options to purchase common stock and stock bonuses
and rights to purchase restricted stock may be granted to non-officer
employees at the discretion of the board of directors and subject to
certain restrictions. Generally, one forty-eighth of the shares optioned
become exercisable each month beginning the first day of the month
following the date of grant. The exercise price of each option equals the
market price of the Company's stock on the date of grant and the options
expire ten years after the date of grant. At August 31, 2001, there are
592,141 options outstanding and 96,989 options available for grant under
this plan. A summary of the activity for the 1999 Plan follows:
2001 2000 1999
-------------------------- ---------------------------- -------------------------
Weighted Weighted Weighted
-average -average -average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ------------ -------------- ------------- ----------- ------------
Outstanding at beginning of year 341,444 $7.2014 115,055 $6.2113 - -
Granted 359,000 $3.6140 304,200 $7.5428 135,500 $6.1888
Exercised (328) $5.4333 (10,256) $7.0652 (1,486) $6.0625
Expired (107,975) $6.5335 (67,555) $7.0735 (18,959) $6.0625
------------ -------------- -----------
Outstanding at end of year 592,141 $5.1492 341,444 $7.2014 115,055 $6.2113
============ ============== ===========
Options exercisable at year-end 156,241 $6.4263 67,262 $6.9539 8,941 $6.1560
============ ============== ===========
Under the terms of the 1997 Plan, the Company has authorized for grant
1,575,000 shares of common stock. Under terms of the 1997 Plan,
nonqualified and incentive options to purchase common stock, and stock
bonuses and rights to purchase restricted stock may be granted to key
employees, directors or consultants at the discretion of the board of
directors and subject to certain restrictions. Generally, one forty-eighth
of the shares optioned become exercisable each month beginning the first
day of the month following the date of grant. The exercise price of
each option equals the market price of the Company's stock on the date of
grant and the options expire ten years after the date of grant. Included
in fiscal 2001 below are 56,666 shares issued to and exercised by two
board members as part of the December 2000 sale of stock. At August 31,
2001, there are 846,728 options outstanding and 194,687 options available
for grant under this plan. The summary of the 1997 Plan below includes
restricted stock grants, expired and exercised of 177,234, 15,925 and
161,309, respectively for fiscal year 2001. The summary of activity for
the 1997 Plan follows:
2001 2000 1999
-------------------------- ---------------------------- -------------------------
Weighted Weighted Weighted
-average -average -average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ------------ -------------- ------------- ----------- ------------
Outstanding at beginning of year 856,458 $9.0586 853,058 $9.1878 753,902 $9.9690
Granted 368,234 $4.1373 268,900 $9.1358 249,000 $7.0960
Exercised (162,309) $3.3124 (152,376) $8.5986 (28,054) $7.4508
Expired (215,655) $9.2795 (113,124) $11.1288 (121,790) $10.1447
------------ -------------- -----------
Outstanding at end of year 846,728 $7.9712 856,458 $9.0586 853,058 $9.1878
============ ============== ===========
Options exercisable at year-end 436,452 $8.6963 374,517 $8.9575 386,277 $8.9605
============ ============== ===========
F-14
Under terms of the 1986 Stock Option Plan (1986 Plan), nonqualified
options to purchase common stock may be granted to key employees and
consultants at the discretion of the board of directors, subject to
certain restrictions. Generally, one forty-eighth of the shares optioned
become exercisable each month beginning the first day of the month
following the date of grant. The exercise price of each option equals
the market price of the Company's stock on the date of grant and the
options expire ten years after the date of grant. The Company has
authorized a total of 712,501 shares of common stock for issuance under
the 1986 Plan. At August 31, 2001, there are 22,650 options outstanding
and 21,037 options available for grant under this plan. A summary of the
activity for the 1986 Plan is as follows:
2001 2000 1999
-------------------------- ---------------------------- -------------------------
Weighted- Weighted- Weighted-
average average average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ------------ -------------- ------------- ----------- ------------
Outstanding at beginning of year 111,283 $2.1292 214,036 $1.6899 227,616 $1.5078
Granted - - - - 10,000 $7.6250
Exercised (85,981) $1.1332 (101,491) $1.1742 (18,425) $1.0396
Expired (2,652) $7.1283 (1,262) $4.4290 (5,155) $7.4902
------------ -------------- -----------
Outstanding at end of year 22,650 $5.3247 111,283 $2.1292 214,036 $1.6899
============ ============== ===========
Options exercisable at year-end 21,120 $5.1581 108,529 $1.9897 210,058 $1.5775
============ ============== ===========
Under the terms of the Non-Employee Director Stock Option Plan (Director
Plan), options to purchase common stock may be granted every January 1 to
each director who is not an officer of the Company. One-fourth of the
shares optioned become exercisable on the first anniversary of the date of
grant and one forty-eighth of the shares optioned become exercisable each
month thereafter, with all options fully exercisable four years after the
date of grant. The exercise price of each option equals the market price
of the Company's stock on the date of grant and the options expire ten
years after the date of grant. The Company has authorized a total of
275,000 shares of common stock for issuance under the Director Plan. At
August 31, 2001, there are 150,768 options outstanding and 117,000 options
available for grants. A summary of the activity for the Director Plan is
as follows:
2001 2000 1999
-------------------------- ---------------------------- -------------------------
Weighted- Weighted- Weighted-
average average average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ------------ -------------- ------------- ----------- ------------
Outstanding at beginning of year 141,278 $10.7939 131,768 $12.0362 109,268 $12.6100
Granted 18,000 $4.8750 22,500 $6.1250 22,500 $9.2500
Exercised - - - - - -
Expired (8,510) $24.5116 (12,990) $15.3095 - -
------------ -------------- -----------
Outstanding at end of year 150,768 $9.3129 141,278 $10.7939 131,768 $12.0362
============ ============== ===========
Options exercisable at year-end 113,590 $10.2180 102,570 $11.1944 81,383 $10.6479
============ ============== ===========
Options under the above plans are granted at prices equal to or greater
than the fair value of the common stock at grant dates as determined by
the board of directors.
F-15
The following table summarizes information about stock options outstanding
at August 31, 2001 for all four plans:
Options Outstanding Options Exercisable
-------------------------------------------------- ----------------------------------
Weighted-
average
Number Remaining Number
Outstanding Contractual Weighted-average Exercisable at Weighted-average
Range of Exercise Prices at 8/31/01 Life Exercise Price 8/31/01 Exercise Price
- ------------------------------ --------------- --------------- ---------------- ---------------- ----------------
$ 0.6000 to $ 1.5000 4,506 1.98 years $1.3989 4,506 $1.3989
$ 2.4000 to $ 3.9500 404,000 9.58 years $3.5617 36,569 $3.7203
$ 4.5000 to $ 7.5000 691,173 7.48 years $6.2664 353,036 $6.3147
$ 7.5625 to $ 11.3750 351,108 7.13 years $9.4335 222,575 $9.5097
$ 11.8750 to $ 27.0625 161,500 7.05 years $13.8369 110,717 $14.2789
Employee Stock Purchase Plan - In 1994, the Company adopted an employee
stock purchase plan (Purchase Plan). In connection with the adoption of
the Purchase Plan, the Company initially reserved 175,000 shares of its
common stock. During January 1998 and 2000, the Company increased the
number of shares available under the plan to 350,000 and 525,000 shares of
common stock, respectively. Under terms of the Purchase Plan, rights to
purchase common stock may be granted to eligible employees at the
discretion of the board of directors, subject to certain restrictions. The
Purchase Plan enables eligible employees of the Company to purchase shares
of common stock at not less than 85% of the fair market value of the
common stock at the determination date through payroll withholding. A
summary of the activity for the employee stock purchase plan is as
follows:
Purchase
Shares Proceeds
Purchases:
As of September 1, 1997 92,464 $ 530,917
1998 117,117 827,666
1999 60,178 485,524
2000 68,653 350,130
2001 135,293 486,040
--------- ------------
Total 473,705 $ 2,680,277
========= ============
F-16
Common Shares reserved at August 31, 2001, for possible future conversion or
issuance are as follows:
Options granted:
1999 Plan 592,141
1997 Plan 846,728
1986 Plan 22,650
Director Plan 150,768
----------
Total shares contingently issuable 1,612,287
Options and purchase rights available for grants:
1999 Plan 96,989
1997 Plan 194,687
1986 Plan 21,037
Director Plan 117,000
Purchase Plan 51,295
----------
Total 481,008
----------
Total common shares reserved 2,093,295
==========
Stock-Based Compensation - The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its stock option plans. No compensation cost
(generally measured as the excess, if any, of the quoted market price of the
common stock at the date of the grant over the amount an employee must pay to
acquire the common stock) has been recognized for the Company's employee and
director stock option plans. SFAS No. 123 prescribes a method to record
compensation cost for stock-based employee compensation plans at fair value, but
allowed disclosure as an alternative. Pro forma disclosures as if the Company
had adopted the cost recognition requirements under SFAS No. 123 are presented
below. The pro forma compensation cost may not be representative of that
expected in future years.
Years Ended
--------------------------------------------
2001 2000 1999
Net (loss) income (in thousands):
As reported $ (13,241) $ (7,608) $ 729
Pro forma (15,048) (8,774) (344)
Earnings (loss) per share - diluted:
As reported $ (1.97) $ (1.26) $ 0.12
Pro forma (2.24) (1.45) (0.05)
Stock options issued 745,234 595,600 490,700
Weighted average exercise price $ 3.90 $ 8.21 $ 5.58
Average compensation value of options
granted per option $ 1.93 $ 3.60 $ 3.95
Compensation cost (for current-year grants) was calculated in accordance with
the binomial model, using the following assumptions: (i) expected volatility
computed using the monthly average of the Company's common stock market price as
listed on the New York Stock Exchange for the period July 28, 1994, date of the
Company's initial public offering, through August 2001, which market price
volatility averaged 70%; (ii) expected dividend yield of 0%; (iii) expected
option term of six years; and (iv) risk-free rate of return as of the date of
grant, which ranged from 5.5% to 6.5%, based on extrapolated yield of five- and
seven-year U.S. Treasury securities.
F-17
Stock Options for Employees Converting to Consultants - During the fourth
quarter of 2000, two employees of the Company terminated employment and entered
into consulting agreements to perform certain activities. Under guidance of FASB
Interpretation 44, the Company recorded $52,000 of unearned compensation
relating to the unvested portion of stock options held by these employees. The
unearned compensation is to be expensed over the remaining vesting periods or
the consulting periods whichever is shorter. The remaining unvested options at
the end of the consulting period will be cancelled. Compensation expense for
these vesting options was approximately $31,000 and $5,000 in 2001 and 2000
respectively.
Stock Options for Consultants -In December 2000, the Company granted options to
purchase 8,000 shares of its common stock to two consultants for services to be
rendered to the Company have exercise prices of $3.8 and are exercisable for a
term of four years from the date of grant. The options vest 1/48 per month over
the four year period. The Company recorded the initial value of these options
based on the Black-Scholes model totaling approximately $16,000, as unearned
compensation on the date of grant. The Company is amortizing this amount as
compensation expense over the consulting period and is revaluing the unvested
portion of the options over the period. In July 2001, one of the consultants
became employed by the Company. The unvested portion of the options were
revalued and based on the lower stock price of the Company on the date of
revaluation no compensation expense for the remaining vesting period of the
options will be required and the remaining related deferred compensation was
reversed. The Company also revalued the remaining consultants options on August
31, 2001, and based on the lower stock price, it reduced the amount of unearned
compensation for the unvested options to $5,400. The Company recognized
compensation expense of approximately $2,700 in 2001 related to these options.
In September 2000, the Company granted options to purchase 20,000 shares of its
common stock to four consultants for services to be rendered to the Company. The
options have an exercise price of $6.625 and are exercisable for a term of four
years from the date of grant. The options vest 1/48 per month over the four year
period. The Company recorded the initial value of these options based on the
Black-Scholes model totaling approximately $35,000, as unearned compensation on
the date of grant. The Company is amortizing this amount as compensation expense
over the consulting period and is revaluing the unvested portion of the options
over the period. The Company revalued the options on August 31, 2001, and based
on the lower stock price, it reduced the amount of unearned compensation for the
unvested options to approximately $14,000. The Company recognized compensation
expense of approximately $7,300 in 2001 related to these options.
In February 2000, the Company granted options to purchase 2,400 shares of its
common stock to a consultant. The options were originally valued at
approximately $44,500 under the Black-Scholes model and vest 1/48 per month over
a four year period. In September 2000, the consultant terminated the consulting
contract with the Company for which the options were granted. The Company
accelerated the vesting of the options and made all options exercisable on the
date of termination of the contract. On this date the Company revalued the
unvested portion of the options and recorded compensation expense of
approximately $40,000.
F-18
Stockholder Rights Plan - In December 1994, the Company adopted a
stockholder rights plan. In connection with the adoption of such plan, the
Company reserved 250,000 shares of its Series A Junior Participating
Preferred Stock, $.001 par value, and declared a dividend of one preferred
share purchase right (a "Right") for each outstanding share of common
stock, par value $.001 per share (the "Common Shares"), of the Company.
The dividend of 4,965,847 Rights was issued to the stockholders of record
on January 16, 1995. Each Right entitles the registered holder to purchase
from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $.001 per share (the "Preferred
Shares"), at a price of $74.40 per one one-hundredth of a Preferred Share,
subject to adjustment. The Rights become exercisable on the earlier of the
tenth day after the public announcement of acquisition by a person or
group of persons, not including an exempt person as defined by the
stockholder rights plan, of 15% or more of the Company's common shares
outstanding on the tenth business day after the date of first public
announcement of the intention of a person or group of persons to commence
a tender or exchange offer to acquire 15% or more of the Company's common
shares outstanding. When issued, the Preferred Shares have dividend and
voting rights that are defined in the Rights plan. The Rights may be
redeemed by the Company at a redemption price of $.01 per Right in
accordance with the Rights plan, and the Rights expire on December 20,
2004.
9. EXPORT SALES
Export sales to foreign markets are as follows (in thousands):
2001 2000 1999
------------------------- ------------------------- ----------------------------
As a As a As a
Percentage Percentage Percentage
of Total of Total of Total
Sales Revenue Sales Revenue Sales Revenue
Export sales:
France $ 3,966 7.7% $ 6,279 13.3% $ 6,001 11.7%
Germany 4,143 8.0% 5,275 11.2% 6,120 11.9%
Other European 8,662 16.7% 6,094 12.9% 7,639 14.9%
Asia 7,423 14.3% 8,793 18.6% 7,150 13.9%
Other 2,499 4.8% 2,820 6.0% 2,082 4.1%
---------- -------- ---------- ------- ---------- -------
Total export sales $ 26,693 51.5% $ 29,261 61.9% $ 28,992 56.5%
========== ======= ========== ======= ========== =======
There are no assets separately identified with foreign sales, and the
profitability of such sales is similar to that of domestic sales.
10. CONCENTRATION OF CREDIT RISK
For fiscal 2001, only one customer had 10% or more of the total Accounts
Receivable and /or Sales. Insight Electronics was 11.5% of the trade
receivables at August 31, 2001 and 10.5% of the total year sales. No
customer had 10% or more of Accounts Receivable or Sales in fiscal 2000.
Purchases from two significant vendors represented 10.0% and 14.8% of
trade accounts payable at August 31, 2001 with 5.4% and 12.0% being the
percent of annual purchases to total Cost of Sales for the fiscal year
2001. For fiscal 2000, one vendor had 10.8% of trade accounts payable at
August 31, 2000 with 14.0% being the percent of annual purchases to total
Cost of Sales.
F-19
11. INCOME TAXES
The tax effects of significant items comprising the Company's net deferred
income taxes as of August 31, 2001 and 2000 are as follows (in thousands):
2001 2000
Net operating losses $ 5,496 2,199
Accruals and valuation allowances not currently deductible 786 194
Inventory costs capitalized for tax purposes 88 501
Tax credit carryforwards 878 994
Less: Valuation allowance (7,248) (350)
--------- -------
Total deferred income tax benefit $ -- $ 3,538
========= =======
The resulting income tax expense (benefit) is shown below (in thousands):
2001 2000 1999
Current - federal $ 101 $ (752) $ 232
Current - state 34 29 49
Deferred expense (benefit) 3,538 (2,891) (12)
-------- --------- -------
$ 3,673 $ (3,614) $ 269
======== ========= =======
A reconciliation between income taxes computed at the federal statutory
rate and income tax expense is shown below (in thousands):
2001 2000 1999
Income taxes (benefit) computed at federal statutory rate $ (3,253) $ (3,817) $ 339
State income tax expense - net of federal
income tax benefit 22 19 11
Expenses not deductible for tax purposes 13 11 17
Change in valuation allowance 6,898 350 -
Effect on tax of foreign sales corporation - - (98)
Other (7) (177) -
-------- --------- -------
Total income tax expense (benefit) $ 3,673 $ (3,614) $ 269
======== ========= =======
In accordance with FAS 109, in the fourth quarter of 2001, the Company
established a full valuation allowance of $7,248,000 against deferred tax
benefits that were included on its balance sheet as of the first day of
2001's fourth quarter. Recent losses, including the restructuring and
other special charges recorded in August 2001, as well as the general
economic environment, made taking the reserve appropriate. The Company
retains the tax benefits involved and will realize the benefit in future
periods to the extent the Company is profitable. As of August 31, 2001,
the Company has income tax loss carryforwards of $16,164,628, $265,751,
$576,911 and $35,341 related to net operating losses, alternative minimum
federal income tax benefits, general business credits and foreign tax
credits respectively, available to reduce future federal income tax
liabilities. The net operating loss carryforward begin to expire August
31, 2020.
F-20
12. EMPLOYEE BENEFIT PLAN
The Company has a profit sharing plan under Section 401(k) of the Internal
Revenue Code, which covers substantially all employees. The Company may
match employee contributions at a rate determined by the board of
directors. Matching contributions of $120,000 and $140,000 were made in
2001 and 1999, respectively. No matching contributions were made in 2000.
13. LITIGATION
The Company is from time to time involved in routine litigation incidental
to the conduct of its business. Based upon discussions with legal counsel,
management believes that any litigation currently pending will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
Litigation the Company had been involved in with Akom Technologies, Inc.
and Raytheon Company was settled in the first quarter of Fiscal 2001 and
the impact on earnings was included in the computation of litigation
expense in the fourth quarter results of fiscal 2000.
14. QUARTERLY INFORMATION (UNAUDITED)
Selected unaudited quarterly financial data is as follows (in thousands,
except per-share amounts):
Fiscal 2001 Quarter Ended Fiscal 2000 Quarter Ended
---------------------------------------------- -----------------------------------------------
Nov. 30 Feb. 28 May 31 Aug. 31 Nov. 30 Feb. 29 May 31 Aug. 31
Sales $ 12,181 $ 11,981 $ 15,094 $ 12,515 $ 9,329 $ 12,186 $ 12,697 $ 13,044
Cost of sales 10,826 10,623 12,279 11,869 10,766 10,817 10,642 11,025
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 1,355 1,358 2,815 646 (1,437) 1,369 2,055 2,019
Operating expenses:
Research and development 1,001 1,121 886 844 1,231 1,026 1,263 1,180
Sales and marketing 1,417 1,538 1,508 1,285 1,496 1,501 1,493 1,557
General and administrative 709 864 844 767 1,265 705 746 830
Restructuring -- -- -- 1,399 -- -- -- --
Litigation -- -- -- -- -- -- -- 301
-------- -------- -------- -------- -------- -------- -------- --------
Total 3,127 3,523 3,238 4,295 3,992 3,232 3,502 3,868
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from operations (1,772) (2,165) (423) (3,649) (5,429) (1,863) (1,447) (1,849)
Other income (expense), net (277) (329) (399) (554) (124) (150) (154) (206)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes (2,049) (2,494) (822) (4,203) (5,553) (2,013) (1,601) (2,055)
Income tax expense (benefit) (717) (873) (288) 5,551 (1,694) (614) (488) (818)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $ (1,332) $ (1,621) $ (534) $ (9,754) $ (3,859) $ (1,399) $ (1,113) $ (1,237)
======== ======== ======== ======== ======== ======== ======== ========
Earnings per share:
Basic $ (0.21) $ (0.24) $ (0.08) $ (1.40) $ (0.65) $ (0.23) $ (0.18) $ (0.20)
======== ======== ======== ======== ======== ======== ======== ========
Diluted $ (0.21) $ (0.24) $ (0.08) $ (1.40) $ (0.65) $ (0.23) $ (0.18) $ (0.20)
======== ======== ======== ======== ======== ======== ======== ========
Weighted average common
shares outstanding:
Basic 6,207 6,834 6,857 6,948 5,894 5,983 6,116 6,191
======== ======== ======== ======== ======== ======== ======== ========
Diluted 6,207 6,834 6,857 6,948 5,894 5,983 6,116 6,191
======== ======== ======== ======== ======== ======== ======== ========
F-21
15. RESTRUCTURING
In the fourth quarter of fiscal 2001, the Company recorded restructuring
expenses of approximately $1.4 million. The restructuring expenses consist
of a fixed asset charge of $1.0 million was taken to write down or write
off fixed assets that will no longer be required due to the move of
certain manufacturing lines overseas and a charge of $400,00 for severance
costs. The Company reduced its workforce by a total of approximately 232
during the fourth quarter of fiscal year 2001 and the first quarter of
fiscal year 2002. This reduction occurred in the manufacturing and
manufacturing support departments of those operations moving overseas.
Communication of workforce reduction plans occurred prior to August 31,
2001.
The following represents a rollforward of the restructuring accrual set up
in the fourth quarter of fiscal 2001, which is included in property &
equipment and accrued expenses in the accompanying financial statements
(in thousands):
Accrual for restructuring costs $ 1,399
Severance payments to employees (47)
Fixed assets disposed of (430)
-------
Balance at August 31, 2001 $ 922
=======
******
F-22
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
3.1 Restated Certificate of Incorporation of Registrant. (2)
3.2 Bylaws of Registrant. (2)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen Stock Certificate. (2)
4.3 Rights Agreement dated as of December 20, 1994. (15)
4.4 First Amendment to Rights Agreement dated August 14, 1996. (16)
4.5 Second Amendment to Rights Agreement dated December 11, 2000. (18)
4.6 Form of Unit Subscription Agreement for Common Stock and Warrants
between the Registrant and certain investors dated December 11,
2000. (19)
4.7 Form of Common Stock Purchase Warrant between Registrant and certain
investors. (19) Form of Registration Rights Agreement between
Registrant and certain investors dated
4.8 December 11, 2000. (19)
10.1 Form of Indemnity Agreement entered into by the Registrant and each
of its officers and directors. (1)
10.2 1982 Incentive Stock Option Plan, as amended and related grant
forms. (1)
10.3 1982 Supplemental Stock Option Plan, as amended and related grant
forms. (1)
10.4 1986 Incentive Stock Option Plan, as amended and related grant
forms. (1)
10.5 1986 Supplemental Stock Option Plan, as amended and related grant
forms. (1)
10.6 Form of Employee Stock Purchase Plan. (1)
10.7 Form of Employee Stock Purchase Plan Offering. (1)
10.8 Non-Employee Director's Stock Option Plan. (2)
10.9 Form of Non-Employee Director's Stock Option. (1)
10.10 Lease Agreement between the Registrant and Jeff Yassai. (2)
10.11 Lease Agreement between the Registrant and JFC Growth Fund, Ltd. (2)
10.12 Transfer Agreement between the Registrant and Peter V. Wright, dated
October 31, 1990. (1)
10.13 Agreement regarding payment due under the October 31, 1990, Transfer
Agreement between the Registrant and Peter V. Wright, dated March
30, 1994. (1)
10.14 Letter Agreement by and between the Registrant and Comerica Bank -
Texas, dated January 1, 1994. (1)
10.15 Promissory Note between the Registrant and Comerica Bank - Texas,
dated December 1, 1994. (3)
10.16 Promissory Note between the Registrant and Comerica Bank - Texas,
dated March 1, 1995. (4)
10.17 Master Lease Agreement between Registrant and Banc One Leasing
Corporation, dated November 3, 1995. (5)
10.18 Form of Restrictive Stock Bonus Agreement to be entered November 30,
1995. (6)
10.19 Loan Letter Agreement and Promissory Note between the Registrant and
Bank One, Texas, N.A. dated March 8, 1996. (7)
10.20 Promissory Note between the Company and Gary A. Andersen dated March
28, 1996. (7)
10.21 Change of Control Agreement between the Company and Gary A. Andersen
and Sam L. Densmore dated December 18, 1995. (7)
10.22 Separation and Consulting Agreement between the Company and Gary A.
Andersen dated August 13, 1996. (8)
1
10.23 Form of Change of Control Agreement for certain officers. (9)
10.24 Separation and Consulting Agreement between the Company and Chris G.
Conlin dated June 10, 1998. (10)
10.25 Form of Restricted Stock Bonus Agreement. (11)
10.26 1999 Equity Incentive Plan. (11)
10.27 Form of Notice of Grant of Stock Options and Grant Agreement. (11)
10.28 Promissory Note between the Company and James P. Farley dated
November 30, 1999. (12)
10.29 Promissory Note between the Company and Darrell Ash dated November
30, 1999. (12)
10.30 Separation Agreement between the Company and Sam L. Densmore dated
November 11, 1999. (12)
10.31 Waiver and Third Amendment to Loan Agreement, dated as of February
29, 2000, among RF Monolithics, Inc., Banc One Leasing Corporation,
and Bank One, Texas, National Association. (13)
10.32 Promissory Note, dated February 29, 2000, in the principal amount of
$7,500,000, executed and delivered by RF Monolithics, Inc. to Bank
One, Texas, National Association. (13)
10.33 Waiver and Amendment to Master Lease Agreement dated as of February
29, 2000, by and between RF Monolithics, Inc. and Banc One Leasing
Corporation. (13)
10.34 Collateral Pledge Agreement dated as of May 31, 2000, by RF
Monolithics, Inc. in favor of Bank One, Texas, National Association.
(14)
10.35 Waiver and Fourth Amendment to Loan Agreement, dated as of May 31,
2000, among RF Monolithics, Inc., Banc One Leasing Corporation, and
Bank One, Texas, National Association. (14)
10.36 Promissory Note, dated May 31, 2000, in the principal amount of
$7,500,000, executed and delivered by RF Monolithics, Inc. to Bank
One, Texas, National Association. (14)
10.37 Waiver and Amendment to Master Lease Agreement dated as of May 31,
2000, by and between RF Monolithics, Inc. and Banc One Leasing
Corporation. (14)
10.38 Separation Agreement between the Company and Thomas Phillips, Jr.
dated July 14, 2000. (17)
10.39 Consulting Agreement between the Company and Tom Garrett dated June
28, 2000. (17)
10.40 Promissory Note, dated May 12, 1999, in the principal amount of
$19,500.00, executed and delivered by RF Monolithics, Inc. to David
Kirk. (17)
10.41 Consulting Agreement between the Company and Michael Bernique dated
June 23, 1999. (17)
10.42 Credit and Security Agreement between Registrant and Wells Fargo
Business Credit, Inc. dated as of December 8, 2000. (19)
10.43 Revolving Note between Registrant and Wells Fargo Business Credit,
Inc. dated as of December 8, 2000. (19)
10.44 Term Note between Registrant and Wells Fargo Business Credit, Inc.
dated as of December 8, 2000. (19)
10.45 Registration Rights Agreement between Registrant and Wells Fargo
Business Credit, Inc. dated as of December 8, 2000. (19)
10.46 Warrant Agreement between Registrant and Wells Fargo Business
Credit, Inc. dated as of December 8, 2000. (19)
10.47 Credit Agreement between Registrant and Wells Fargo Bank Minnesota,
N.A. dated as of December 8, 2000. (19)
2
10.48 Revolving Note between Registrant and Wells Fargo Bank Minnesota,
N.A. dated as of December 8, 2000. (19)
10.49 Export-Import Bank of the United States Working Capital Guarantee
Program Borrower's Agreement dated as December 8, 2000. (19)
10.50 Promissory Note, dated January 29, 2001, in the principle amount of
$41,768.74, executed and delivered by RF Monolithics, Inc. to David
T. Somerville.(19)
10.51 Manufacturing Agreement between Registrant and Automated Technology
(Phil.) Inc. Electronics Corporation dated February 22, 2001. (20)
10.52 Manufacturing Agreement between Registrant and Cirtek Electronics
Corporation dated March 23, 2001. (20)
10.53 First Amendment to Credit and Security Agreement between Registrant
and Wells Fargo Business Credit, Inc. dated March 30, 2001. (20)
10.54 First Amendment to Credit and Security Agreement between Registrant
and Wells Fargo Bank Minnesota, N.A. dated March 30, 2001. (20)
10.55 Amendment 1 to manufacturing agreement between Registrant and Cirtek
Electronics Corporation dated June 1, 2001. (20)
10.56 Manufacturing and Technical Support Agreement between Registrant and
Morioka Seiko Instruments Inc. dated June 11, 2001. (20)
10.57 Second Amendment to Credit and Security Agreement between Registrant
and Wells Fargo Business Credit, Inc. dated August 23, 2001. (21)
10.58 Second Amendment to Credit and Security Agreement between Registrant
and Wells Fargo Bank Minnesota, N.A. dated August 23, 2001. (21)
10.59 Amendment 1 to manufacturing agreement between Registrant and
Automated Technology (Phil.) Inc. Electronics Corporation dated July
19, 2001. (21)
11.1 Computation of net income per share. (21)
23.1 Consent of Deloitte & Touche LLP, Independent Auditors. (21)
24.1 Power of Attorney. See page 29.
(1) Previously filed as an exhibit to the Registration Statement on Form S-1,
as amended (Registration No. 33-78040) and incorporated herein by
reference.
(2) Previously filed as an exhibit to the Annual Report on Form 10-K for the
year ended August 31, 1994, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended November 30, 1994, and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended February 28, 1995, and incorporated herein by
reference.
(5) Previously filed as an exhibit to the Annual Report on Form 10-K for the
year ended August 31, 1995, and incorporated herein by reference.
(6) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended November 30, 1995, and incorporated herein by
reference.
(7) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended February 29, 1996, and incorporated herein by
reference.
(8) Previously filed as an exhibit to the Annual Report on Form 10-K for the
year ended August 31, 1996, and incorporated herein by reference.
(9) Previously filed as an exhibit to the Annual Report on Form 10-K for the
year ended August 31, 1997, and incorporated herein by reference.
3
(10) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended May 31, 1998, and incorporated herein by reference.
(11) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended May 31, 1999, and incorporated herein by reference.
(12) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended November 30, 1999, and incorporated herein by
reference.
(13) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended February 29, 2000, and incorporated herein by
reference.
(14) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended May 31, 2000, and incorporated herein by reference.
(15) Previously filed as an exhibit to the Form 8-K file December 29, 1994,
and incorporated herein by reference.
(16) Previously filed as an exhibit to the Form 8-K file December 19, 1996,
and incorporated herein by reference.
(17) Previously filed as an exhibit to the Annual Report on Form 10-K for
the year ended August 31, 2000, and incorporated herein by reference.
(18) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended November 30, 2000, and incorporated herein by
reference.
(19) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended February 28, 2001, and incorporated herein by
reference.
(20) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended May 31, 2001, and incorporated herein by reference.
(21) Filed as an exhibit to this Annual Report on Form 10-K.
4