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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended August 31, 1996
Commission File No. 0-24414
RF Monolithics, Inc.
(Exact name of Registrant as specified in its charter)
--------------------------------------------------------
Delaware 75-1638027
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification)
4441 Sigma Road, Dallas, Texas 75244
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-2903
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK .001 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of November 15, 1996, was $34,681,072. 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.
The number of shares outstanding of the Registrant's Common Stock was 5,340,271
as of November 15, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Definitive Proxy Statement to be filed with the Commission pursuant
to Regulation 14A in connection with the 1997 Annual Meeting is incorporated
herein by reference into Part III of this Report.
RF MONOLITHICS, INC.
FORM 10-K
YEAR ENDED AUGUST 31, 1996
Table of Contents
Item
Number Page
- ------ ----
PART I.
1. Business............................................................ 2
2. Facilities.......................................................... 10
3. Legal Proceedings................................................... 11
4. Submission of Matters to a Vote of Security Holders................. 11
PART II.
5. Market for Registrant's Common Stock and Related Stockholder Matters 11
6. Selected Financial Data............................................. 12
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 13
8. Financial Statements and Supplementary Data......................... 19
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure................................................ 19
PART III.
10. Directors and Executive Officers of the Registrant.............. 19
11. Executive Compensation.......................................... 19
12. Security Ownership of Certain Beneficial Owners and Management.. 20
13. Certain Relationships and Related Transactions.................. 20
PART IV.
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 20
PART I.
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this section, as well as in the sections entitled
"Legal Proceedings," "Selected Financial Data" and "Management's Discussion and
Analysis" in this report.
ITEM 1. BUSINESS
RF Monolithics, Inc. ("RFM" or the "Company") designs, develops, manufactures
and markets a broad range of radio frequency ("RF") component and module
products in four areas: low-power components, low-power Virtual Wire(R) radio
systems, frequency control modules and filters. 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 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.
The Company focuses its product development in the frequency range of 50
megahertz ("MHz") to 2,400 MHz and above. The Company markets its line of more
than 500 resonators, filters, clocks, oscillators, custom modules and radio
systems to original equipment manufacturers ("OEMs") world-wide, including Delco
Electronics, Digital Equipment Corporation, Siemens Automotive, Silicon
Graphics, Inc. and Code-Alarm, Inc.
Background
The Company believes that a significant market opportunity for more
widespread adoption of SAW technology is emerging. As electronic applications
increase in 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 which are not effectively addressed
by traditional RF approaches.
SAW-technology-based discrete components, modules and RF systems combine a
complex mix of software-controlled design rules, wafer fabrication, hybrid
assembly and packaging processes to meet stringent customer and governmental
compliance requirements. The earliest SAW applications were developed for high-
level military systems for electronic warfare and volume consumer products such
as TVs and VCRs. The unique features of SAW technology provide flexible
solutions to systems designers defining tomorrow's emerging applications across
multiple market segments.
Markets and Applications
The Company focuses on specific market opportunities where the Company
believes that its SAW technology solutions coupled with its RF design expertise
address current and emerging market and application requirements. The Company
offers products in four rapidly growing areas: low-power
2
components, low-power Virtual Wire(R) radio systems, frequency control modules
and filters. These products are incorporated into application designs in the
five primary markets: automotive, computer, industrial, consumer and
telecommunications.
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 run flat tire and immobilizer
theft-deterrent systems. Automotive electronic applications continue to grow
with the unending drive toward smaller size, reduced cost and improved system
performance. These market requirements are met by the Company's low-power
components.
Computer
The operating speed of computer products is increasing in order to provide
more widespread, faster access to and manipulation of multimedia information and
the more rapid design and analysis of electronics, structural and industrial
systems. Frequency control modules, primarily clocks, are applied in computer
systems to provide a precise, stable frequency control source. The design and
deployment of wireless local area computer and data link networks is generating
increased interest in SAW filters. The Company also offers frequency control
clocks, oscillators and custom modules for computing applications in the
military market segment.
Industrial
The industrial market includes applications such as security systems, meter
reading and bar code reading devices, medical systems and custom data link
equipment. Low-power components, low-power Virtual Wire(R) radio systems and
filters may all be designed into industrial applications, depending upon the
customer's RF design expertise and time-to-market requirements.
Consumer
Consumer market applications encompass a wide range of electronic designs.
Those utilizing SAW-based devices include the cable television industry,
wireless headphones and loudspeakers, wireless door chimes and home automation
applications. These consumer electronic applications may incorporate low-power
components, low-power Virtual Wire(R) radio systems and filters.
Telecommunications
The Company believes that a number of dynamics within the telecommunications
market are opening new applications for SAW technology. The deployment of
digital cellular telephone systems has been initiated worldwide. The digital
modulation requires SAW filters that minimize distortion and conform to
international cellular telephony standards. In addition, high-speed Synchronous
Optical Networks ("SONET") performance is enhanced with the incorporation of
SAW-stabilized oscillators.
Products
The Company's products are organized into four primary product families:
low-power components, low-power Virtual Wire(R) radio systems, frequency control
modules and filters.
3
Low-Power Components:
Resonators. The Company's resonators are used in low-power wireless
transmitter and receiver applications, including automotive remote keyless entry
systems and related products. The Company manufactures SAW resonators in volume,
and they are supplied in three-lead metal packages ("TO39") and leadless surface
mount packages. The surface mount technology ("SMT") facility initiated high-
volume production of one-port resonators in 1995. To the extent that they have
not already, the Company's competitors will be introducing SMT packages for
their products.
Coupled-Resonator Filters. The Company's coupled-resonator filters are
resonator structures which are optimized for digital communications IF filter
designs used in air-to-ground telephone systems, 915 MHz cordless telephones and
hybrid receiver applications. 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.
Low-Power Virtual Wire(R) Radio Systems:
During 1996, the Company established the Virtual Wire(R) Operations in order
to consolidate and focus resources on development and marketing of its
proprietary radio systems receiver technology. The Company's family of hybrid
transmitter (HX) and receiver (RX) modules is included in the Virtual Wire(R)
Operations. During the fourth quarter of fiscal 1996, the Company introduced a
chip set receiver based on its patented Amplifier Sequenced Hybrid ("ASH")
technology. The chip set offers performance identical to the hybrid modules at
lower total cost.
These products feature small size, very low power consumption and excellent
RF performance, and provide the system designer flexibility and fast time to
market for emerging applications. The breadth of frequency ranges covers both
U.S. 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) radio systems product offerings also include complete
transceiver design and development kits which allow the system designer, who has
minimal RF experience, the ability to apply wireless two-way data transfer to
emerging applications.
Frequency Control Modules:
The Company's frequency control module products consist of clocks and both
fixed-frequency and voltage-controlled SAW-based oscillators. These products
provide added value to the SAW components manufactured by the Company. Each
module incorporates one or more SAW discrete devices with standard and custom
integrated circuits and related passive components. The Company manufactures
clocks and fixed-frequency oscillators applying resonators and coupled-resonator
filters to eliminate tuning coils for signal filtering and stabilization and SAW
delay lines to allow frequency variability in voltage-controlled oscillators.
4
High-frequency clocks. The Company's high-frequency clock modules are used in
high-speed computing and high-resolution graphics applications in the computer
market segment. The Company's SAW-based clocks allow the customer to realize
improved performance by providing a very 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. New SMT packages were
introduced in 1996 and complement the Company's leaded metal packaged product.
Higher-speed, lower-cost clocks are in active design with select customer
partners.
Oscillators. The Company produces commercial and military fixed-frequency and
voltage-controlled SAW oscillators. These products are supplied in leaded metal
packages and used in applications such as microwave radios, identification
friend or foe (IFF) transponders, hybrid-fiber-coax communication systems and
precision instrumentation.
Filters:
The Company designs and manufactures four types of SAW filters: low-loss
transversal, precision transversal, proximity-coupled and coupled-resonator.
(See above discussion of coupled-resonator filter in Low-Power Components).
Low-loss transversal filters and precision transversal filters are used in
digital cellular systems incorporating European Global System for Mobile
Communications (GSM), digital European cordless telephone (DECT), Code Division
Multiple Access (CDMA) and personal communications system (PCS) standards.
Other applications include Very Small Aperture Terminal (VSAT) modems and SONET
repeaters. The low-loss filters are designed to minimize signal distortion in
the frequency band the filter is designed to pass. The precision filters
provide excellent amplitude and group delay flatness for fractional bandwidths
of 10% or more and are used in a number of military applications.
The proximity-coupled filters are narrow-band SAW filters used in cellular
applications deploying the IS-54 Time Division Multiple Access (TDMA) standard
and in cellular digital packetized data (CDPD) applications as intermediate
frequency (IF) filters. Proximity filters are also used extensively in digital
pagers and a number of analog cellular phone systems.
Manufacturing
The manufacturing of the Company's products is a highly complex and precise
process that is sensitive to a wide variety of factors, including the level of
contaminants in the manufacturing environment, impurities in the materials used
and the performance of manufacturing personnel and production equipment. Until
the devices are enclosed or sealed within their final package, they are subject
to contamination. Because of this, almost all operations prior to enclosure
welding take place under laminar air flow hoods or within clean-room
environments. The Company has experienced in the past product shipment delays
and lower-than-expected production yields. In particular, the Company
experienced a yield loss in excess of $250,000 during the introduction of a
process improvement project in the TO39 resonator product line during the third
quarter of fiscal 1995. The Company has experienced in the past and may in the
future experience a delay in transferring products from engineering to volume
manufacturing status. There can be no assurance the manufacturing process will
not result in shipment delays or loss of production yields that will materially
and adversely increase the cost of manufacturing. The Company's manufacturing
operations are housed in a single location. In addition, the Company has
limited ability to outsource its manufacturing operations. As a result of the
Company's substantial reliance on a single manufacturing facility, damage
occurring to such
5
facility, whether by act of nature or otherwise, may have a material adverse
affect on the Company's manufacturing operations.
The Company's customers demand an increasing level of quality. There is no
assurance that the Company can achieve these improvements to its operations. To
the extent they are not achieved the Company's operating results could be
materially and adversely affected. 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 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. There can be no
assurance that the Company can continue to increase its manufacturing capacity
and improve its manufacturing processes in a timely manner so as to take
advantage of increased market demand.
The Company divides its manufacturing operations into two key areas: wafer
fabrication and assembly.
Wafer Fabrication
Fabrication of deposited and patterned wafers takes place in a clean-room
environment. Thin aluminum films are precisely deposited onto three-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 2,000 die on a single three-inch wafer. Over the past
two years, the Company completed an expansion of its wafer fabrication factory,
adding facilities and new automated wafer processing equipment. As demands on
the wafer fabrication facility increase, there is an ongoing need to increase
the capacity and operational efficiency of this facility. There can be no
assurance that the Company will be able to achieve these improvements in a
timely manner. To the extent the Company does not achieve acceptable wafer
fabrication yields or experiences product shipment delays as a result of
problems associated with the expansion of the wafer fabrication factory, the
Company's operating results could be materially and adversely affected.
Assembly
In assembly, there are three production areas which correspond to the three
distinct types of packages being manufactured: components, module devices and
SMT devices.
Component manufacturing involves the assembly of single-die devices into
leaded metal packaging. This method of assembly includes the Company's older
low-power component products.
Module manufacturing consist of multiple devices, one or more of which is a
SAW. The resulting packages vary in configuration, but all have leads which are
used to mount the package through holes in the customer's printed circuit
boards. The Company's products assembled in module manufacturing include
frequency control devices and filters.
In fiscal 1995, the Company completed construction of an SMT production
facility. The Company's SMT products contain SAW die and, in some cases, other
electronic components as well. The Company's manufacturing process is based on
arrays, which allows for automated processing of up to 400 devices at a time.
Since this represents a unique manufacturing process, some of the equipment has
been custom-designed for the Company and represents several unique applications
of existing manufacturing technology.
6
The SMT facility is responsible for assembly of low-power components and low-
power Virtual Wire(R) radio system products.
Source of Components
While the Company uses standard components whenever possible, certain of the
components used in the Company's SAW devices and modules are made to the
Company's specifications. This is particularly true for specialized
semiconductor manufacturers from whom the Company purchases several RF
integrated circuits. These companies include Motorola, Maxim, Cal Eastern Labs
and Kyocera. 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. Delays in delivery,
quality problems or the inability of the Company to obtain the components
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. The Company is currently investigating the outsourcing of some of
its new transmitter products. Should an adequate source of supply not be
located, this will delay the introduction of those products.
Sales and Marketing
The Company distributes its products in the United States through
manufacturers' representatives managed by the Company's internal sales force.
International sales are handled primarily on a direct sales basis augmented by
manufacturers' representatives in Norway, Sweden, Singapore, Taiwan, Korea,
Australia, South Africa and Brazil. The Company provides sales and marketing
support in Europe from a sales office located near Paris, France. Sales outside
of North America accounted for approximately 50%, 47% and 52% of the Company's
net sales during fiscal 1996, 1995 and 1994, respectively.
The Company expects that international sales will continue to account for a
significant portion of its total sales. There can be no assurance, however,
that the Company will be able to maintain or increase international market
demand for the Company's products or that the Company will be able to
effectively meet that demand. The Company's international sales are currently
denominated in U.S. currency. An increase in the value of the U.S. dollar
relative to foreign currencies could make the Company's products more expensive
and, therefore, potentially less competitive in those markets. Additional risks
inherent in the Company's international business activities generally include
unexpected changes in regulatory requirements, tariffs and other trade barriers,
costs and risks of localizing international operations, potentially adverse tax
consequences, repatriation of earnings and the burdens of complying with a wide
variety of foreign laws. There can be no assurance that such factors will not
have an adverse effect on the Company's future results of operations.
The Company has historically had a single customer accounting for 10% or more
of its sales, Digital Equipment Corporation. Shipments to this customer
represented 10%, 19% and 28% of total sales during the fiscal periods ending
August 31, 1996, 1995 and 1994, respectively. Sales to major customers have
fluctuated in the past, and there can be no assurance that sales to such
customers will continue at previously achieved levels, if at all.
RFM enters into select custom product development programs based on their
strategic nature relating to the customer or the RFM product development road
map. These development programs can last from 2 months to 18 months. The scope
of these programs includes initial engineering of the RF function under
development through assisting in the interface of the RF and digital hardware.
A small number of such programs are currently under way.
7
Competition
The markets for the Company's products are intensely competitive and are
characterized by price erosion, rapid technological change and product
obsolescence. In each of the markets for the Company's product, the Company
competes with very large vertically integrated, international companies,
including Matsushita, Sanyo, Siemens, Toyocom and Murata, that have
substantially greater financial, technical, sales, marketing, distribution and
other resources, as well as with existing competitors with broader product lines
than the Company. The Company's competitors with greater financial resources or
broader product lines may be able to engage in sustained price reductions in the
Company's primary markets to gain market share. The Company also expects
increased competition from existing competitors as well as competition from a
number of companies that currently use SAW expertise largely for internal
requirements. In addition, the Company experiences increased competition from
companies that offer alternative solutions such as phase locked loop technology,
which combines a semiconductor with a traditional crystal. The Company believes
competitors may duplicate the Company's products, which could adversely affect
selling prices and 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, availability of wafer fabrication and assembly manufacturing
capability, the Company's ability to support decreases in selling price through
reduction in cost of sales, adequate sources of raw materials, product quality,
reliability and price, the pace at which the Company's customers incorporate the
Company's products into their end user products and general economic conditions.
There can be no assurance that the Company will be able to compete successfully
in the future.
Research and Development
The Company's research and development efforts are primarily aimed at
deriving new, proprietary, innovative SAW device structures and SAW-based hybrid
modules that uniquely address market needs. These developments also include
process improvements in wafer fabrication involving better line width and metal
thickness control as well as improvements in device packaging.
RFM employs design engineers and scientists in its research and development
efforts. These design engineers and scientists collectively have over 250 years
of experience in SAW device and RF circuit design. They are responsible for new
products from inception to the commencement of volume manufacturing and closely
coordinate their work with the responsible product managers. The Company
believes that the efforts of this group help to ensure that RFM's products
provide an optimum system solution for the customer and are manufacturable at a
competitive cost.
From time to time, the Company has entered into agreements with customers to
develop specific SAW devices for inclusion in the customer's end product.
Pursuant to such agreements, the nonrecurring engineering ("NRE") cost
associated with such development work, which is treated by the Company as cost
of technology development sales, is generally reimbursed by the customer. Total
engineering-related expenses, including research and development expenditures
and cost of technology development sales (or NRE), during fiscal years 1996,
1995 and 1994 were $3.4 million, $3.6 million and $2.0 million, respectively.
The Company considers the development of new products essential to increasing
and maintaining sales.
8
Proprietary Rights
The Company relies on a combination of patents, copyrights and nondisclosure
agreements in order to establish and protect its proprietary rights. The
Company's policy is to file patent applications to protect technology,
inventions and improvements that are important to its business. There can be no
assurance that patents will issue from any of the Company's pending applications
or that any claims allowed from existing or pending patents will be sufficiently
broad to protect the Company's technology. While the Company intends to protect
its intellectual property rights vigorously, there can be no assurance that any
patents held by the Company will not be challenged, invalidated or circumvented,
or the rights granted thereunder will provide competitive advantages to the
Company.
The Company also seeks to protect its trade secrets and proprietary
technology, in part, through confidentiality agreements with employees,
consultants and other parties. There can be no assurance that these agreements
will not be breached, that the Company will have adequate remedies for any
breach or that the Company's trade secrets will not 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 electronic 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. In particular, the Company is utilizing in certain of its filter
products, primarily for cellular telephones, technology that is claimed in a
third party's patent. There can be no assurance that the Company will not in
the future be notified that it is infringing other patent and/or other
intellectual property rights of third parties. In the event of such alleged
infringement, there can be no assurance that a license to the technology in
question could be obtained on commercially reasonable terms, if at all, that
litigation will not occur or that the outcome of such litigation will not be
adverse to the Company. The failure to obtain necessary licenses or other
rights, the occurrence of litigation arising out of such claims or an adverse
outcome from such litigation could have a material adverse effect on the
Company's business. In any event, patent litigation is expensive, and the
Company's results of operations could be materially adversely affected by such
litigation, regardless of its outcome.
Regulations
The Company is subject to a variety of federal, state and local laws, rules
and regulations related to the use, storage, emission, treatment, disposal,
transportation and exposure of others to certain toxic, volatile and other
hazardous chemicals used in the Company's manufacturing process. The failure to
comply with present or future regulations could result in fines being imposed on
the Company, suspension of production or a cessation of operations. Such
regulations could also require the Company to acquire costly equipment, to make
changes to its manufacturing process, or to incur substantial other expenses to
comply with environmental regulations. Any past or future failure by the
Company to control the use of, or to restrict 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.
9
Employees
As of August 31, 1996, the Company had a total of 443 employees, including 24
in sales, marketing and customer support; 40 in engineering and product
development; 353 in manufacturing; and 26 in finance and administration. Of
such employees, approximately 53 were temporary employees. With the exception
of two employees located in sales locations in Europe, 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 great degree upon the
continued service of its key technical and senior management personnel and its
continuing ability to attract and retain highly qualified technical and
managerial personnel. Competition for such personnel is intense. There can be
no assurance that the Company will be able to retain or continue to attract key
managerial and technical employees. 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.
Potential Fluctuations in Results of Operations; Order Trends and Backlog
The Company's quarterly and annual results have been and will continue to be
affected by a wide variety of factors that have had in the past and in the
future could have a material adverse effect on the Company's business and
results of operations during any particular period, including the level of
orders that are received and can be shipped in a quarter, the rescheduling or
cancellation of orders by its customers, competitive pressures on selling
prices, changes in product or customer mix, availability and cost of raw
materials, 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, and the level of
expenditures for research and development, sales, and general and administrative
functions.
Historically, the electronics industry has experienced sudden and unexpected
economic downturns. The Company's results of operations are subject to such
downturns. In addition, the Company's operating expenses are largely fixed and
difficult to change quickly should sales not meet the Company's expectations,
thus magnifying the adverse effect of any such revenue shortfall. In view of
its significant growth in recent periods, 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, 1996, was approximately $11.4 million as
compared to $11.9 million as of August 31, 1995. 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 subject to fluctuations, and there
can be no assurance that backlog as of any particular date will be a reliable
measure of sales for any future period.
ITEM 2. FACILITIES
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
10
approximately 93,000 square feet. One building, totaling approximately 63,000
square feet, is leased through July 2003, with the Company having an option to
cancel the lease on July 31, 1999. The second building, totaling approximately
30,000 square feet, is also leased through July 2003, with the Company having an
option to cancel the lease after July 31, 2001. The Company believes that its
existing facilities are adequate for its current requirements. Should additional
space be needed, there can be no assurance that it will be commercially
available on reasonable terms when it is needed.
ITEM 3. LEGAL PROCEEDINGS
On June 7, 1996 the Company was served with a complaint filed by TimeKeeping
Systems, Inc. ("TimeKeeping") in the Court of Common Pleas for Cuyahoga County,
Ohio, captioned TimeKeeping Systems, Inc. v. R.F. Monolithics, Inc., No. 308658.
The Company is the only defendant named in the complaint. The complaint purports
to state a single cause of action for breach of contract and alleges that the
Company failed to timely fulfill certain purchase orders TimeKeeping issued in
1995. The complaint seeks damages of $900,000 based primarily on a claim of lost
profits. The Company has removed the action to the United States District Court
for the Northern District of Ohio, where it is pending as No. 1:96 CV 1451. The
Company has submitted a counterclaim for $33,000 in unpaid billings plus related
legal expenses.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
August 31, 1996.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been quoted on the National Association
of Securities Dealers Automated Quotation System ("NASDAQ") National Market
System under the symbol "RFMI" since the Company's initial public offering on
July 28, 1994. The following table sets forth the high and low sales prices of
the Company stock for the periods indicated as furnished by NASDAQ. These prices
reflect prices between dealers, without retail markups, markdowns or
commissions, and may not necessarily represent actual transactions.
High Low
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1995:
First Quarter 11 1/2 7 3/8
Second Quarter 13 7 7/8
Third Quarter 10 3/8 7 1/8
Fourth Quarter 9 1/4 7 1/4
1996:
First Quarter 9 5/8 6 5/8
Second Quarter 7 1/4 5 5/8
Third Quarter 11 3/4 6 1/8
Fourth Quarter 11 1/8 6 3/8
The Company has not paid dividends on its Common Stock and presently
intends to continue this policy in order to retain earnings for use in its
business. The Company had approximately 200 stockholders of record as of
November 15, 1996 (which number does not include the number of stockholders
whose shares are held of record by a brokerage house or clearing agency, but
does include such brokerage house or
11
clearing agency as one record holder). The last sales price for RFMI's Common
Stock, as reported by NASDAQ on November 15, 1996, was $9.75.
ITEM 6. SELECTED FINANCIAL DATA
Year Ended August 31,
---------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except per-share amounts)
Statement of Income Data:
Sales $35,718 $32,141 $24,787 $17,058 $13,910
Cost of sales 22,336 20,253 15,372 11,333 8,693
------- ------ ------ ------ -----
Gross profit 13,382 11,888 9,415 5,725 5,217
Gross profit margin % 37.5 % 37.0 % 38.0 % 33.6 % 37.5 %
Research and development 3,366 3,148 1,381 855 796
Sales and marketing 4,391 4,300 3,517 2,825 1,962
General and administrative 2,747 2,266 2,104 1,597 1,341
------- ------ ------ ------ -----
Total operating expenses 10,504 9,714 7,002 5,277 4,099
------- ------ ------ ------ -----
Income from operations 2,878 2,174 2,413 448 1,118
Other income (expense), net (107) 197 (139) (41) (7)
------- ------ ------ ------ -----
Income before income taxes and accounting change 2,771 2,371 2,274 407 1,111
Income tax expense (benefit) 882 851 13 (128) 436
------- ------ ------ ------ -----
Income before accounting change 1,889 1,520 2,261 535 675
Cumulative effect of accounting change - - - - 3,175
------- ------ ------ ------ -----
Net income $ 1,889 $ 1,520 $ 2,261 $ 535 $ 3,850
------- ------- ------- ------- -------
Earnings per share (pro forma prior to 1995) $0.35 $0.29 $0.59 $0.15
===== ===== ===== =====
Weighted average common and common equivalent
shares outstanding (pro forma prior to 1995) 5,429 5,325 3,830 3,538
===== ===== ===== =====
Balance Sheet Data (at August 31):
Cash, cash equivalents and short-term
investments $ 6,060 $ 5,086 $ 6,555 $ 2,014 $ 1,559
Working capital 12,879 9,616 9,101 3,044 3,844
Total assets 30,571 30,545 23,735 13,364 10,309
Long-term debt 2,413 2,854 153 755 262
Shareholders' equity 23,128 20,292 18,470 9,054 8,494
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
RFM designs, develops, manufactures and markets a broad range of RF
components and modules for the low-power component, low-power Virtual Wire(R)
radio systems, frequency control modules and filter product areas. The Company's
products are based on SAW technology, and the Company's strategy is to leverage
its RF design skills 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, high-frequency clocks, oscillators, transmitter and
receiver modules. The Company's average selling prices within these product
lines generally range from $1 to $30 for low-power products (components and
radio systems), $10 to $350 for frequency control modules and $5 to $50 for
filter products.
During fiscal 1994 and the first two quarters of fiscal 1995, the
Company constructed and tested its new surface-mount technology ("SMT")
manufacturing facility. The purpose of the facility is to provide the capability
to manufacture products utilizing surface-mount packaging in a highly automated
environment. During this period, the facility had not reached production status,
so the related equipment was not placed into service, and certain associated
costs were capitalized as start-up costs. The related costs were included in
property and equipment as construction in progress. In the third quarter of
fiscal 1995, this facility achieved production status. Accordingly, depreciation
on the equipment and amortization of capitalized start-up costs began.
In the fourth quarter of fiscal 1994, the Company completed an initial
public offering of its stock. The Company issued 1,600,000 shares of its common
stock on the NASDAQ market at $6.50 per share, resulting in net proceeds of $8.5
million.
During fiscal 1994 and 1993, the Company's income tax expense was
reduced as a result of the adoption of Statement of Financial Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109") and subsequent reductions in the
related valuation allowance. See the discussion on income taxes for further
detail.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the sections entitled "Business," "Legal Proceedings" and "Selected Financial
Data" in this report.
Results of Operations
The following discussion relates to the financial statements of the
Company for the fiscal year ended August 31, 1996 (current year or fiscal 1996),
in comparison to the fiscal year ended August 31, 1995 (prior year or fiscal
1995), as well as the fiscal year ended August 31, 1994 (fiscal 1994). In
addition, there is discussion of the financial statements for the three months
ended August 31, 1996 (fourth quarter), in comparison to the three months ended
August 31, 1995 (comparable quarter of the prior year).
13
The following table sets forth, for the years ended August 31 (i) the
percentage relationship of certain items from the Company's statements of income
to total sales and (ii) the percentage change in these items from year to year:
Percentage of Sales Year-to-Year Change
-------------------------- ---------------------
1995 to 1994 to
1996 1995 1994 1996 1995
---- ---- ---- ---- ----
Sales 100 % 100 % 100 % 11 % 30 %
Cost of sales 62 63 62 10 32
---- ---- ---- ---- ------
Gross profit 38 37 38 13 26
Research and development 9 10 6 7 128
Sales and marketing 12 13 14 2 22
General and administrative 8 7 8 21 8
---- ---- ---- ---- ------
Total operating expenses 29 30 28 8 39
---- ---- ---- ---- ------
Income from operations 9 7 10 32 (10)
Other income (expense), net - 1 (1) (154) (242)
---- ---- ---- ---- ------
Income before income taxes 9 8 9 17 4
Income tax expense (benefit) 3 3 - 4 (6,446)
---- ---- ---- ---- ------
Net income 6 % 5 % 9 % 24 % (33)%
==== ==== ==== ==== =======
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,
---------------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------- --------------------------
% % %
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in thousands)
Product sales:
Low-power components and
Virtual Wire/(R)/radio systems $27,493 77 % $20,247 63 % $13,447 54 %
Frequency control modules 6,064 17 10,304 32 9,542 39
Filter 2,036 6 1,017 3 1,314 5
------- ---- ------- ---- ------- ----
Total product sales 35,593 100 31,568 98 24,303 98
Technology development sales 125 - 573 2 484 2
------- ---- ------- ---- ------- ----
Total sales $35,718 100 % $32,141 100 % $24,787 100 %
======= ==== ======= ==== ======= ====
Product sales increased 13% in fiscal 1996 and 30% in fiscal 1995,
primarily because of increased units shipped of the Company's low-power
products. Low-power sales include sales of both low-power
14
component products and low-power Virtual Wire/(R)/ radio system products. Low-
power sales increased 36% in fiscal 1996 and 51% in fiscal 1995. A significant
portion of the 1996 and 1995 increase was due to the introduction of the
Company's surface-mount low-power component products particularly to customers
in automotive markets. In fiscal 1995, the Company brought its new SMT facility
to production status, with gradually increasing production levels during fiscal
1995 and fiscal 1996. The Company has invested a considerable amount of its
capital, technical, sales and marketing resources into new SMT products that
were primarily targeted toward the low-power market.
Frequency control module sales decreased 41% in fiscal 1996 after
increasing 8% in fiscal 1995. These products accounted for only 17% of total
sales in fiscal 1996, compared to 32% in fiscal 1995. Frequency control module
sales include sales to the Company's largest customer, Digital Equipment
Corporation ("Digital"), for use in systems based on the Alpha microprocessor.
Sales to Digital decreased in both fiscal 1996 and fiscal 1995, primarily as a
result of lower average selling prices, as this customer converted to lower-
priced units. The lower-priced units, in the current year, represented a new
line of clock oscillator products that were introduced to respond to price
competition from products that utilize phase lock loop technology. Digital
accounted for approximately 10%, 19% and 28% of total sales during fiscal 1996,
1995 and 1994, respectively. The Company has no long-term volume purchase
commitments from its major customers, including Digital. Orders to Digital have
fluctuated in the past, and there can be no assurance that such fluctuations
will not recur or that Digital will continue to purchase the Company's products
at all.
International sales (primarily in Europe and Asia) were approximately
50% of the Company's total sales during fiscal 1996 compared to approximately
47% in fiscal 1995 and 52% in fiscal 1994. 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. The Company
intends to continue its focus on international sales in the future and expects
that international sales will continue to represent a significant portion of its
business. There can be no assurance, however, that this can be achieved.
The Company's top five customers accounted for approximately 28%, 38% and
48% of the Company's total sales in fiscal 1996, 1995 and 1994, respectively.
The reduction in the relative portion of sales to the Company's top five
customers over this period largely reflects the reduction in sales to the
Company's largest customer, Digital. In addition, a significant portion of the
increased sales for the Company's new SMT products were due to new customers,
which increased the total number of customers receiving RFM products.
While the Company has achieved sales increases in prior periods, there
can be no assurance that this can be achieved in future periods. The Company's
success is highly dependent on achieving technological advances in its product
design and manufacturing capabilities, as well as its ability to sell its
products in a competitive marketplace that can be influenced by outside factors
such as economic and regulatory conditions. The Company experiences increased
competition from companies that offer alternative solutions such as phased
locked loop technology. There can be no assurance that competition from
alternative technologies or from competitors duplicating the Company's
technologies will not adversely affect selling prices and market share.
Gross Profit Margin
Gross profit margin increased to 37.5% in fiscal 1996, compared to 37.0% in
fiscal 1995, primarily as a result of increased gross profit margin for the
Company's low-power products. Margins for these products increased primarily due
to a decrease in per-unit manufacturing costs which were the result of improved
production processes that increased yields and productivity, and increased
demand creating an
15
increase in the number of units produced. The increased number of units produced
allowed relatively high fixed overhead costs to be lower on a per-unit basis,
particularly for the new SMT facility. There can be no assurance, however, that
the trend toward lower per-unit manufacturing costs, that occurred in the
current year, will continue. An additional reason for improved gross profit
margin was that the average selling prices for low-power products increased as a
result of changes in product mix within this product line.
The improvement in low-power gross profit margins was partially offset
by a reduction in gross profit for the higher-margin frequency control module
products. Historically, the Company has achieved substantially higher gross
profit margins on its frequency control module products than its low-power
products due in part to the higher engineering and technical content of the
frequency control module products. These products accounted for only 17% of
total sales in fiscal 1996, compared to 32% in fiscal 1995. The decline in
sales to Digital accounted for most of this impact. In addition, lower average
selling prices for these products caused a decline in gross margins, despite
lower per-unit manufacturing costs.
Gross profit margins decreased to 37.0% in fiscal 1995 from 38.0% in
fiscal 1994. This was primarily due to lower gross margins for the Company's
low-power products, resulting from higher per-unit manufacturing costs
associated with increasing the capacity to produce these products, particularly
for the new SMT facility, which reached volume production status in fiscal 1995.
Additionally in fiscal 1995, the Company experienced a yield loss of
approximately $250,000 associated with the introduction of a process improvement
procedure for its leaded metal component manufacturing. Additionally, gross
profit margins were adversely impacted as sales from the higher-margin frequency
control module products declined to 32% of total sales in fiscal 1995 from 39%
of total sales in fiscal 1994.
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 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. There can be no assurance that the Company can
continue to increase its manufacturing capacity and improve its manufacturing
processes in a timely manner so as to take advantage of increased market demand.
Failure to do this would result in a loss of potential sales in the periods
impacted.
Research and Development
Research and development expenses increased approximately 7% in fiscal
1996 and 128% in fiscal 1995. The increase in both fiscal 1996 and fiscal 1995
was due to increased focus on developing standard products and increased
emphasis on process engineering and document control process for its operations.
During the past several years, the Company has decreased its activities in
connection with customer-funded technology development contracts (nonrecurring
engineering expenses). The Company believes that the continued development of
its technology and new products is essential to its success and is committed to
continuing its investment in research and development, which is expected to
increase in absolute dollars in future periods. Since sales increased faster
than research and development expenses, such expenses decreased to 9% of total
sales in fiscal 1996 from 10% in fiscal 1995.
Sales and Marketing
Sales and marketing expenses increased approximately 2% in fiscal 1996 and
22% in fiscal 1995. These increases were due primarily to increased sales
commissions and marketing costs needed to support the Company's increased sales.
Since sales increased faster than sales and marketing expenses, such expenses
decreased as a percent of total sales to 12% in fiscal 1996 from 13% in fiscal
1995 and 14% in fiscal 1994. The Company
16
expects to incur higher sales and marketing expenses in absolute dollars in
future periods as it expands its sales and marketing efforts.
General and Administrative
General and administrative expenses increased approximately 21% in fiscal
1996 and 8% in fiscal 1995. Such increases were primarily attributable to
increased staffing and support for the Company's expansion, and in the current
year included increased costs for write-offs of certain foreign receivables.
There can be no assurance that the Company will not continue to incur bad debt
write-offs as it expands its business to new customers and new geographic areas.
The Company currently expects general and administrative expenses will increase
in absolute dollars in future periods.
Other Income (Expense)
During the first two quarters of the current year, the Company increased
its indebtedness to finance an increase in working capital and capital
expenditures. This increase in indebtedness caused an increase in interest
expense for fiscal 1996, compared to fiscal 1995, resulting in a net reduction
of other income.
Income Tax Expense
The Company's income tax expense was $882,000 in fiscal 1996, compared
to $851,000 in fiscal 1995, and $13,000 in fiscal 1994. Fiscal 1996 included
the one-time favorable impact of $116,000 ($.02 per share), resulting from
recognition of research and development tax credits. The Company recognized an
income tax benefit of $854,000 ($.22 per share) in fiscal 1994 as a result of a
decrease in the valuation allowance that was provided upon adoption of SFAS 109,
in view of continued increases in earnings during this period. The Company does
not expect a similar tax benefit in the future.
In fiscal 1993, the Company adopted SFAS 109 and elected to apply it
retroactively to September 1, 1991. The cumulative effect of adopting SFAS 109
was to record in fiscal 1992 a deferred tax asset of $3.2 million,
representing the estimated benefits of the Company's net operating loss
carryforward and expected future deductible temporary timing differences, and to
increase fiscal 1992 net income by this amount.
The Company's effective tax rate, exclusive of the fiscal 1996 one-
time tax credit and the fiscal 1994 valuation allowance benefit, was
approximately 36%, 36% and 38% in fiscal 1996, 1995 and 1994, respectively.
Earnings per Share
Net income increased 24% to $1.9 million in the current year as compared to
$1.5 million in the prior year. The Company's earnings per share was $.35 per
share for fiscal 1996, compared to $.29 per share for fiscal 1995 and $.59 per
share for fiscal 1994. As discussed above, fiscal 1994 included a tax benefit
related to the decrease in the valuation allowance for deferred tax assets of
$.22 per share. Earnings per share in fiscal 1994 reflect lower weighted average
common and common equivalent shares outstanding relative to fiscal 1996 and
fiscal 1995. The weighted average common and common equivalent shares
outstanding in fiscal 1996 and fiscal 1995 reflected the impact of 1,600,000
shares of common stock issued in connection with the Company's initial public
offering in July 1994.
17
Fourth Quarter of Fiscal 1996
Unaudited quarterly financial data is presented in Note 12 of the
accompanying financial statements.
Sales for the fourth quarter increased 21% to $10.0 million, compared
to $8.3 million in the comparable quarter of the prior year. The overall sales
increase was primarily due to an increase in low-power sales of approximately
34%, compared to the comparable quarter of the prior year. This was primarily
due to an increase in the number of units shipped, particularly for new SMT type
products for automotive customers. This increase was partially offset by a 34%
decrease in sales for frequency control module products, compared to the
comparable quarter of the prior year, primarily due to a decrease in the average
selling price and number of units shipped to Digital.
Gross profit margins were 40.0% in the fourth quarter, compared to
33.7% for the comparable quarter of the prior year. This was primarily due to
improvement in margins for the low-power product line, resulting from a
continued reduction in per-unit manufacturing costs for those products,
particularly the new SMT products. This reduction in cost was due to increased
productivity, improvements in yield and an increased number of units produced,
allowing for fixed overhead expenses to be spread over a larger number of units.
Also, there was an increase in average selling prices for these products due to
changes in product mix toward higher-priced units. Margins for frequency
control module products declined due to lower average selling prices associated
with the introduction of a new line of lower-priced units and associated start-
up costs.
Operating income for the fourth quarter was $1.1 million, or 11% of total
sales compared to $.3 million, or 4% of total sales, for the comparable quarter
of the prior year. The increase in operating income as a percentage of total
sales was due to gross margins improving and revenues increasing faster than
operating expenses. Operating expenses increased $.4 million in the fourth
quarter, compared to the comparable quarter of the prior year. This increase was
due to the additional costs of supporting the Company's increased level of
sales, as well as an increase in product and market development programs.
Earnings per share were $.13 in the fourth quarter, compared to $.05 per share
for the comparable quarter of the prior year.
Liquidity and Capital Resources
Principal sources of liquidity at August 31, 1996, consisted of $6.1
million of cash, cash equivalents and short-term investments, and $4.0 million
of unused credit under a line of credit agreement. As of August 31, 1996, the
Company also had $2.8 million unused credit available under an equipment
collateralized operating lease facility (Lease Facility) which was to be
advanced in stages prior to October 18, 1996. No additional advances were made
under the Lease Facility and the Company is currently under negotiations to
extend it under current terms and conditions through the end of fiscal year
1997. The credit facilities contain financial covenants and restrictions
relating to various matters, including a minimum net worth requirement, a
minimum ratio of earnings before interest and taxes to interest expense and
current maturity of the term loan, a minimum quick ratio and a maximum ratio of
total liabilities to tangible net worth. As of August 31, 1996, the Company was
in compliance with such covenants and restrictions.
Net cash from operations increased $2.3 million due to a $1.3 million
increase in net income and noncash items included in net income, such as
depreciation and amortization, and $1.0 million less cash used in working
capital, such as trade receivables and inventory. As of August 31, 1996,
inventory had been reduced almost $.8 million from the prior year.
18
Cash used in investing activities in the current year was $1.8 million
lower than the prior year due to lower capital acquisitions. Fiscal year 1995
and 1994 capital acquisitions included significant purchases of property and
equipment to construct the Company's SMT manufacturing facility. The Company
expects to acquire approximately $4 million to $7 million of capital equipment
by the end of fiscal 1997, consisting primarily of equipment needed for its
manufacturing facilities. Some of this equipment may be acquired under the lease
facility.
Net cash generated from financing activities was less than $.1 million.
Funds raised from operations, borrowings on notes payable and exercises of stock
options were mostly used to repay other debt and acquire property and equipment.
In the prior year, financing activities resulted in $2.3 million of funds
generated mainly from borrowings on notes payable used to finance increases in
working capital and capital expenditures. In fiscal 1994, the IPO generated more
than $8.5 million that was used to retire debt, pay preferred dividends and
finance capital spending.
The Company believes that cash generated from operations, if any, banking
facilities, and the $6.1 million balance in cash and short-term investments will
be sufficient to meet the Company's operating cash requirements through fiscal
1997. To the extent that these sources of funds are insufficient to also meet
the Company's capital expenditure requirements, the Company will be required to
raise additional funds. No assurance can be given that additional financing for
capital expenditures will be available or, if available, that it will be
available on acceptable terms.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in Appendix A attached
hereto and incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
Registrant's Definitive Proxy Statement to be filed with the Commission pursuant
to Regulation 14A in connection with the 1996 Annual Meeting (the "Proxy
Statement") under the heading "Nominees."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the Proxy Statement under the heading "Executive Compensation."
19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the Proxy Statement under the heading "Certain Transactions."
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements. Financial statements are attached as Appendix A
to this report. The index to the financial statements is found on
page F-1 of Appendix A.
(a) 2. Financial Statement Schedules. All schedules are omitted since the
required information is not present or is not present in amounts
sufficient to require a submission of the schedules, or because the
information required is included in the financial statements and notes
thereto.
(a) 3. Exhibits. See Exhibit Index in part (c), below.
(b) On August 14, 1996, the Company filed a report on Form 8-K with the
Commission in connection with the First Amendment to Rights Agreement
which amended a Rights Agreement dated as of December 20, 1994.
(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)
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)
20
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
Mr. Andersen and Mr. Densmore dated December 18, 1995. (7)
10.22 Separation and Consulting Agreement between the Company and Mr. Andersen. (8)
11.1 Computation of net income per share. (8)
23.1 Consent of Deloitte & Touche LLP, Independent Auditors. (8)
24.1 Power of Attorney. See page 23
(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.
21
(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) 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.
22
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 21st day of
November, 1996.
RF MONOLITHICS, INC.
By: /s/ SAM L. DENSMORE
--------------------
Sam L. Densmore
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 Cooley Godward LLP 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 the
Registrant and in the capacities indicated on the 21st day of November, 1996.
/s/ SAM L. DENSMORE /s/ FRANCIS J. HUGHES, JR.
- --------------------- ---------------------------
Sam L. Densmore Francis J. Hughes, Jr.
CEO, President & Director Director
/s/ DEAN C. CAMPBELL /s/ CORNELIUS C. BOND, JR.
- ---------------------- ---------------------------
Dean C. Campbell Cornelius C. Bond, Jr.
Director Director
23
RF MONOLITHICS, INC.
INDEX TO FINANCIAL STATEMENTS -
ITEM 8 OF FORM 10-K
- ----------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS AND NOTES:
BALANCE SHEETS AS OF AUGUST 31, 1996 AND 1995 F-3
STATEMENTS OF INCOME FOR THE YEARS ENDED AUGUST 31, 1996,
1995 AND 1994 F-4
STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
AUGUST 31, 1996, 1995 AND 1994 F-5
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
AUGUST 31, 1996, 1995 AND 1994 F-6
NOTES TO 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 balance sheets of RF Monolithics, Inc. as of
August 31, 1996 and 1995, and the related statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended August
31, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of RF Monolithics, Inc. as of August 31, 1996
and 1995, and the results of its operations and its cash flows for each of the
three years in the period ended August 31, 1996, in conformity with generally
accepted accounting principles.
/s/Deloitte & Touche LLP
Dallas, Texas
October 23, 1996
F-2
RF MONOLITHICS, INC.
BALANCE SHEETS
AUGUST 31, 1996 AND 1995
(In Thousands)
- ----------------------------------------------------------------------------------------------------------
ASSETS 1996 1995
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 1,029 $ 433
Short-term investments (Note 1) 5,031 4,653
Trade receivables, less allowance of $283 and $175 in 1996 and 1995,
respectively (Note 5) 6,703 6,195
Inventories (Notes 2 and 5) 3,935 4,708
Prepaid expenses and other 536 477
Deferred income tax benefits (Note 9) 675 549
-------- --------
Total current assets 17,909 17,015
PROPERTY AND EQUIPMENT - Net (Notes 3 and 5) 10,321 10,743
DEFERRED INCOME TAX BENEFITS (Note 9) 1,614 2,031
OTHER ASSETS - Net (Note 4) 727 756
-------- --------
TOTAL $ 30,571 $ 30,545
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - current portion (Note 5) $ 1,500 $ 1,911
Capital lease obligations - current portion (Note 6) 329 297
Accounts payable - trade 1,033 2,616
Accounts payable - construction and equipment 142 773
Accrued expenses and other liabilities 1,950 1,747
Income taxes payable (Note 9) 54 29
Dividends payable on preferred stock (Note 7) 22 26
-------- --------
Total current liabilities 5,030 7,399
LONG-TERM DEBT - Less current portion:
Notes payable (Note 5) 1,505 1,630
Capital lease obligations (Note 6) 908 1,224
-------- --------
Total long-term debt 2,413 2,854
COMMITMENTS AND CONTINGENCIES (Notes 6 and 11)
STOCKHOLDERS' EQUITY (Notes 5 and 7):
Common stock: $.001 par value, 20,000 shares authorized;
5,314 and 5,024 shares issued and outstanding in 1996
and 1995, respectively 5 5
Additional paid-in capital 24,547 23,368
Accumulated deficit (1,214) (3,103)
Unearned compensation (210) -
Unrealized gain on short-term investments (Note 1) - 22
-------- --------
Total stockholders' equity 23,128 20,292
-------- --------
TOTAL $ 30,571 $ 30,545
======== ========
See notes to financial statements.
F-3
RF MONOLITHICS, INC.
STATEMENTS OF INCOME
YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(In Thousands, Except Per-Share Amounts)
- -------------------------------------------------------------------------------------------
1996 1995 1994
SALES (Note 8) $35,718 $32,141 $24,787
COST OF SALES 22,336 20,253 15,372
------- ------- -------
GROSS PROFIT 13,382 11,888 9,415
OPERATING EXPENSES:
Research and development 3,366 3,148 1,381
Sales and marketing 4,391 4,300 3,517
General and administrative 2,747 2,266 2,104
------- ------- -------
Total 10,504 9,714 7,002
------- ------- -------
INCOME FROM OPERATIONS 2,878 2,174 2,413
OTHER INCOME (EXPENSE):
Interest income 337 302 65
Interest expense (488) (184) (161)
Other 44 79 (43)
------- ------- -------
Total (107) 197 (139)
------- ------- -------
INCOME BEFORE INCOME TAXES 2,771 2,371 2,274
INCOME TAX EXPENSE (Note 9):
Current and deferred 882 851 867
Change in deferred tax valuation allowance - - (854)
------- ------- -------
Total 882 851 13
------- ------- -------
NET INCOME $ 1,889 $ 1,520 $ 2,261
======= ======= =======
EARNINGS PER SHARE (Pro forma in 1994) $ .35 $ .29 $ .59
======= ======= =======
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
(Pro forma in 1994) 5,429 5,325 3,830
======= ======= =======
See notes to financial statements.
F-4
RF MONOLITHICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Common Stock Additional Unrealized Treasury
Preferred --------------- Paid-In Accumulated Unearned Gain on Common
Stock Shares Amount Capital Deficit Compensation Investments Stock Total
BALANCE, SEPTEMBER 1, 1993 $786 743 $1 $15,208 $(6,884) $ - $ - $(57) $9,054
Retirement of treasury stock - (33) - (57) - - - 57 -
Common stock options exercised
(Note 7) - 26 - 71 - - - - 71
Net proceeds from initial public
offering (Note 7) - 1,600 2 8,534 - - - - 8,536
Cash dividend on convertible
preferred stock (Note 7) - - - (1,452) - - - - (1,452)
Conversion of preferred stock
(Note 7) (786) 2,620 2 784 - - - - -
Net income - - - - 2,261 - - - 2,261
---- ---- -- ------- ------- ----- --- ---- -------
BALANCE, AUGUST 31, 1994 - 4,956 5 23,088 (4,623) - - - 18,470
Common stock options exercised,
including tax benefit (Note 9) - 68 - 280 - - - - 280
Unrealized gain on investments
(Note 1) - - - - - - 22 - 22
Net income - - - - 1,520 - - - 1,520
---- ---- -- ------- ------- ----- --- ---- -------
BALANCE, AUGUST 31, 1995 - 5,024 5 23,368 (3,103) - 22 - 20,292
Common stock granted to employees
(Note 7) - 51 - 362 - (362) - - -
Forfeiture of common stock grants
(Note 7) - (17) - (119) - 119 - - -
Amortization of unearned
compensation (Note 7) - - - - - 33 - - 33
Issuance of common stock under
the Purchase Plan (Note 7) - 24 - 137 - - - - 137
Common stock options exercised,
including tax benefit (Note 9) - 232 - 799 - - - - 799
Change in unrealized gain on
investments (Note 1) - - - - - - (22) - (22)
Net income - - - - 1,889 - - - 1,889
---- ---- -- ------- ------- ----- --- ---- -------
BALANCE, AUGUST 31, 1996 $ - 5,314 $5 $24,547 $(1,214) $(210) $ - $ - $23,128
==== ===== == ======= ======= ===== === ==== =======
See notes to financial statements.
F-5
RF MONOLITHICS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(In Thousands)
- ------------------------------------------------------------------------------------------------
1996 1995 1994
OPERATING ACTIVITIES:
Net income $ 1,889 $ 1,520 $ 2,261
Noncash items included in net income:
Deferred taxes and valuation allowance 291 585 (159)
Depreciation and amortization 2,532 1,576 1,028
Provision for doubtful accounts 257 75 56
Loss on sale of assets 31 - -
Other 33 (10) 7
Cash from (used in) operating working capital:
Trade receivables (765) (1,396) (2,299)
Inventories 773 (2,720) (519)
Prepaid expenses and other (59) (295) (67)
Accounts payable (2,214) 1,281 494
Accrued expenses and other liabilities 203 145 827
Income taxes payable 25 (55) 53
------- ------- -------
Net cash from operations 2,996 706 1,682
------- ------- -------
INVESTING ACTIVITIES:
Increase in short-term investments (5,031) (4,640) (4,907)
Decrease in short-term investments 4,631 4,916 552
Acquisition of property and equipment (2,114) (4,439) (2,576)
Proceeds from sale of assets 33 - -
Increase in other assets (13) (92) (184)
------- ------- -------
Net cash used in investing activities (2,494) (4,255) (7,115)
------- ------- -------
FINANCING ACTIVITIES:
Borrowings on notes payable 2,385 3,558 1,947
Repayments of notes payable (2,921) (17) (4,480)
Repayments of capital lease obligations (302) (346) (170)
Common stock issued for options exercised 799 280 71
Common stock issued under the Purchase Plan 137 - -
Net proceeds from initial public offering - - 8,536
Accrual (payment) of costs of initial public offering - (674) 674
Dividends paid on preferred stock (4) (467) (959)
------- ------- -------
Net cash from financing activities 94 2,334 5,619
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 596 (1,215) 186
CASH AND CASH EQUIVALENTS:
Beginning of year 433 1,648 1,462
------- ------- -------
End of year $ 1,029 $ 433 $ 1,648
======= ======= =======
SUPPLEMENTAL INFORMATION:
Interest paid $ 507 $ 184 $ 192
======= ======= =======
Income taxes paid $ 132 $ 173 $ 79
======= ======= =======
Noncash investing and financing activities:
Property and equipment acquisitions by debt $ 18 $ 1,563 $ 1,115
======= ======= =======
Dividends payable $ 22 $ 26 $ 493
======= ======= =======
Total cash and noncash property and equipment additions $ 2,132 $ 6,002 $ 3,691
======= ======= =======
See notes to financial statements.
F-6
RF MONOLITHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - RF Monolithics, Inc. (the Company) designs, develops, manufactures
and markets a broad range of radio frequency (RF) component and module
products in four areas: low-power components, low-power Virtual Wire radio
systems, frequency control modules and filters. 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: automotive, computer, industrial, consumer and
telecommunications, and are sold primarily in North America, Europe and Asia.
BASIS OF PRESENTATION - In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the financial statements and
revenues and expenses for the period. Actual results could differ
significantly from those estimates.
SALES are recognized when products are shipped.
CASH EQUIVALENTS represent liquid investments with maturities at the date of
acquisition of three months or less.
SHORT-TERM INVESTMENTS represent primarily government and corporate
obligations with original maturities at the date of acquisition of three or
more months which are classified as available-for-sale and are stated at fair
value. At August 31, 1996, the original investment cost approximated fair
value. At August 31, 1995, the original investment cost was $4,618,000,
resulting in an unrealized gain of $35,000 ($22,000 net of taxes).
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;
capitalized SMT facility start-up costs, five years; leasehold improvements,
three to eight years not exceeding the lease term; and office furniture, five
years.
OTHER ASSETS include legal costs of obtaining patents. These costs are
amortized over the lives of the respective patents.
FINANCIAL INSTRUMENTS consist of cash, short-term investments, receivables,
payables and debt, the carrying value of which are a reasonable estimate of
their fair values due to their short maturities or variable interest rates.
F-7
RESEARCH AND DEVELOPMENT COSTS are expensed as incurred. These costs do not
include nonrecurring engineering costs related to contract technology
development sales which are included in cost of sales.
DEFERRED INCOME TAXES are provided under the asset and liability method for
temporary differences in recognition of income and expense for tax and
financial reporting purposes.
EARNINGS PER SHARE are computed based on the weighted average number of
common shares and dilutive common equivalent shares from common stock options
(using the treasury stock method) and convertible preferred stock (using the
if-converted method) outstanding in the applicable periods presented.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, all common shares issued and common stock options granted by the Company
at a price less than the initial public offering price during the 12 months
preceding the initial public offering in fiscal 1994 have been included in
the pro forma computation for fiscal 1994 of common and common equivalent
shares outstanding in accordance with the treasury stock method.
ACCOUNTING FOR STOCK-BASED COMPENSATION - In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," which will be
effective for the Company beginning September 1, 1996. SFAS No. 123 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. Companies are permitted,
however, to continue to apply APB Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument
awarded. 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.
RECLASSIFICATIONS have been made to certain 1994 and 1995 amounts to conform
to the 1996 presentation.
2. INVENTORIES
Inventories consist of the following (in thousands):
1996 1995
Raw materials and supplies $1,904 $2,125
Work in process 763 1,220
Finished goods 1,268 1,363
------ ------
Total $3,935 $4,708
====== ======
F-8
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
1996 1995
Machinery and equipment $14,646 $12,032
Equipment under capital leases (Note 6) 1,792 1,779
Construction in progress 126 1,648
Leasehold improvements 2,221 1,411
Capitalized SMT facility start-up costs 579 579
Office furniture 202 152
------- -------
Total 19,556 17,601
Less accumulated depreciation and
amortization (including $473
and $195 in 1996 and 1995,
respectively, for capital leases) 9,245 6,858
------- -------
Property and equipment - net $10,321 $10,743
======= =======
Capitalized start-up costs are related to the construction and start-up
activities for the surface mount technology (SMT) production line, the
Company's first new technology production facility built since the original
facility. Amortization of these costs began in 1995. 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):
1996 1995
Patents, less accumulated amortization of
$152 and $110 in 1996 and 1995,
respectively $ 427 $ 269
Patent deposits 276 448
Other 24 39
----- -----
Total $ 727 $ 756
===== =====
F-9
5. NOTES PAYABLE
Notes payable at August 31, 1996 and 1995, consist of the following (in
thousands):
1996 1995
Note payable under $5,000 revolving
line-of-credit facility which expires
December 31, 1997, bearing interest at
the bank's prime floating rate or LIBOR
(7.56% at August 31, 1996), subject to
certain covenents generally related to
working capital, shareholder's equity
and earnings and collateralized by all
account receivable, inventory and
equipment purchased on or subsequent
to March 1, 1996 (net book value of $1,016
at August 31, 1996), excluding leased
equipment $ 1,000 $ 1,500
Note payable under $2,500 equipment term
loan facility payable in equal monthly
installments, maturing five years from the
date of each advance, bearing interest at
the bank's prime floating rate or LIBOR
(8.75% to 8.90% at August 31, 1996), subject
to certain covenants generally related to
working capital, shareholder's equity and
earnings and collateralized by certain
equipment (net book value of $7,816 at
August 31, 1996) 2,005 2,041
------- -------
Total 3,005 3,541
Less current portion 1,500 1,911
------- -------
Long-term portion $ 1,505 $ 1,630
======= =======
Long-term debt matures as follows: $500 in 1998, $500 in 1999,
$483 in 2000 and $22 in 2001.
At August 31, 1996, the available unused balance under the revolving
line-of-credit facility is $4,000.
F-10
6. LEASES AND OTHER COMMITMENTS
The Company has entered into noncancelable capital and operating lease
agreements for its manufacturing facility and certain equipment. Rent
expense under the operating leases in 1996, 1995 and 1994 was $486,000,
$294,000 and $287,000, respectively. Minimum future rental commitments under
the capital and operating leases at August 31, 1996, are as follows (in
thousands):
Capital
Lease Operating
Obligations Leases
Fiscal year ending August 31:
1997 $ 414 $ 587
1998 377 587
1999 355 421
2000 277 386
2001 - 386
Thereafter - 729
------- -------
Total minimum payments 1,423 $ 3,096
=======
Less amounts representing interest 186
-------
Total present value of net minimun
lease payments at August 31, 1996 1,237
Less current portion 329
-------
Long-term portion $ 908
=======
The Company has a $1,500,000 equipment lease facility with a bank which was
fully utilized at August 31, 1996. Borrowings under this facility, which are
presented as capital lease obligations, are due in monthly installments over
a five-year period from the date of each advance.
The Company also has a $3,500,000 equipment lease facility with a bank which
was to be advanced in stages prior to October 18, 1996. At August 31, 1996,
the Company had utilized $687,308 of the equipment lease facility. Lease
obligations under this facility, which are presented as operating lease
obligations and are reflected in the table above, are due in monthly
installments over a four-year period from the date of each advance. No
additional advances were made under this facility prior to October 18, 1996.
The Company is currently negotiating an extension of this lease facility.
CONSULTING AGREEMENT - In August 1996, the Company entered into a contract
for future consulting services and noncompete agreement with a former officer
of the Company. Pursuant to the agreement, the Company will pay the former
officer $13,000 per month until February 28, 1998, unless terminated earlier
by the former officer. The former officer has agreed not to compete with the
Company for a period ending one year after the termination of the consulting
agreement.
7. CAPITAL STOCK
In conjunction with the initial public offering (IPO), 1,600,000 shares of
common stock were issued in August 1994, resulting in net proceeds to the
Company of $8,536,000 after deduction of the related IPO costs incurred,
including $674,000 accrued at August 31, 1994. Also, in connection with the
IPO, all
F-11
series of preferred stocks were converted into 2,620,066 shares of common
stock, and the Company declared dividends of $1,452,000 ($3.81 per share) on
all Series A Preferred Stock. Preferred stock of 5,000,000 shares with $.001
par value is authorized; none was issued at August 31, 1996 and 1995. Rights,
preferences and other terms of the preferred stock will be determined by the
Board of Directors at the time of issuance.
STOCK OPTIONS - Under terms of the 1982 Stock Option Plan (1982 Plan),
nonqualified and incentive options to purchase common stock may be granted to
key employees at the discretion of the board of directors and subject to
certain restrictions. Only incentive stock options have been granted under
this plan. Generally, one forty-eighth of the shares optioned become
exercisable each month beginning at the date of grant. The options expire
ten years after the date of grant. At August 31, 1996, there are 312,499
options outstanding and 145,037 options available for grant under this plan.
A summary of the activity for the 1982 Plan follows:
Exercise
Shares Price
Granted:
1994 62,499 $4.50-$6.00
1995 - -
1996 327,000 6.25- 8.50
Exercised:
1994 - -
1995 (10,714) 6.00
1996 (31,750) 6.25
Expired:
1994 - -
1995 (14,286) 6.00
1996 (20,250) 6.25- 8.50
-------
Options outstanding at
August 31, 1996 312,499 4.50- 8.50
=======
Exercisable at August 31, 1996 62,810 $4.50-$8.50
=======
In October 1996, the Company granted, to certain employees, incentive options
to purchase 75,000 shares of the Company's common stock at an exercise price
of $8.125 per share.
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 at the date of grant. The options expire ten years after the
date of grant. At
F-12
August 31, 1996, there are 346,088 options outstanding and 17,839 options
available for grant under this plan. A summary of the activity for the 1986
Plan is as follows:
Exercise
Shares Price
Options outstanding at September 1, 1993 469,057 $ .60-$ 1.50
Granted:
1994 175,858 1.50- 9.00
1995 7,333 7.25
1996 - -
Exercised:
1994 (25,541) .60- 4.50
1995 (57,166) .60- 7.25
1996 (200,243) .60- 6.00
Expired:
1994 (2,241) .60- 4.50
1995 (11,922) .60- 9.00
1996 (9,047) .60- 7.25
--------
Options outstanding at August 31, 1996 346,088 .60- 7.50
========
Exercisable at August 31, 1996 285,622 $ .60-$10.875
========
Under the terms of the Non-Employee Director Stock Option Plan (Director
Plan), options to purchase common stock may be granted to each non-employee
director every January 1. 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
options expire ten years after the date of grant. At August 31, 1996, there
are 64,500 options outstanding and 110,500 options available for grants. A
summary of the activity for the Director Plan is as follows:
Exercise
Shares Price
Granted:
1994 37,500 $ 6.50
1995 13,500 10.875
1996 13,500 6.00
------
Options outstanding at August 31, 1996 64,500 6.00- 10.875
======
Exercisable at August 31, 1996 24,875 $6.50-$10.875
Options under the above plans are granted at prices equal to or greater than
the estimated fair value of the common stock at grant dates as determined by
the board of directors.
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 reserved 175,000 shares of its common stock.
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
F-13
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.
In November 1995, the Company initiated its first offering under the Purchase
Plan. In connection with the offering, the board of directors approved of
purchase dates on June 30, 1996, December 31, 1996, June 30, 1997, and
December 31, 1997. At June 30, 1996, 24,310 shares were purchased by
employees under the Purchase Plan for aggregate proceeds of $136,896.
Common shares reserved at August 31, 1996, for possible future conversion or
issuance are as follows:
Options granted:
1982 Plan 312,499
1986 Plan 346,088
Director Plan 64,500
---------
Total shares contingently issuable 723,087
Options and purchase rights available for grants:
1982 Plan 145,037
1986 Plan 17,839
Director Plan 110,500
Purchase Plan 150,690
---------
Total 424,066
---------
Total common shares reserved 1,147,153
=========
COMMON STOCK GRANTS - In January 1995, the Company granted 51,700 shares of
its common stock to key employees of the Company. Based on a share price of
$7.00 per share at the measurement date, the Company recorded unearned
compensation of $361,900. One-fourth of the shares granted become
exercisable on November 27, 1996, November 27, 1997, November 27, 1998, and
November 27, 1999, respectively. During 1996, certain employees who were
granted 17,000 shares terminated their employment with the Company. All
shares granted to these employees were reacquired and retired. In 1996,
compensation expense related to remaining common stock grants was
approximately $33,000.
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 Share), 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
F-14
outstanding or 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. 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.
8. SIGNIFICANT CUSTOMER AND EXPORT SALES
Sales to a significant customer and export sales to foreign markets as a
percent of the Company's total revenues are as follows:
1996 1995 1994
Significant customer 10% 19% 28%
Foreign markets (Primarily Europe
and Asia) 50% 47% 52%
9. INCOME TAXES
The tax effects of significant items comprising the Company's net deferred
income tax benefits as of August 31, 1996 and 1995, are as follows (in
thousands):
1996 1995
Accruals and valuation allowances
not currently deductible $ 567 $ 504
Inventory costs capitalized for
tax purposes 107 106
Unrealized gain on short-term
investments - (13)
Other 1 (48)
------ ------
Total current 675 549
Book over tax (tax over book)
depreciation (83) 15
Tax net operating loss (NOL)
and tax credit carryforwards 1,697 2,016
------ ------
Total noncurrent 1,614 2,031
------ ------
Total deferred income tax benefit $2,289 $2,580
====== ======
Management believes that no valuation allowance against the deferred tax
benefits is necessary at August 31, 1996 or 1995.
The resulting income tax expense is shown below (in thousands):
1996 1995 1994
Current - federal $484 $198 $ 89
Current - state 107 81 83
Deferred 291 572 695
---- ---- ----
Total current and deferred 882 851 867
Change in deferred tax valuation
allowance - - (854)
---- ---- ----
$882 $851 $ 13
==== ==== ====
F-15
A reconciliation between income taxes computed at the federal statutory rate
and income tax expense is shown below (in thousands):
1996 1995 1994
Income taxes computed at federal
statutory rate $ 942 $ 806 $ 773
State income tax expense - net
of federal income tax benefit 71 53 55
Research and development tax credit (116) - -
Expiration of investment and research
and development tax credits 30 - -
Expenses not deductible for tax purposes 14 15 3
Change in deferred tax valuation
allowance - - (854)
Other (59) (23) 36
------ ------ ------
Total income tax expense $ 882 $ 851 $ 13
====== ====== ======
As of August 31, 1996, the following income tax carryforwards are available
to reduce future federal income tax liabilities (in thousands):
Period
Amount Expiring
NOL tax benefits $ 823 2000-2005
Investment tax credits 71 1997-1998
Research and development tax credits 639 1997-2011
Alternative minimum federal income
tax benefits 164 No expiration
------
$1,697
======
10. 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.
No matching contributions were made in 1996, 1995 or 1994.
11. LITIGATION
In June 1996, the Company was served with a complaint filed by a certain
customer. The complaint alleges breach of contract in that the Company
failed to timely fulfill certain purchase orders issued in 1995. The
complaint seeks damages of $900,000 based primarily on a claim of lost
profits. The Company has since filed a countersuit against the customer
alleging breach of contract and seeking repayment for goods delivered and
attorney fees related to this litigation. Management believes that the
outcome of this matter will not materially affect the financial position,
results of operations or cash flows of the Company.
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12. QUARTERLY INFORMATION (UNAUDITED)
Selected unaudited quarterly financial data is as follows (in thousands,
except per-share amounts).
Fiscal 1995 Quarter Ended Fiscal 1996 Quarter Ended
-------------------------------- ------------------------------------
Nov.30 Feb.28 May 31 Aug.31 Nov.30 Feb.29 May 31 Aug.31
Sales $7,816 $7,762 $8,268 $8,295 $8,418 $8,237 $9,029 $10,034
Cost of sales 4,697 4,624 5,438 5,494 5,478 5,209 5,625 6,024
------ ------ ------ ------ ------ ------ ------ -------
Gross profit 3,119 3,138 2,830 2,801 2,940 3,028 3,404 4,010
Operating expenses:
Research and development 727 796 863 762 764 727 896 979
Sales and marketing 999 1,102 1,053 1,146 1,031 1,039 1,078 1,243
General and administrative 493 586 600 587 636 723 687 701
------ ------ ------ ------ ------ ------ ------ ------
Total 2,219 2,484 2,516 2,495 2,431 2,489 2,661 2,923
------ ------ ------ ------ ------ ------ ------ ------
Income from operations 900 654 314 306 509 539 743 1,087
Other income (expense), net 56 61 60 20 (43) (24) 73 (113)
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes 956 715 374 326 466 515 816 974
Income tax expense 382 286 110 73 187 206 211 278
------ ------ ------ ------ ------ ------ ------ ------
Net income $ 574 $ 429 $ 264 $ 253 $ 279 $ 309 $ 605 $ 696
====== ====== ====== ====== ====== ====== ====== ======
Earnings per share $ .11 $ .08 $ .05 $ .05 $ .05 $ .06 $ .11 $ .13
====== ====== ====== ====== ====== ====== ====== ======
Weighted average common and
common equivalent shares
outstanding 5,317 5,333 5,329 5,322 5,348 5,398 5,461 5,504
====== ====== ====== ====== ====== ====== ====== ======
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