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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, 1997
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, 1997, was $55,056,157. 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 5,517,153
as of November 15, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Definitive Proxy Statement to be filed with the Commission pursuant
to Regulation 14A in connection with the 1998 Annual Meeting is incorporated
herein by reference into Part III of this Report.
RF MONOLITHICS, INC.
FORM 10-K
YEAR ENDED AUGUST 31, 1997
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......................................... 19
13. Certain Relationships and Related Transactions......... 19
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 200
megahertz ("MHz") to 2,400 MHz and above. The Company markets its line of more
than 500 resonators, filters, clocks, oscillators, transmitters and receivers to
original equipment manufacturers ("OEMs") world-wide, including Code-Alarm,
Inc., Delco Electronics, Linear Corporation, Nokia Telecommunications, Northern
Telecom, Inc., Siemens AG, and Silicon Graphics, Inc.
BACKGROUND
The Company believes that a significant market opportunity for more
widespread adoption of SAW technology is emerging. As electronic applications
increase in 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 areas: low-power components, low-power Virtual Wire(R)
radio systems, frequency control modules and filters. These products are
incorporated into
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application designs in the five primary markets: automotive, consumer, computer,
industrial and telecommunications.
Automotive
The automotive industry utilizes SAW-based components in transmitter and
receiver designs for remote keyless entry (RKE) applications. Emerging
applications utilizing transmitter and receiver functions include the run flat
tire and immobilizer theft-deterrent systems. Automotive electronic
applications continue to grow with the unending drive toward smaller size,
reduced cost and improved system performance as evidenced by some of the
emerging multiplexing design schemes. These market requirements are met by the
Company's low-power components and low-power Virtual Wire(R) radio system
modules. This market is subject to severe price competition.
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 demand in SAW filters. The Company also offers frequency control
clocks, oscillators and custom modules for reference timing 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, such as European Global System
for Mobile Communications (GSM) and Code Division Multiple Access (CDMA), 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.
3
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.
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 both three-lead metal packages ("TO39") and leadless
surface mount packages. The surface mount technology ("SMT") facility initiated
high-volume production in 1995. The market for low-power resonators is
intensely competitive and has been characterized by price erosion, rapid
technological change and product obsolescence. As a result, the Company has
experienced increasing price competition for these 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 receiver at
lower total cost.
These products feature small size, very low power consumption and excellent
RF performance, and provide the system designer flexibility and fast time to
market for emerging applications. The breadth of frequency ranges covers both
North American and international frequency bands for low-power data
transmission. The receiver's ASH architecture provides exceptional performance
with extremely low harmonic radiation, allowing customers ease of international
standards certification.
The Virtual Wire(R) 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. The application market for Virtual Wire(R) radio systems
includes remote barcode data entry , remote meter reading and wireless
thermostats.
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 1997 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 for commercial and military avionics, optical
network 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
both digital cellular systems GSM and personal communications system (PCS)
standards and in 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 2% or more.
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 or sealing are performed in controlled environments such as clean-room
environments. The Company has experienced in the past product shipment delays
and lower-than-expected production yields. 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 facility, whether by act of
nature or otherwise, may have a material adverse affect on the Company's
manufacturing operations.
5
The Company's customers demand an increasing level of quality. The Company
has begun the process of implementing a program to achieve QS 9000 and ISO 9001
certification in 1998. 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: TO39 components, module devices
and SMT components.
TO39 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. The SMT facility is responsible for
assembly of low-power components and low-power Virtual Wire(R) radio system
products.
6
During fiscal 1997, the Company began construction of two 6,000 square foot
production facilities that will be utilized in 1998 to manufacture the TO39
components and module devices, respectively.
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 Maxim Integrated Products Inc., Cal
Eastern Labs Inc. and Kyocera America, Inc. The Company has experienced delays
and quality control problems with certain of its single-source suppliers in the
past. Although the Company is attempting to obtain second-source suppliers, the
Company believes it will continue to be dependent upon single-source suppliers.
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.
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 through a combination of manufacturers'
representatives and direct sales management. During 1997, the Company expanded
its sales structure in Western Europe and Israel to fifteen representatives and
in Asia and South America to eleven representatives. The North American sales
organization was restructured to include five additional representatives. The
Company provides sales and marketing support in Europe from a sales office
located near Paris, France. The Company's sales office in London, England was
closed in 1997.
Sales outside of North America accounted for approximately 50%, 50% and 47%
of the Company's net sales during fiscal 1997, 1996 and 1995, 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. A significant
portion of the Company's business is in Asian markets which have been
experiencing economic instability. There can be no assurance that the Company's
sales to Asian markets will not be affected by such economic instability.
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.
No single customer accounted for more than 8% of sales and the top 10
customers accounted for approximately 39% of total sales. 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 Electric Industrial Co., LTD., Sanyo Electric Co., Siemens,
Ag, Toyo Communication Equipment Co., LTD. and Murata Manufacturing Co., that
have substantially greater financial, technical, sales, marketing, distribution
and other resources, and broader product lines than the Company. The Company's
competitors 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 approximately 50 individuals in engineering and product
development, including design engineers and scientists. 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
technology development (or NRE) sales during fiscal years 1997, 1996 and 1995
were $318,000, $125,000 and $573,000, respectively. Costs related to these
sales were included in the Company's cost of sales during these years. The
Company considers the development of new products essential to increasing and
maintaining sales.
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 electronics industry is characterized by uncertainty and conflicting
intellectual property claims. The Company has in the past and may in the future
become aware of the intellectual property rights of others that it may be
infringing. There can be no assurance that the Company will not in the future be
notified that it is infringing on other patents and/or other intellectual
property rights of third parties. In the event of such alleged infringement,
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.
EMPLOYEES
As of August 31, 1997, the Company had a total of 552 employees, including
25 in sales, marketing and customer support; 51 in engineering and product
development; 440 in manufacturing; and 36 in finance and administration. Of
such employees, approximately 111 were temporary employees. With the exception
of one employee 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
9
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, 1997, was approximately $12.9 million
as compared to $11.4 million as of August 31, 1996. 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.
The Company has improved its manufacturing operations to the point that
many products can be manufactured with lead times of seven weeks or less. The
Company typically receives and fulfills a significant portion of its orders
within the quarter. As a result, the Company may not learn of revenue
shortfalls until late in a fiscal quarter. Additionally, the Company's operating
expenses are based in part on future revenues and are relatively fixed in the
short term. Any revenue shortfall below its expectations could have an immediate
and significant adverse effect on results of operations.
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 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
10
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 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 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. A motion for Leave to amend was granted, which
permitted TimeKeeping to add claims for fraud and spoliation of evidence, and a
continuation was granted. The complaint seeks compensatory damages of $4,000,000
and punitive damages in the amount of $250,000. The Company has submitted a
counterclaim for $33,000 in unpaid billings plus related legal expenses. The
Company believes that the allegations in the Timekeeping complaint are without
merit and intends to vigorously defend itself against such action.
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, 1997.
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
---- ---
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
1997:
First Quarter 11 3/4 7 1/8
Second Quarter 11 1/2 8 5/8
Third Quarter 15 1/4 9 1/2
Fourth Quarter 26 5/8 14 1/4
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, 1997 (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 clearing agency as one record holder). The
last sales price for RFMI's Common Stock, as reported by NASDAQ on November 15,
1997, was $12.75.
11
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED AUGUST 31,
---------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
STATEMENT OF INCOME DATA:
Sales $47,692 $35,718 $32,141 $24,787 $17,058
Cost of sales 28,136 22,336 20,253 15,372 11,333
------- ------- ------- ------- -------
Gross profit 19,556 13,382 11,888 9,415 5,725
Gross profit margin % 41.0 % 37.5 % 37.0 % 38.0 % 33.6 %
Research and development 4,169 3,366 3,148 1,381 855
Sales and marketing 5,842 4,391 4,300 3,517 2,825
General and administrative 3,391 2,747 2,266 2,104 1,597
------- ------- ------- ------- -------
Total operating expenses 13,402 10,504 9,714 7,002 5,277
------- ------- ------- ------- -------
Income from operations 6,154 2,878 2,174 2,413 448
Other income (expense), net (142) (107) 197 (139) (41)
------- ------- ------- ------- -------
Income before income taxes and accounting change 6,012 2,771 2,371 2,274 407
Income tax expense (benefit) 2,205 882 851 13 (128)
------- ------- ------- ------- -------
Net income $ 3,807 $ 1,889 $ 1,520 $ 2,261 $ 535
======= ======= ======= ======= =======
Earnings per share (pro forma prior to 1995) $ 0.66 $ 0.35 $ 0.29 $ 0.59 $ 0.15
======= ======= ======= ======= =======
Weighted average common and common equivalent shares outstanding
(pro forma prior to 1995) 5,790 5,429 5,325 3,830 3,538
======= ======= ======= ======= =======
BALANCE SHEET DATA (AT AUGUST 31):
Cash, cash equivalents and short-term investments $ 5,979 $ 6,060 $ 5,086 $ 6,555 $ 2,014
Working capital 14,674 12,879 9,616 9,101 3,044
Total assets 37,360 30,571 30,545 23,735 13,364
Long-term debt 1,911 2,413 2,854 153 755
Shareholders' equity 27,995 23,128 20,292 18,470 9,054
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 system, frequency control module 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, and transmitter and
receiver modules. The Company's average selling prices within these product
lines generally range from less than $1 to $30 for low-power products
(components and radio systems), $10 to $350 for frequency control modules and $4
to $30 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.
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, 1997 (current year or fiscal 1997), in
comparison to the fiscal year ended August 31, 1996 (prior year or fiscal 1996),
as well as the fiscal year ended August 31, 1995 (fiscal 1995). In addition,
there is discussion of the financial statements for the three months ended
August 31, 1997 (fourth quarter), in comparison to the three months ended August
31, 1996 (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
----------------------------- -----------------------
1996 to 1995 to
1997 1996 1995 1997 1996
---- ---- ---- ------- -------
Sales 100% 100% 100% 34% 11%
Cost of sales 59 62 63 26 10
---- ---- ---- ------- -------
Gross profit 41 38 37 46 13
Research and development 9 9 10 24 7
Sales and marketing 12 12 13 33 2
General and administrative 7 8 7 23 21
---- ---- ---- ------- -------
Total operating expenses 28 29 30 28 8
---- ---- ---- ------- -------
Income from operations 13 9 7 114 32
Other income (expense), net - - 1 33 (154)
---- ---- ---- ------- -------
Income before income taxes 13 9 8 117 17
Income tax expense 5 3 3 150 4
---- ---- ---- ------- -------
Net Income 8% 6% 5% 102% 24%
==== ==== ==== ======= =======
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,
-----------------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ -------------------------
% % %
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in thousands)
Product Sales:
Low-power components $36,118 76% $25,764 72% $19,673 61%
Virtual Wire(R) radio systems 2,415 5 1,729 5 574 2
Frequency control modules 3,429 7 6,064 17 10,304 32
Filter 5,412 11 2,036 6 1,017 3
------- -------- ------- ------- ------- --------
Total product sales 47,374 99 35,593 100 31,568 98
Technology development 318 1 125 - 573 2
------- -------- ------- ------- ------- --------
Total sales $47,692 100% $35,718 100% $32,141 100%
======= ======== ======= ======= ======= ========
Product sales increased 33% in fiscal 1997 and 13% in fiscal 1996,
primarily because of increased units shipped of the Company's low-power
component and filter products. Low-power component sales
14
increased 40% in fiscal 1997 and 31% in fiscal 1996. A significant portion of
the 1997 and 1996 increase was due to the demand for the Company's surface-mount
resonator 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, 1996 and 1997.
The Company believes that the markets for its low-power component products
is approximately $100 million and is growing in terms of unit volume. These
markets have attracted a number of large international competitors, particularly
for the automotive segment. The increased competition has resulted in lower
average selling prices in many cases. The Company believes that the impact of
lower average selling prices may be significant enough in future periods to
offset the impact of selling an increased number of units. There can be no
assurance that sales for low-power components will continue to increase, or even
stay at the same level they have been in previous periods.
The Company has devoted a considerable amount of its capital, technical,
sales and marketing resources into the Virtual Wire(R) radio systems products.
It has developed and released to manufacturing status more than 25 individual
product variations of Virtual Wire(R) radio products. The Company believes these
types of products provide an opportunity to exploit its proprietary technology
and pursue its strategy of focusing on value added products. The Company is
helping more than 50 potential customers to incorporate these products into a
wide variety of new applications. The timing of when any sales resulting from
such new applications reach the production phase is dependent upon the timing of
both the customers product development cycles and their product introduction
cycles. There can be no assurance as to when or even if these new products will
have a significant impact on the Company's sales.
Filter sales increased 166% in fiscal 1997 and 100% in fiscal 1996 as a
result of increased demand from customers in the telecommunications and wireless
LAN markets. In future periods, the Company will devote significant resources to
developing and supporting the growth of its filter products. The product
development and introduction cycle for filter products takes between six months
to a year to complete, therefore, the timing of any revenue in this area is
unpredictable. There can be no assurance as to when or if this strategy to
focus on filter products will have a significant impact on the Company's sales.
Frequency control module sales decreased 43% in fiscal 1997 and 41% in
fiscal 1996. These products accounted for only 7% of total sales in fiscal 1997,
compared to 17 % in 1996 and 32% in fiscal 1995. Frequency control module sales
in prior years predominately included sales to the Company's then largest
customer, Digital Equipment Corporation ("Digital"), for use in systems based on
the Alpha microprocessor. Sales to Digital decreased in fiscal 1997, 1996 and
1995, primarily as a result of lower average selling prices, as this customer
converted to lower-priced units and, more recently, due to reduced sales units.
The lower-priced units, in 1996, 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 1%,
10%, and 19% of total sales during fiscal 1997, 1996 and 1995, respectively.
The Company's top five customers accounted for approximately 27%, 28% and
38% of the Company's total sales in fiscal 1997, 1996 and 1995, respectively.
Over the last two fiscal years, 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. No single customer accounted
for more than 8% of total sales in 1997. The reduction in the relative portion
of sales to the Company's top five customers from 1995 to 1996 largely reflects
the reduction in sales to the Company's then largest customer, Digital.
15
International sales (primarily in Europe and Asia) were approximately 50%
of the Company's total sales during fiscal 1997 compared to approximately 50% in
fiscal 1996 and 47% in fiscal 1995. 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.
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 41.0% in fiscal 1997, compared to 37.5% in
fiscal 1996, and 37.0% in fiscal 1995, primarily as a result of increased gross
profit margin for the Company's low-power component and filter 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 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. In 1997, low-power products experienced a
decrease in average sales price as a result of competitive pressures. This was
not experienced in fiscal 1996 when improved gross profit margins were aided by
increased average selling prices as a result of changes in product mix within
this product line. There can be no assurance, however, that the trend toward
lower per-unit manufacturing costs, that occurred in recent years, will
continue. If average selling prices were to decrease faster than per unit
manufacturing costs decrease, then the Company's gross profit margins would be
adversely impacted.
The improvement in low-power gross profit margins in both 1997 and 1996 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 7%
of total sales in fiscal 1997, compared to 17% in fiscal 1996 and 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.
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.
16
Research and Development
Research and development expenses increased approximately 24% in fiscal
1997 and 7% in fiscal 1996. The increase in both fiscal 1997 and 1996 was due to
increased staffing to support the increased sales growth of the Company and
increased emphasis on process engineering and document control process for its
operations. Since sales increased comparably to research and development
expenses, such expenses maintained a level at 9% of total sales in fiscal 1997
and 1996. The Company believes that the continued development of its technology
and new products is essential to its success and is committed to continuing its
investment in research and development, which is expected to increase in
absolute dollars in future periods.
Sales and Marketing
Sales and marketing expenses increased approximately 33% in fiscal 1997 and
2% in fiscal 1996. These increases were due primarily to increased resources in
the form of sales representative organizations and to increased sales
commissions and marketing costs needed to support the Company's increased sales.
Since sales increased comparably to sales and marketing expenses, such expenses
maintained a level of 12% in fiscal 1997 and fiscal 1996. The Company expects to
incur higher sales and marketing expenses in absolute dollars in future periods
as it expands its sales and marketing efforts.
General and Administrative
General and administrative expenses increased approximately 23% in fiscal
1997 and 21% in fiscal 1996. Such increases were primarily attributable to
continued increased support for the Company's expansion and increased costs for
write-offs of certain receivable accounts. 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. Since sales increased faster than general and administrative
expenses, such expenses decreased to 7% of sales in fiscal 1997 from 8% in
fiscal 1996.
Other Income (Expense)
During the current year, the Company repaid portions of its indebtedness as
cash generated from operations allowed. This decrease in indebtedness caused a
decrease in interest expense for fiscal 1997, compared to fiscal 1996, resulting
in a net reduction of other income.
Income Tax Expense
The Company's income tax expense was $2.2 million in fiscal 1997, compared
to $882,000 in fiscal 1996, and $851,000 in fiscal 1995. 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's effective tax rate, exclusive of the fiscal 1996 one-time tax
credit, was approximately 37%, 36% and 36% in fiscal 1997, 1996 and 1995,
respectively.
Earnings per Share
Net income increased 120% to $3.8 million in the current year as compared
to $1.9 million in the prior year. The Company's earnings per share was $.66
per share for fiscal 1997, compared to $.35 per share for fiscal 1996 and $.29
per share for fiscal 1995.
17
Fourth Quarter of Fiscal 1997
Unaudited quarterly financial data is presented in Note 12 of the
accompanying financial statements.
Sales for the fourth quarter increased 40% to $14.1 million, compared to
$10.0 million in the comparable quarter of the prior year. The overall sales
increase was primarily due to an increase in low-power component products and
filter products sales of approximately 41% and 285%, respectively, 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.
Gross profit margins were 42.5% in the fourth quarter, compared to 40.0%
for the comparable quarter of the prior year. This was primarily due to
improvement in margins for the low-power component 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 allocated over a larger number of
units.
Operating income for the fourth quarter was $2.3 million, or 16% of total
sales. This compares to $1.1 million, or 11% 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 $786,000 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, increases in product and market development programs and system
development programs. Earnings per share was $.23 in the fourth quarter,
compared to $.13 for the comparable quarter of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Principal sources of liquidity at August 31, 1997, consisted of $6.0
million of cash, cash equivalents and short-term investments, and $7.6 million
of unused credit facilities. The unutilized portion of the credit facilities
includes $5.0 million under a line of credit agreement and $2.6 million under an
equipment-collateralized operating lease facility. The equipment-collateralized
operating lease facility was to be advanced in stages prior to December 31,
1997, and the Company is currently under negotiations to extend the current
terms and conditions through the end of fiscal year 1998. 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, 1997, the Company was in compliance with such covenants
and restrictions.
Net cash from operations increased to $5.9 million due to a $2.6 million
increase in net income and noncash items included in net income, such as
depreciation and amortization, offset by $.4 million additional cash used in
working capital, such as trade accounts receivable and inventory.
Cash used in investing activities in the current year was $6.0 million.
Fiscal year 1997 and 1996 capital acquisitions included significant purchases of
property and equipment to enhance the Company's manufacturing facilities.
The Company expects to acquire approximately $8 million to $12 million of
capital equipment by the end of fiscal 1998, consisting primarily of equipment
needed for its manufacturing facilities. Some of this equipment may be acquired
under an equipment-collateralized operating lease facility.
18
Net cash used in financing activities was $.4 million in 1997 and $.5
million in 1996. Funds raised from operations and exercises of stock options
were mostly used to repay other debt and acquire property and equipment.
The Company believes that cash generated from operations, if any, banking
facilities, and the $6.0 million balance in cash and short-term investments will
be sufficient to meet the Company's operating cash requirements through fiscal
1998. 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 1998 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."
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."
19
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements. Financial statements are attached as Appendix A to
this report. The index to the financial statements is found on page F-1
of Appendix A.
(a) 2. Financial Statement Schedules. All schedules are omitted since the
required information is not present or is not present in amounts
sufficient to require a submission of the schedules, or because the
information required is included in the financial statements and notes
thereto.
(a) 3. Exhibits. See Exhibit Index in part (c), below.
(b) The Company did not file any reports on Form 8-K during the quarter
ended August 31, 1997.
(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)
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)
20
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)
10.23 Form of Change of Control Agreement for
certain officers. (9)
11.1 Computation of net income per share. (9)
23.1 Consent of Deloitte & Touche LLP,
Independent Auditors. (9)
24.1 Power of Attorney. See page 22.
(1) Previously filed as an exhibit to the Registration Statement on Form
S-1, as amended (Registration No. 33-78040) and incorporated herein
by reference.
(2) Previously filed as an exhibit to the Annual Report on Form 10-K for
the year ended August 31, 1994, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Quarterly Report on Form 10-Q
for the quarter ended November 30, 1994, and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Quarterly Report on Form 10-Q
for the quarter ended February 28, 1995, and incorporated herein by
reference.
(5) Previously filed as an exhibit to the Annual Report on Form 10-K for
the year ended August 31, 1995, and incorporated herein by reference.
(6) Previously filed as an exhibit to the Quarterly Report on Form 10-Q
for the quarter ended November 30, 1995, and incorporated herein by
reference.
(7) Previously filed as an exhibit to the Quarterly Report on Form 10-Q
for the quarter ended February 29, 1996, and incorporated herein by
reference.
(8) Previously filed as an exhibit to the Annual Report on Form 10-K for
the year ended August 31, 1996, and incorporated herein by reference.
(9) 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.
21
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 25th day of
November, 1997.
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 25th day of November, 1997.
/s/ SAM L. DENSMORE /s/ DEAN C. CAMPBELL
- -------------------------------- --------------------------------
Sam L. Densmore Dean C. Campbell
CEO, President & Director Director
/s/ JAMES P. FARLEY /s/ MATTHEW J. DESCH
- -------------------------------- --------------------------------
James P. Farley Matthew J. Desch
VP Finance and Controller Director
/s/ MICHAEL R. BERNIQUE /s/ FRANCIS J. HUGHES, JR.
- -------------------------------- --------------------------------
Michael R. Bernique Francis J. Hughes, Jr.
Director Director
/s/ CORNELIUS C. BOND, JR.
- --------------------------------
Cornelius C. Bond, Jr.
Director
22
APPENDIX A
----------------------------------------
RF Monolithics, Inc.
Financial Statements as of
August 31, 1997 and 1996, and for
Each of the Three Years in the
Period Ended August 31, 1997, and
Independent Auditors' Report
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, 1997 and 1996 F-3
Statements of Income for the Years Ended August 31, 1997, 1996 and 1995 F-4
Statements of Stockholders' Equity for the Years Ended
August 31, 1997, 1996 and 1995 F-5
Statements of Cash Flows for the Years Ended
August 31, 1997, 1996 and 1995 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, 1997 and 1996, and the related statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended August
31, 1997. 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, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended August 31, 1997, in conformity with generally
accepted accounting principles.
Dallas, Texas
October 14, 1997
F-2
RF MONOLITHICS
BALANCE SHEETS
AUGUST 31, 1997 AND 1996
(In Thousands)
- -------------------------------------------------------------------------------
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 482 $ 1,029
Short-term investments (Note 1) 5,487 5,031
Trade receivables, less allowance of $440 and
$283 in 1997 and 1996 respectively (Note 5) 9,517 6,703
Inventories (Notes 2 and 5) 4,934 3,935
Prepaid expenses and other 961 536
Deferred income tax benefits (Note 9) 747 675
-------- --------
Total current assets 22,128 17,909
PROPERTY AND EQUIPMENT - Net (Notes 3 and 5) 13,694 10,321
DEFERRED INCOME TAX BENEFITS (Note 9) 890 1,614
OTHER ASSETS - Net (Note 4) 648 727
-------- --------
TOTAL $ 37,360 $ 30,571
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - current portion (Note 5) $ 500 $ 1,500
Capital lease obligations - current portion (Note 6) 665 329
Accounts payable - trade 2,135 1,033
Accounts payable - construction and equipment 604 142
Accrued expenses and other liabilities 2,965 1,972
Income taxes payable (Note 9) 585 54
-------- --------
Total current liabilities 7,454 5,030
LONG-TERM DEBT - Less current portion:
Notes payable (Note 5) 1,005 1,505
Capital lease obligations (Note 6) 906 908
-------- --------
Total long-term debt 1,911 2,413
COMMITMENTS AND CONTINGENCIES (Notes 6 and 11)
STOCKHOLDERS' EQUITY (Notes 5 and 7):
Common stock: $.001 par value, 20,000 shares authorized;
5,514 and 5,314 shares issued and outstanding in 1997
and 1996, respectively 6 5
Additional paid-in capital 25,535 24,547
Retained earnings (accumulated deficit) 2,593 (1,214)
Unearned compensation (142) (210)
Unrealized gain on short-term investments (Note 1) 3 --
-------- --------
Total stockholders' equity 27,995 23,128
-------- --------
TOTAL $ 37,360 $ 30,571
======== ========
See notes to financial statements.
F-3
RF MONOLITHICS, INC.
STATEMENTS OF INCOME
YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(In Thousands, Except Per-Share Amounts)
- --------------------------------------------------------------------------------
1997 1996 1995
SALES (Note 8) $ 47,692 $ 35,718 $ 32,141
COST OF SALES 28,136 22,336 20,253
-------- -------- --------
GROSS PROFIT 19,556 13,382 11,888
OPERATING EXPENSES:
Research and development 4,169 3,366 3,148
Sales and marketing 5,842 4,391 4,300
General and administrative 3,391 2,747 2,266
-------- -------- --------
Total 13,402 10,504 9,714
-------- -------- --------
INCOME FROM OPERATIONS 6,154 2,878 2,174
OTHER INCOME (EXPENSE):
Interest income 288 337 302
Interest expense (351) (488) (184)
Other (79) 44 79
-------- -------- --------
Total (142) (107) 197
-------- -------- --------
INCOME BEFORE INCOME TAXES 6,012 2,771 2,371
INCOME TAX EXPENSE (Note 9) - Current and deferred 2,205 882 851
-------- -------- --------
NET INCOME $ 3,807 $ 1,889 $ 1,520
======== ======== ========
EARNINGS PER SHARE $ .66 $ .35 $ .29
======== ======== ========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 5,790 5,429 5,325
======== ======== ========
See notes to financial statements.
F-4
RF MONOLITHICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(In Thousands)
- --------------------------------------------------------------------------------
Retained
Common Stock Additional Earnings Unrealized
------------------ Paid-In (Accumulate Unearned Gain on
Shares Amount Capital Deficit) Compensation Investments Total
BALANCE, SEPTEMBER 1, 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
Common stock options exercised,
including tax benefit (Note 9) 132 1 596 -- -- -- 597
Amortization of unearned
compensation (Note 7) -- -- -- -- 68 -- 68
Issuance of common stock under
the Purchase Plan (Note 7) 68 -- 392 -- -- -- 392
Change in unrealized gain on
investments (Note 1) -- -- -- -- -- 3 3
Net income -- -- -- 3,807 -- -- 3,807
------ -------- -------- -------- -------- ------- --------
BALANCE, AUGUST 31, 1997 5,514 6 25,535 $ 2,593 $ (142) $ 3 $ 27,995
====== ======== ======== ======== ======== ======= ========
See notes to financial statements.
F-5
RF MONOLITHICS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(In Thousands)
- --------------------------------------------------------------------------------
1997 1996 1995
OPERATING ACTIVITIES:
Net income $ 3,807 $ 1,889 $ 1,520
Noncash items included in net income:
Deferred taxes and valuation allowance 652 291 585
Depreciation and amortization 2,947 2,532 1,576
Provision for doubtful accounts 157 257 75
(Gain) loss on sale of assets (9) 31 --
Other 68 33 (10)
Cash from (used in) operating working capital:
Trade receivables (2,971) (765) (1,396)
Inventories (999) 773 (2,720)
Prepaid expenses and other (425) (59) (295)
Accounts payable - trade 1,102 (1,583) 1,036
Accrued expenses and other liabilities 993 203 145
Income taxes payable 531 25 (55)
------- ------- -------
Net cash from operating activities 5,853 3,627 461
------- ------- -------
INVESTING ACTIVITIES:
Increase in short-term investments (5,481) (5,031) (4,640)
Decerase in short-term investments 5,028 4,631 4,916
Acquisition of property and equipment (5,550) (2,114) (4,439)
Proceeds from sale of assets 34 33 --
Increase (decrease) in other assets 9 (13) (92)
------- ------- -------
Net cash used in investing activities (5,960) (2,494) (4,255)
------- ------- -------
FINANCING ACTIVITIES:
Borrowings on notes payable -- 2,385 3,558
Repayments of notes payable (1,500) (2,921) (17)
Repayments of capital lease obligations (391) (302) (346)
Borrowings (repayments) of accounts payable - construction and equipment 462 (631) 245
Common stock issued for options exercised 598 799 280
Common stock issued under the Purchase Plan 391 137 --
Accrual (payment) of costs of initial public offering -- -- (674)
Dividends paid on preferred stock -- (4) (467)
------- ------- -------
Net cash from (used in) financing activities (440) (537) 2,579
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (547) 596 (1,215)
CASH AND CASH EQUIVALENTS:
Beginning of year 1,029 433 1,648
------- ------- -------
End of year $ 482 $ 1,029 $ 433
======= ======= =======
SUPPLEMENTAL INFORMATION:
Interest paid $ 352 $ 507 $ 184
======= ======= =======
Income taxes paid $ 761 $ 132 $ 173
======= ======= =======
Noncash investing and financing activities:
Property and equipment acquisitions by debt $ 725 $ 18 $ 1,563
======= ======= =======
Total cash and noncash property and equipment additions $ 6,274 $ 2,132 $ 6,002
======= ======= =======
See notes to financial statements.
F-6
RF MONOLITHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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, consumer, industrial and
telecommunications, and are sold primarily in North America, Europe and Asia.
FINANCIAL STATEMENT PREPARATION requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and revenues and expenses for the
period. Actual results could differ significantly from those estimates.
REVENUES are recognized when products are shipped. The Company permits the
return of damaged or defective products and accepts limited amounts of
product returns in other instances. Accordingly, the Company provides
allowances for the estimated amounts of these returns at the time of revenue
recognition.
CASH EQUIVALENTS represent liquid investments with maturities at the date of
acquisition of three months or less.
SHORT-TERM INVESTMENTS represent primarily government 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, 1997, the original investment cost was $5,481,000,
resulting in an unrealized gain of $5,000 ($3,000 net of taxes). At August
31, 1996, the original investment cost approximated fair value.
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).
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," which establishes new standards for computing and presenting earnings
per share and is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is
not permitted. The Company does not expect the adoption of SFAS No. 128 to
have a significant impact upon the Company's reported earnings per share.
STOCK-BASED COMPENSATION arising from stock option grants is accounted for by
the intrinsic value method under APB Opinion No. 25. SFAS No. 123,
"Accounting for Stock-Based Compensation," was effective for the Company
beginning September 1, 1996. This statement requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. As permitted by SFAS No. 123, the Company will
continue to apply APB Opinion No. 25 to its stock-based compensation awards
to employees and will disclose the required pro forma effect on net income
and earnings per share (Note 7).
RECLASSIFICATIONS have been made to certain 1995 and 1996 amounts to conform
to the 1997 presentation.
2. INVENTORIES
Inventories consist of the following (in thousands):
1997 1996
Raw materials and supplies $ 2,569 $ 1,904
Work in process 1,239 763
Finished goods 1,126 1,268
--------- ---------
Total $ 4,934 $ 3,935
========= =========
F-8
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
1997 1996
Machinery and equipment $ 16,684 $14,646
Equipment under capital leases (Note 6) 2,516 1,792
Construction in progress 3,021 126
Leasehold improvements 2,651 2,221
Capitalized SMT facility start-up costs 579 579
Office furniture 310 202
-------- -------
Total 25,761 19,566
Less accumulated depreciation and amortization (including $763 and
$473 in 1997 and 1996, respectively, for capital leases) 12,067 9,245
-------- -------
Property and equipment - net $ 13,694 $10,321
======== =======
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):
1997 1996
Patents, less accumulated amortization of $221 and
$152 in 1997 and 1996, respectively $ 366 $ 427
Patent deposits 209 276
Other 73 24
------- -------
Total $ 648 $ 727
======= =======
F-9
5. NOTES PAYABLE
Notes payable at August 31, 1997 and 1996, consist of the following (in
thousands):
1997 1996
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
(8.5% at August 31, 1997), subject to certain covenants generally related to
working capital, shareholder's equity and earnings and collateralized by all
accounts receivable, inventory and equipment purchased on or subsequent to March
1, 1996 (net book value of $3,595 at August 31, 1997), excluding leased equipment $ - $ 1,000
Note payable under $2,500 equipment term loan facility payable in equal monthly
installments, maturing five years from the date of each advance, bearing
interest at the bank's prime floating rate or LIBOR (8.5% to 8.9% at August 31,
1997), subject to certain covenants generally related to working capital,
shareholder's equity and earnings and collateralized by certain equipment (net
book value of $4,869 at August 31, 1997) 1,505 2,005
--------- ---------
Total 1,505 3,005
Less current portion 500 1,500
--------- ---------
Long-term portion $ 1,005 $ 1,505
========= =========
Long-term debt matures as follows: $500 in 1998, $500 in 1999, $483 in 2000 and $22 in 2001.
At August 31, 1997, the available unused balance under the revolving line-of-
credit facility is $5.0 million.
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 1997, 1996 and 1995 was $748,000,
$486,000 and $294,000, respectively. Minimum future rental commitments under
the capital and operating leases at August 31, 1997, are as follows (in
thousands):
Capital
Lease Operating
Obligations Leases
Fiscal year ending August 31:
1998 $ 665 $ 923
1999 698 866
2000 376 782
2001 - 443
2002 - 382
Thereafter - 351
------- -------
Total minimum payments 1,739 $ 3,747
=======
Less amounts representing interest 168
-------
Total present value of net minimum lease payments at August 31, 1997 1,571
Less current portion 665
-------
Long-term portion $ 906
=======
The Company has a $1,500,000 equipment lease facility with a bank which was
fully utilized at August 31, 1997. 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.
Lease obligations, which are presented as operating lease obligations in the
above table, are under a $3,500,000 equipment lease facility, of which the
Company had utilized $684,308 at August 31, 1997. Payments are due in
monthly installments over a four-year period from the date of each advance.
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 approximately $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
Preferred stock of 5,000,000 shares with $.001 par value is authorized; none
was issued at August 31, 1997 and 1996. Rights, preferences and other terms
of the preferred stock will be determined by the Board of Directors at the
time of issuance.
F-11
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, 1997, there are 484,431
options outstanding and 90,557 options available for grant under this plan.
A summary of the activity for the 1982 Plan follows:
Exercise
Shares Price
Options outstanding September 1, 1994 62,499 $4.50-$6.00
Granted:
1995 - -
1996 327,000 6.25-8.50
1997 215,500 8.125-22.50
Exercised:
1995 (10,714) 6.00
1996 (31,750) 6.25
1997 (31,276) 4.50-10.125
Expired:
1995 (14,286) 6.00
1996 (20,250) 6.25-8.50
1997 (12,292) 6.25-8.25
--------
Options outstanding at August 31, 1997 484,431 6.25-22.50
========
Exercisable at August 31, 1997 145,076 6.25-14.75
========
F-12
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 August 31, 1997, there are 248,560 options outstanding and
21,638 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, 1994 617,133 $.60-$9.00
Granted:
1995 7,333 7.25
1996 - -
1997 - -
Exercised:
1995 (57,166) .60-7.25
1996 (200,243) .60-6.00
1997 (93,718) .60-7.25
Expired:
1995 (11,922) .60-9.00
1996 (9,047) .60-7.25
1997 (3,810) .60-4.50
--------
Options outstanding at August 31, 1997 248,560 .60-7.50
========
Exercisable at August 31, 1997 220,720 $.60-$7.50
========
Under the terms of the Non-Employee Director Stock Option Plan (Director
Plan), options to purchase common stock may be granted every January 1 to
each director who is not an officer of the Company. One-fourth of the shares
optioned become exercisable on the first anniversary of the date of grant and
one forty-eighth of the shares optioned become exercisable each month
thereafter, with all options fully exercisable four years after the date of
grant. The options expire ten years after the date of grant. At August 31,
1997, there are 70,768 options outstanding and 97,000 options available for
grants. A summary of the activity for the Director Plan is as follows:
Exercise
Shares Price
Options outstanding at September 1, 1994 37,500 $6.50
Granted:
1995 13,500 10.875
1996 13,500 6.00
1997 13,500 9.125
Exercised:
1997 (7,232) 6.50
-------
Options outstanding at August 31, 1997 70,768 6.00-10.875
=======
Exercisable at August 31, 1997 35,736 $6.50-$10.875
=======
F-13
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.
In October 1997, in conjunction with the appointment of two new members of
the board of directors, the Company granted, to certain non-employee
directors, options to purchase 25,000 shares of the Company's common stock at
an exercise price of $27.0625 per share.
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 restrictions. The Purchase Plan enables eligible
employees of the Company to purchase shares of common stock at not less than
85% of the fair market value of the common stock at the determination date
through payroll withholding. A summary of the activity for the employee
stock purchase plan is as follows:
Purchase
Shares Proceeds
June 30, 1996 24,310 $ 138,896
December 31, 1996 29,426 167,166
June 30, 1997 38,728 224,855
------- -----------
Total 92,464 $ 530,917
------- -----------
COMMON SHARES reserved at August 31, 1997, for possible future conversion or
issuance are as follows:
Options granted:
1982 Plan 484,431
1986 Plan 248,560
Director Plan 70,768
----------
Total shares contingently issuable 803,759
Options and purchase rights available for grants:
1982 Plan 90,557
1986 Plan 21,638
Director Plan 97,000
Purchase Plan 82,536
----------
Total 291,731
----------
Total common shares reserved 1,095,490
==========
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 became
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 $68,000 and $33,000.
F-14
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 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.
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option plans. Accordingly, no
compensation cost (generally measured as the excess, if any, of the quoted
market price of the common stock at the date of the grant over the amount an
employee must pay to acquire the common stock) has been recognized for the
Company's stock option plans. Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," issued by the Financial
Accounting Standards Board in 1995, prescribed a method to record
compensation cost for stock-based employee compensation plans at fair value.
Pro forma disclosures as if the Company had adopted the cost recognition
requirements under SFAS No. 123 in 1997 and 1996 are presented below.
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to September 1, 1995, the resulting pro forma compensation cost
may not be representative of that expected in future years.
Years Ended
---------------------------------
1997 1996
Net income (in thousands):
As reported $ 3,807 $ 1,889
Pro forma 3,251 1,605
Earnings per share:
As reported $ 0.66 $ 0.35
Pro forma 0.56 0.30
Stock options issued 229,000 340,500
Weighted average exercise price $ 9.40 $ 6.65
Average compensation value of options granted per option $ 4.75 $ 3.31
Compensation cost (for current-year grants) was calculated in accordance with
the binomial model, using the following assumptions: (i) expected volatility
computed using the monthly average of the Company's common stock market price
as listed on the New York Stock Exchange for the period July 28 ,1994, date
of the Company's initial public offering, through August 1997, which market
price
F-15
volatility averaged 60%; (ii) expected dividend yield of 0%; (iii) expected
option term of six years; and (iv) risk-free rate of return as of the date of
grant, which ranged from 5.5% to 6.5%, based on extrapolated yield of five-
and seven-year U.S. Treasury securities.
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:
1997 1996 1995
Significant customer 1% 10% 19%
Export sales:
North America 50% 50% 53%
Europe 32 28 24
Asia 14 18 19
Other 4 4 4
--- --- ---
Total export sales 100% 100% 100%
=== === ===
9. INCOME TAXES
The tax effects of significant items comprising the Company's net deferred
income tax benefits as of August 31, 1997 and 1996, are as follows (in
thousands):
1997 1996
Accruals and valuation allowances not currently deductible $ 666 $ 567
Inventory costs capitalized for tax purposes 81 107
Other - 1
---------- ----------
Total current 747 675
Book over tax (tax over book) depreciation 109 (83)
Tax net operating loss (NOL) and tax credit carryforwards 781 1,697
---------- ----------
Total noncurrent 890 1,614
---------- ----------
Total deferred income tax benefit $ 1,637 $ 2,289
========== ==========
Management believes that no valuation allowance against the deferred tax
benefits is necessary at August 31, 1997 or 1996.
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The resulting income tax expense is shown below (in thousands):
1997 1996 1995
Current - federal $ 1,359 $ 484 $ 198
Current - state 194 107 81
Deferred 652 291 572
--------- ------- -------
$ 2,205 $ 882 $ 851
========= ======= =======
A reconciliation between income taxes computed at the federal statutory rate
and income tax expense is shown below (in thousands):
1997 1996 1995
Income taxes computed at federal statutory rate $ 2,044 $ 942 $ 806
State income tax expense - net of federal
income tax benefit 128 71 53
Research and development tax credit - (116) -
Expiration of investment and research and development
tax credits - 30 -
Expenses not deductible for tax purposes 20 14 15
Other 13 (59) (23)
--------- ------- -------
Total income tax expense $ 2,205 $ 882 $ 851
========= ======= =======
As of August 31, 1997, the following income tax carryforwards are available
to reduce future federal income tax liabilities (in thousands):
Period
Amount Expiring
Investment tax credits $ 31 1997-1998
Research and development tax credits 589 1997-2011
Alternative minimum federal income tax benefits 161 No expiration
-------
$ 781
=======
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 1997, 1996 or 1995.
11. LITIGATION
On June 7, 1996, the Company was served with a complaint filed by TimeKeeping
Systems, Inc. ("TimeKeeping"). 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. A motion
to amend was granted, which permitted TimeKeeping to add claims for fraud and
spoliation of evidence, and continuation was granted. The complaint seeks
compensatory damages of $4,000,000
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and punitive damages in the amount of $250,000. The Company has removed the
action to the United States District Court for the Northern District of Ohio.
The Company has submitted a counterclaim for $33,000 in unpaid billings plus
related legal expenses. The Company believes that the allegations in the
TimeKeeping complaint are without merit and intends to vigorously defend
itself against such action.
12. QUARTERLY INFORMATION (UNAUDITED)
Selected unaudited quarterly financial data is as follows (in thousands,
except per-share amounts):
Fiscal 1997 Quarter Ended Fiscal 1996 Quarter Ended
------------------------------------------ ---------------------------------------
Nov. 30 Feb. 28 May 31 Aug. 31 Nov. 30 Feb. 29 May 31 Aug. 31
Sales $ 10,077 $ 10,695 $ 12,841 $ 14,079 $ 8,418 $ 8,237 $ 9,029 $ 10,034
Cost of sales 6,090 6,422 7,527 8,097 5,478 5,209 5,625 6,024
-------- -------- -------- -------- ------- ------- ------- --------
Gross profit 3,987 4,273 5,314 5,982 2,940 3,028 3,404 4,010
Operating expenses:
Research and development 914 969 1,060 1,226 764 727 896 979
Sales and marketing 1,357 1,431 1,497 1,557 1,031 1,039 1,078 1,243
General and administrative 700 778 987 926 636 723 687 701
-------- -------- -------- -------- ------- ------- ------- --------
Total 2,971 3,178 3,544 3,709 2,431 2,489 2,661 2,923
-------- -------- -------- -------- ------- ------- ------- --------
Income from operations 1,016 1,095 1,770 2,273 509 539 743 1,087
Other income (expense), net (48) 8 (9) (93) (43) (24) 73 (113)
-------- -------- -------- -------- ------- ------- ------- --------
Income before income taxes 968 1,103 1,761 2,180 466 515 816 974
Income tax expense 368 419 612 806 187 206 211 278
-------- -------- -------- -------- ------- ------- ------- --------
Net income $ 600 $ 684 $ 1,149 $ 1,374 $ 279 $ 309 $ 605 $ 696
======== ======== ======== ======== ======= ======= ======= ========
Earnings per share $ .11 $ .12 $ .20 $ .23 $ .05 $ .06 $ .11 $ .13
======== ======== ======== ======== ======= ======= ======= ========
Weighted average common and
common equivalent shares
outstanding 5,599 5,687 5,774 5,988 5,348 5,398 5,461 5,504
======== ======== ======== ======== ======= ======= ======= ========
******
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