ITEM 1. BUSINESS
RF Monolithics, Inc. ("RFM" or the "Company") designs, develops, manufactures and markets a broad range of radio frequency ("RF") component and module products in four areas: low-power components, low-power Virtual Wire(R) radio systems, frequency control modules and filters. The Company's products are based on surface acoustic wave ("SAW") technology and are manufactured as discrete devices to perform specific functions and as integrated modules to meet system performance requirements. The Company believes that its SAW-based products, coupled with its RF design and manufacturing expertise, offer electronics manufacturers certain fundamental advantages over alternative technologies. As electronic applications ranging from automotive remote keyless entry ("RKE") to digital cellular phones to computers migrate to higher operating frequencies with tighter tolerances and more stringent performance specifications, demand for RF modules and SAW discrete components is expected to increase.
The Company focuses its product development in the frequency range of 50 megahertz ("MHz") to 2,400 MHz and above. The Company markets its line of more than 500 resonators, filters, clocks, oscillators, custom modules and radio systems to original equipment manufacturers ("OEMs") world-wide, including Delco Electronics, Digital Equipment Corporation, Siemens Automotive, Silicon Graphics, Inc. and Code-Alarm, Inc.
Background
The Company believes that a significant market opportunity for more widespread adoption of SAW technology is emerging. As electronic applications increase in speed and frequency, there will be an increasing demand for improved performance and functionality, greater precision, reduced size, lower power consumption and greater reliability. The Company believes that these dynamics are creating frequency control opportunities which are not effectively addressed by traditional RF approaches.
SAW-technology-based discrete components, modules and RF systems combine a complex mix of software-controlled design rules, wafer fabrication, hybrid assembly and packaging processes to meet stringent customer and governmental compliance requirements. The earliest SAW applications were developed for high- level military systems for electronic warfare and volume consumer products such as TVs and VCRs. The unique features of SAW technology provide flexible solutions to systems designers defining tomorrow's emerging applications across multiple market segments.
Markets and Applications
The Company focuses on specific market opportunities where the Company believes that its SAW technology solutions coupled with its RF design expertise address current and emerging market and application requirements. The Company offers products in four rapidly growing areas: low-power
components, low-power Virtual Wire(R) radio systems, frequency control modules and filters. These products are incorporated into application designs in the five primary markets: automotive, computer, industrial, consumer and telecommunications.
Automotive
The automotive industry utilizes SAW-based components in transmitter and receiver designs for RKE applications. Emerging applications utilizing transmitter and receiver functions include the run flat tire and immobilizer theft-deterrent systems. Automotive electronic applications continue to grow with the unending drive toward smaller size, reduced cost and improved system performance. These market requirements are met by the Company's low-power components.
Computer
The operating speed of computer products is increasing in order to provide more widespread, faster access to and manipulation of multimedia information and the more rapid design and analysis of electronics, structural and industrial systems. Frequency control modules, primarily clocks, are applied in computer systems to provide a precise, stable frequency control source. The design and deployment of wireless local area computer and data link networks is generating increased interest in SAW filters. The Company also offers frequency control clocks, oscillators and custom modules for computing applications in the military market segment.
Industrial
The industrial market includes applications such as security systems, meter reading and bar code reading devices, medical systems and custom data link equipment. Low-power components, low-power Virtual Wire(R) radio systems and filters may all be designed into industrial applications, depending upon the customer's RF design expertise and time-to-market requirements.
Consumer
Consumer market applications encompass a wide range of electronic designs. Those utilizing SAW-based devices include the cable television industry, wireless headphones and loudspeakers, wireless door chimes and home automation applications. These consumer electronic applications may incorporate low-power components, low-power Virtual Wire(R) radio systems and filters.
Telecommunications
The Company believes that a number of dynamics within the telecommunications market are opening new applications for SAW technology. The deployment of digital cellular telephone systems has been initiated worldwide. The digital modulation requires SAW filters that minimize distortion and conform to international cellular telephony standards. In addition, high-speed Synchronous Optical Networks ("SONET") performance is enhanced with the incorporation of SAW-stabilized oscillators.
Products
The Company's products are organized into four primary product families: low-power components, low-power Virtual Wire(R) radio systems, frequency control modules and filters.
Low-Power Components:
Resonators. The Company's resonators are used in low-power wireless transmitter and receiver applications, including automotive remote keyless entry systems and related products. The Company manufactures SAW resonators in volume, and they are supplied in three-lead metal packages ("TO39") and leadless surface mount packages. The surface mount technology ("SMT") facility initiated high- volume production of one-port resonators in 1995. To the extent that they have not already, the Company's competitors will be introducing SMT packages for their products.
Coupled-Resonator Filters. The Company's coupled-resonator filters are resonator structures which are optimized for digital communications IF filter designs used in air-to-ground telephone systems, 915 MHz cordless telephones and hybrid receiver applications. Coupled-resonator filters are well suited for certain frequency stabilization applications, such as the frequency control clock modules, and as input filters for the hybrid receiver modules and output filters for the hybrid transmitter modules manufactured by the Company.
Low-Power Virtual Wire(R) Radio Systems:
During 1996, the Company established the Virtual Wire(R) Operations in order to consolidate and focus resources on development and marketing of its proprietary radio systems receiver technology. The Company's family of hybrid transmitter (HX) and receiver (RX) modules is included in the Virtual Wire(R) Operations. During the fourth quarter of fiscal 1996, the Company introduced a chip set receiver based on its patented Amplifier Sequenced Hybrid ("ASH") technology. The chip set offers performance identical to the hybrid modules at lower total cost.
These products feature small size, very low power consumption and excellent RF performance, and provide the system designer flexibility and fast time to market for emerging applications. The breadth of frequency ranges covers both U.S. and international frequency bands for low-power data transmission. The receiver's ASH architecture provides exceptional performance with extremely low harmonic radiation, allowing customers ease of international standards certification.
The Virtual Wire(R) radio systems product offerings also include complete transceiver design and development kits which allow the system designer, who has minimal RF experience, the ability to apply wireless two-way data transfer to emerging applications.
Frequency Control Modules:
The Company's frequency control module products consist of clocks and both fixed-frequency and voltage-controlled SAW-based oscillators. These products provide added value to the SAW components manufactured by the Company. Each module incorporates one or more SAW discrete devices with standard and custom integrated circuits and related passive components. The Company manufactures clocks and fixed-frequency oscillators applying resonators and coupled-resonator filters to eliminate tuning coils for signal filtering and stabilization and SAW delay lines to allow frequency variability in voltage-controlled oscillators.
High-frequency clocks. The Company's high-frequency clock modules are used in high-speed computing and high-resolution graphics applications in the computer market segment. The Company's SAW-based clocks allow the customer to realize improved performance by providing a very stable frequency source which results in very low timing variations from one cycle to the next (commonly referred to as "jitter") and good symmetry across each cycle. New SMT packages were introduced in 1996 and complement the Company's leaded metal packaged product. Higher-speed, lower-cost clocks are in active design with select customer partners.
Oscillators. The Company produces commercial and military fixed-frequency and voltage-controlled SAW oscillators. These products are supplied in leaded metal packages and used in applications such as microwave radios, identification friend or foe (IFF) transponders, hybrid-fiber-coax communication systems and precision instrumentation.
Filters:
The Company designs and manufactures four types of SAW filters: low-loss transversal, precision transversal, proximity-coupled and coupled-resonator. (See above discussion of coupled-resonator filter in Low-Power Components).
Low-loss transversal filters and precision transversal filters are used in digital cellular systems incorporating European Global System for Mobile Communications (GSM), digital European cordless telephone (DECT), Code Division Multiple Access (CDMA) and personal communications system (PCS) standards. Other applications include Very Small Aperture Terminal (VSAT) modems and SONET repeaters. The low-loss filters are designed to minimize signal distortion in the frequency band the filter is designed to pass. The precision filters provide excellent amplitude and group delay flatness for fractional bandwidths of 10% or more and are used in a number of military applications.
The proximity-coupled filters are narrow-band SAW filters used in cellular applications deploying the IS-54 Time Division Multiple Access (TDMA) standard and in cellular digital packetized data (CDPD) applications as intermediate frequency (IF) filters. Proximity filters are also used extensively in digital pagers and a number of analog cellular phone systems.
Manufacturing
The manufacturing of the Company's products is a highly complex and precise process that is sensitive to a wide variety of factors, including the level of contaminants in the manufacturing environment, impurities in the materials used and the performance of manufacturing personnel and production equipment. Until the devices are enclosed or sealed within their final package, they are subject to contamination. Because of this, almost all operations prior to enclosure welding take place under laminar air flow hoods or within clean-room environments. The Company has experienced in the past product shipment delays and lower-than-expected production yields. In particular, the Company experienced a yield loss in excess of $250,000 during the introduction of a process improvement project in the TO39 resonator product line during the third quarter of fiscal 1995. The Company has experienced in the past and may in the future experience a delay in transferring products from engineering to volume manufacturing status. There can be no assurance the manufacturing process will not result in shipment delays or loss of production yields that will materially and adversely increase the cost of manufacturing. The Company's manufacturing operations are housed in a single location. In addition, the Company has limited ability to outsource its manufacturing operations. As a result of the Company's substantial reliance on a single manufacturing facility, damage occurring to such
facility, whether by act of nature or otherwise, may have a material adverse affect on the Company's manufacturing operations.
The Company's customers demand an increasing level of quality. There is no assurance that the Company can achieve these improvements to its operations. To the extent they are not achieved the Company's operating results could be materially and adversely affected. The Company has in the past experienced sudden increases in demand which have put pressure on its manufacturing facilities to increase capacity to meet this demand. In addition, new products sometimes require different manufacturing processes than the Company currently possesses. The Company has devoted the bulk of its capital expenditures to increase capacity and improve its manufacturing processes. There can be no assurance that the Company can continue to increase its manufacturing capacity and improve its manufacturing processes in a timely manner so as to take advantage of increased market demand.
The Company divides its manufacturing operations into two key areas: wafer fabrication and assembly.
Wafer Fabrication
Fabrication of deposited and patterned wafers takes place in a clean-room environment. Thin aluminum films are precisely deposited onto three-inch- diameter quartz substrates that are subsequently etched with very small (micron and submicron) patterned structures. Each patterned device is called a die, and there may be from 40 to 2,000 die on a single three-inch wafer. Over the past two years, the Company completed an expansion of its wafer fabrication factory, adding facilities and new automated wafer processing equipment. As demands on the wafer fabrication facility increase, there is an ongoing need to increase the capacity and operational efficiency of this facility. There can be no assurance that the Company will be able to achieve these improvements in a timely manner. To the extent the Company does not achieve acceptable wafer fabrication yields or experiences product shipment delays as a result of problems associated with the expansion of the wafer fabrication factory, the Company's operating results could be materially and adversely affected.
Assembly
In assembly, there are three production areas which correspond to the three distinct types of packages being manufactured: components, module devices and SMT devices.
Component manufacturing involves the assembly of single-die devices into leaded metal packaging. This method of assembly includes the Company's older low-power component products.
Module manufacturing consist of multiple devices, one or more of which is a SAW. The resulting packages vary in configuration, but all have leads which are used to mount the package through holes in the customer's printed circuit boards. The Company's products assembled in module manufacturing include frequency control devices and filters.
In fiscal 1995, the Company completed construction of an SMT production facility. The Company's SMT products contain SAW die and, in some cases, other electronic components as well. The Company's manufacturing process is based on arrays, which allows for automated processing of up to 400 devices at a time. Since this represents a unique manufacturing process, some of the equipment has been custom-designed for the Company and represents several unique applications of existing manufacturing technology.
The SMT facility is responsible for assembly of low-power components and low- power Virtual Wire(R) radio system products.
Source of Components
While the Company uses standard components whenever possible, certain of the components used in the Company's SAW devices and modules are made to the Company's specifications. This is particularly true for specialized semiconductor manufacturers from whom the Company purchases several RF integrated circuits. These companies include Motorola, Maxim, Cal Eastern Labs and Kyocera. The Company has experienced delays and quality control problems with certain of its single-source suppliers in the past. Although the Company is attempting to obtain second-source suppliers, the Company believes it will continue to be dependent upon single-source suppliers. Delays in delivery, quality problems or the inability of the Company to obtain the components required to manufacture the Company's products on a cost-effective basis could have a material adverse effect on the Company's business and results of operations. The Company is currently investigating the outsourcing of some of its new transmitter products. Should an adequate source of supply not be located, this will delay the introduction of those products.
Sales and Marketing
The Company distributes its products in the United States through manufacturers' representatives managed by the Company's internal sales force. International sales are handled primarily on a direct sales basis augmented by manufacturers' representatives in Norway, Sweden, Singapore, Taiwan, Korea, Australia, South Africa and Brazil. The Company provides sales and marketing support in Europe from a sales office located near Paris, France. Sales outside of North America accounted for approximately 50%, 47% and 52% of the Company's net sales during fiscal 1996, 1995 and 1994, respectively.
The Company expects that international sales will continue to account for a significant portion of its total sales. There can be no assurance, however, that the Company will be able to maintain or increase international market demand for the Company's products or that the Company will be able to effectively meet that demand. The Company's international sales are currently denominated in U.S. currency. An increase in the value of the U.S. dollar relative to foreign currencies could make the Company's products more expensive and, therefore, potentially less competitive in those markets. Additional risks inherent in the Company's international business activities generally include unexpected changes in regulatory requirements, tariffs and other trade barriers, costs and risks of localizing international operations, potentially adverse tax consequences, repatriation of earnings and the burdens of complying with a wide variety of foreign laws. There can be no assurance that such factors will not have an adverse effect on the Company's future results of operations.
The Company has historically had a single customer accounting for 10% or more of its sales, Digital Equipment Corporation. Shipments to this customer represented 10%, 19% and 28% of total sales during the fiscal periods ending August 31, 1996, 1995 and 1994, respectively. Sales to major customers have fluctuated in the past, and there can be no assurance that sales to such customers will continue at previously achieved levels, if at all.
RFM enters into select custom product development programs based on their strategic nature relating to the customer or the RFM product development road map. These development programs can last from 2 months to 18 months. The scope of these programs includes initial engineering of the RF function under development through assisting in the interface of the RF and digital hardware. A small number of such programs are currently under way.
Competition
The markets for the Company's products are intensely competitive and are characterized by price erosion, rapid technological change and product obsolescence. In each of the markets for the Company's product, the Company competes with very large vertically integrated, international companies, including Matsushita, Sanyo, Siemens, Toyocom and Murata, that have substantially greater financial, technical, sales, marketing, distribution and other resources, as well as with existing competitors with broader product lines than the Company. The Company's competitors with greater financial resources or broader product lines may be able to engage in sustained price reductions in the Company's primary markets to gain market share. The Company also expects increased competition from existing competitors as well as competition from a number of companies that currently use SAW expertise largely for internal requirements. In addition, the Company experiences increased competition from companies that offer alternative solutions such as phase locked loop technology, which combines a semiconductor with a traditional crystal. The Company believes competitors may duplicate the Company's products, which could adversely affect selling prices and market share.
The Company believes that its ability to compete in its target markets depends on factors both within and outside the Company's control, including timing and success of new product introductions by the Company and its competitors, availability of wafer fabrication and assembly manufacturing capability, the Company's ability to support decreases in selling price through reduction in cost of sales, adequate sources of raw materials, product quality, reliability and price, the pace at which the Company's customers incorporate the Company's products into their end user products and general economic conditions. There can be no assurance that the Company will be able to compete successfully in the future.
Research and Development
The Company's research and development efforts are primarily aimed at deriving new, proprietary, innovative SAW device structures and SAW-based hybrid modules that uniquely address market needs. These developments also include process improvements in wafer fabrication involving better line width and metal thickness control as well as improvements in device packaging.
RFM employs design engineers and scientists in its research and development efforts. These design engineers and scientists collectively have over 250 years of experience in SAW device and RF circuit design. They are responsible for new products from inception to the commencement of volume manufacturing and closely coordinate their work with the responsible product managers. The Company believes that the efforts of this group help to ensure that RFM's products provide an optimum system solution for the customer and are manufacturable at a competitive cost.
From time to time, the Company has entered into agreements with customers to develop specific SAW devices for inclusion in the customer's end product. Pursuant to such agreements, the nonrecurring engineering ("NRE") cost associated with such development work, which is treated by the Company as cost of technology development sales, is generally reimbursed by the customer. Total engineering-related expenses, including research and development expenditures and cost of technology development sales (or NRE), during fiscal years 1996, 1995 and 1994 were $3.4 million, $3.6 million and $2.0 million, respectively. The Company considers the development of new products essential to increasing and maintaining sales.
Proprietary Rights
The Company relies on a combination of patents, copyrights and nondisclosure agreements in order to establish and protect its proprietary rights. The Company's policy is to file patent applications to protect technology, inventions and improvements that are important to its business. There can be no assurance that patents will issue from any of the Company's pending applications or that any claims allowed from existing or pending patents will be sufficiently broad to protect the Company's technology. While the Company intends to protect its intellectual property rights vigorously, there can be no assurance that any patents held by the Company will not be challenged, invalidated or circumvented, or the rights granted thereunder will provide competitive advantages to the Company.
The Company also seeks to protect its trade secrets and proprietary technology, in part, through confidentiality agreements with employees, consultants and other parties. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach or that the Company's trade secrets will not otherwise become known to or independently developed by others. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as the laws of the United States.
The electronic industry is characterized by uncertainty and conflicting intellectual property claims. The Company has in the past and may in the future become aware of the intellectual property rights of others that it may be infringing. In particular, the Company is utilizing in certain of its filter products, primarily for cellular telephones, technology that is claimed in a third party's patent. There can be no assurance that the Company will not in the future be notified that it is infringing other patent and/or other intellectual property rights of third parties. In the event of such alleged infringement, there can be no assurance that a license to the technology in question could be obtained on commercially reasonable terms, if at all, that litigation will not occur or that the outcome of such litigation will not be adverse to the Company. The failure to obtain necessary licenses or other rights, the occurrence of litigation arising out of such claims or an adverse outcome from such litigation could have a material adverse effect on the Company's business. In any event, patent litigation is expensive, and the Company's results of operations could be materially adversely affected by such litigation, regardless of its outcome.
Regulations
The Company is subject to a variety of federal, state and local laws, rules and regulations related to the use, storage, emission, treatment, disposal, transportation and exposure of others to certain toxic, volatile and other hazardous chemicals used in the Company's manufacturing process. The failure to comply with present or future regulations could result in fines being imposed on the Company, suspension of production or a cessation of operations. Such regulations could also require the Company to acquire costly equipment, to make changes to its manufacturing process, or to incur substantial other expenses to comply with environmental regulations. Any past or future failure by the Company to control the use of, or to restrict adequately the discharge of, hazardous substances could subject the Company to future liabilities and could have a material adverse effect on the Company's business, operating results and financial condition.
Employees
As of August 31, 1996, the Company had a total of 443 employees, including 24 in sales, marketing and customer support; 40 in engineering and product development; 353 in manufacturing; and 26 in finance and administration. Of such employees, approximately 53 were temporary employees. With the exception of two employees located in sales locations in Europe, all of the employees of the Company are based at the Company's headquarters in the metropolitan area of Dallas, Texas. The Company's future success depends to a great degree upon the continued service of its key technical and senior management personnel and its continuing ability to attract and retain highly qualified technical and managerial personnel. Competition for such personnel is intense. There can be no assurance that the Company will be able to retain or continue to attract key managerial and technical employees. None of the Company's employees are represented by a labor union. The Company has not experienced any work stoppages and considers its relations with its employees to be good.
Potential Fluctuations in Results of Operations; Order Trends and Backlog
The Company's quarterly and annual results have been and will continue to be affected by a wide variety of factors that have had in the past and in the future could have a material adverse effect on the Company's business and results of operations during any particular period, including the level of orders that are received and can be shipped in a quarter, the rescheduling or cancellation of orders by its customers, competitive pressures on selling prices, changes in product or customer mix, availability and cost of raw materials, the ability of the Company to manufacture a sufficient volume of products in a cost-effective manner, fluctuations in manufacturing yield, availability of wafer fabrication and assembly manufacturing capacity, loss of any strategic relationship, the ability to introduce new products and technologies on a timely and cost-effective basis, new product introductions by the Company's competitors, market acceptance of products of both the Company and its customers, supply constraints for other components incorporated into its customers' products, foreign currency fluctuations, and the level of expenditures for research and development, sales, and general and administrative functions.
Historically, the electronics industry has experienced sudden and unexpected economic downturns. The Company's results of operations are subject to such downturns. In addition, the Company's operating expenses are largely fixed and difficult to change quickly should sales not meet the Company's expectations, thus magnifying the adverse effect of any such revenue shortfall. In view of its significant growth in recent periods, the Company believes that period-to- period comparisons of its financial results should not be relied upon as an indication of future performance.
The Company's backlog at August 31, 1996, was approximately $11.4 million as compared to $11.9 million as of August 31, 1995. The Company includes in its backlog all purchase orders scheduled for delivery within the subsequent 12 months. The Company's backlog, although useful for scheduling production, does not represent actual sales and should not be used as a measure of future sales. All orders in backlog are subject to cancellation prior to 30 days before shipment without penalty at the option of the customer and to changes in delivery schedules. The Company's backlog is subject to fluctuations, and there can be no assurance that backlog as of any particular date will be a reliable measure of sales for any future period.
ITEM 2.
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 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.
ITEM 3. LEGAL PROCEEDINGS
On June 7, 1996 the Company was served with a complaint filed by TimeKeeping Systems, Inc. ("TimeKeeping") in the Court of Common Pleas for Cuyahoga County, Ohio, captioned TimeKeeping Systems, Inc. v. R.F. Monolithics, Inc., No. 308658. The Company is the only defendant named in the complaint. The complaint purports to state a single cause of action for breach of contract and alleges that the Company failed to timely fulfill certain purchase orders TimeKeeping issued in 1995. The complaint seeks damages of $900,000 based primarily on a claim of lost profits. The Company has removed the action to the United States District Court for the Northern District of Ohio, where it is pending as No. 1:96 CV 1451. The Company has submitted a counterclaim for $33,000 in unpaid billings plus related legal expenses.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended August 31, 1996.
PART II.
ITEM 5.
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 ---- --- 1995: First Quarter 11 1/2 7 3/8 Second Quarter 13 7 7/8 Third Quarter 10 3/8 7 1/8 Fourth Quarter 9 1/4 7 1/4 1996: First Quarter 9 5/8 6 5/8 Second Quarter 7 1/4 5 5/8 Third Quarter 11 3/4 6 1/8 Fourth Quarter 11 1/8 6 3/8
The Company has not paid dividends on its Common Stock and presently intends to continue this policy in order to retain earnings for use in its business. The Company had approximately 200 stockholders of record as of November 15, 1996 (which number does not include the number of stockholders whose shares are held of record by a brokerage house or clearing agency, but does include such brokerage house or
clearing agency as one record holder). The last sales price for RFMI's Common Stock, as reported by NASDAQ on November 15, 1996, was $9.75.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
RFM designs, develops, manufactures and markets a broad range of RF components and modules for the low-power component, low-power Virtual Wire(R) radio systems, frequency control modules and filter product areas. The Company's products are based on SAW technology, and the Company's strategy is to leverage its RF design skills to provide SAW-based solutions to the current and emerging needs of the electronics industry. The Company's products include more than 500 resonators, filters, high-frequency clocks, oscillators, transmitter and receiver modules. The Company's average selling prices within these product lines generally range from $1 to $30 for low-power products (components and radio systems), $10 to $350 for frequency control modules and $5 to $50 for filter products.
During fiscal 1994 and the first two quarters of fiscal 1995, the Company constructed and tested its new surface-mount technology ("SMT") manufacturing facility. The purpose of the facility is to provide the capability to manufacture products utilizing surface-mount packaging in a highly automated environment. During this period, the facility had not reached production status, so the related equipment was not placed into service, and certain associated costs were capitalized as start-up costs. The related costs were included in property and equipment as construction in progress. In the third quarter of fiscal 1995, this facility achieved production status. Accordingly, depreciation on the equipment and amortization of capitalized start-up costs began.
In the fourth quarter of fiscal 1994, the Company completed an initial public offering of its stock. The Company issued 1,600,000 shares of its common stock on the NASDAQ market at $6.50 per share, resulting in net proceeds of $8.5 million.
During fiscal 1994 and 1993, the Company's income tax expense was reduced as a result of the adoption of Statement of Financial Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") and subsequent reductions in the related valuation allowance. See the discussion on income taxes for further detail.
Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section, as well as in the sections entitled "Business," "Legal Proceedings" and "Selected Financial Data" in this report.
Results of Operations
The following discussion relates to the financial statements of the Company for the fiscal year ended August 31, 1996 (current year or fiscal 1996), in comparison to the fiscal year ended August 31, 1995 (prior year or fiscal 1995), as well as the fiscal year ended August 31, 1994 (fiscal 1994). In addition, there is discussion of the financial statements for the three months ended August 31, 1996 (fourth quarter), in comparison to the three months ended August 31, 1995 (comparable quarter of the prior year).
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:
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:
Product sales increased 13% in fiscal 1996 and 30% in fiscal 1995, primarily because of increased units shipped of the Company's low-power products. Low-power sales include sales of both low-power
component products and low-power Virtual Wire/(R)/ radio system products. Low- power sales increased 36% in fiscal 1996 and 51% in fiscal 1995. A significant portion of the 1996 and 1995 increase was due to the introduction of the Company's surface-mount low-power component products particularly to customers in automotive markets. In fiscal 1995, the Company brought its new SMT facility to production status, with gradually increasing production levels during fiscal 1995 and fiscal 1996. The Company has invested a considerable amount of its capital, technical, sales and marketing resources into new SMT products that were primarily targeted toward the low-power market.
Frequency control module sales decreased 41% in fiscal 1996 after increasing 8% in fiscal 1995. These products accounted for only 17% of total sales in fiscal 1996, compared to 32% in fiscal 1995. Frequency control module sales include sales to the Company's largest customer, Digital Equipment Corporation ("Digital"), for use in systems based on the Alpha microprocessor. Sales to Digital decreased in both fiscal 1996 and fiscal 1995, primarily as a result of lower average selling prices, as this customer converted to lower- priced units. The lower-priced units, in the current year, represented a new line of clock oscillator products that were introduced to respond to price competition from products that utilize phase lock loop technology. Digital accounted for approximately 10%, 19% and 28% of total sales during fiscal 1996, 1995 and 1994, respectively. The Company has no long-term volume purchase commitments from its major customers, including Digital. Orders to Digital have fluctuated in the past, and there can be no assurance that such fluctuations will not recur or that Digital will continue to purchase the Company's products at all.
International sales (primarily in Europe and Asia) were approximately 50% of the Company's total sales during fiscal 1996 compared to approximately 47% in fiscal 1995 and 52% in fiscal 1994. The Company considers all product sales with a delivery destination outside North America to be international sales. These sales are denominated primarily in U.S. currency. The Company intends to continue its focus on international sales in the future and expects that international sales will continue to represent a significant portion of its business. There can be no assurance, however, that this can be achieved.
The Company's top five customers accounted for approximately 28%, 38% and 48% of the Company's total sales in fiscal 1996, 1995 and 1994, respectively. The reduction in the relative portion of sales to the Company's top five customers over this period largely reflects the reduction in sales to the Company's largest customer, Digital. In addition, a significant portion of the increased sales for the Company's new SMT products were due to new customers, which increased the total number of customers receiving RFM products.
While the Company has achieved sales increases in prior periods, there can be no assurance that this can be achieved in future periods. The Company's success is highly dependent on achieving technological advances in its product design and manufacturing capabilities, as well as its ability to sell its products in a competitive marketplace that can be influenced by outside factors such as economic and regulatory conditions. The Company experiences increased competition from companies that offer alternative solutions such as phased locked loop technology. There can be no assurance that competition from alternative technologies or from competitors duplicating the Company's technologies will not adversely affect selling prices and market share.
Gross Profit Margin
Gross profit margin increased to 37.5% in fiscal 1996, compared to 37.0% in fiscal 1995, primarily as a result of increased gross profit margin for the Company's low-power products. Margins for these products increased primarily due to a decrease in per-unit manufacturing costs which were the result of improved production processes that increased yields and productivity, and increased demand creating an
increase in the number of units produced. The increased number of units produced allowed relatively high fixed overhead costs to be lower on a per-unit basis, particularly for the new SMT facility. There can be no assurance, however, that the trend toward lower per-unit manufacturing costs, that occurred in the current year, will continue. An additional reason for improved gross profit margin was that the average selling prices for low-power products increased as a result of changes in product mix within this product line.
The improvement in low-power gross profit margins was partially offset by a reduction in gross profit for the higher-margin frequency control module products. Historically, the Company has achieved substantially higher gross profit margins on its frequency control module products than its low-power products due in part to the higher engineering and technical content of the frequency control module products. These products accounted for only 17% of total sales in fiscal 1996, compared to 32% in fiscal 1995. The decline in sales to Digital accounted for most of this impact. In addition, lower average selling prices for these products caused a decline in gross margins, despite lower per-unit manufacturing costs.
Gross profit margins decreased to 37.0% in fiscal 1995 from 38.0% in fiscal 1994. This was primarily due to lower gross margins for the Company's low-power products, resulting from higher per-unit manufacturing costs associated with increasing the capacity to produce these products, particularly for the new SMT facility, which reached volume production status in fiscal 1995. Additionally in fiscal 1995, the Company experienced a yield loss of approximately $250,000 associated with the introduction of a process improvement procedure for its leaded metal component manufacturing. Additionally, gross profit margins were adversely impacted as sales from the higher-margin frequency control module products declined to 32% of total sales in fiscal 1995 from 39% of total sales in fiscal 1994.
The Company has in the past experienced sudden increases in demand which have put pressure on its manufacturing facilities to increase capacity to meet this demand. In addition, new products sometimes require different manufacturing processes than the Company currently possesses. The Company has devoted the bulk of its capital expenditures to increase capacity and improve its manufacturing processes. There can be no assurance that the Company can continue to increase its manufacturing capacity and improve its manufacturing processes in a timely manner so as to take advantage of increased market demand. Failure to do this would result in a loss of potential sales in the periods impacted.
Research and Development
Research and development expenses increased approximately 7% in fiscal 1996 and 128% in fiscal 1995. The increase in both fiscal 1996 and fiscal 1995 was due to increased focus on developing standard products and increased emphasis on process engineering and document control process for its operations. During the past several years, the Company has decreased its activities in connection with customer-funded technology development contracts (nonrecurring engineering expenses). The Company believes that the continued development of its technology and new products is essential to its success and is committed to continuing its investment in research and development, which is expected to increase in absolute dollars in future periods. Since sales increased faster than research and development expenses, such expenses decreased to 9% of total sales in fiscal 1996 from 10% in fiscal 1995.
Sales and Marketing
Sales and marketing expenses increased approximately 2% in fiscal 1996 and 22% in fiscal 1995. These increases were due primarily to increased sales commissions and marketing costs needed to support the Company's increased sales. Since sales increased faster than sales and marketing expenses, such expenses decreased as a percent of total sales to 12% in fiscal 1996 from 13% in fiscal 1995 and 14% in fiscal 1994. The Company
expects to incur higher sales and marketing expenses in absolute dollars in future periods as it expands its sales and marketing efforts.
General and Administrative
General and administrative expenses increased approximately 21% in fiscal 1996 and 8% in fiscal 1995. Such increases were primarily attributable to increased staffing and support for the Company's expansion, and in the current year included increased costs for write-offs of certain foreign receivables. There can be no assurance that the Company will not continue to incur bad debt write-offs as it expands its business to new customers and new geographic areas. The Company currently expects general and administrative expenses will increase in absolute dollars in future periods.
Other Income (Expense)
During the first two quarters of the current year, the Company increased its indebtedness to finance an increase in working capital and capital expenditures. This increase in indebtedness caused an increase in interest expense for fiscal 1996, compared to fiscal 1995, resulting in a net reduction of other income.
Income Tax Expense
The Company's income tax expense was $882,000 in fiscal 1996, compared to $851,000 in fiscal 1995, and $13,000 in fiscal 1994. Fiscal 1996 included the one-time favorable impact of $116,000 ($.02 per share), resulting from recognition of research and development tax credits. The Company recognized an income tax benefit of $854,000 ($.22 per share) in fiscal 1994 as a result of a decrease in the valuation allowance that was provided upon adoption of SFAS 109, in view of continued increases in earnings during this period. The Company does not expect a similar tax benefit in the future.
In fiscal 1993, the Company adopted SFAS 109 and elected to apply it retroactively to September 1, 1991. The cumulative effect of adopting SFAS 109 was to record in fiscal 1992 a deferred tax asset of $3.2 million, representing the estimated benefits of the Company's net operating loss carryforward and expected future deductible temporary timing differences, and to increase fiscal 1992 net income by this amount.
The Company's effective tax rate, exclusive of the fiscal 1996 one- time tax credit and the fiscal 1994 valuation allowance benefit, was approximately 36%, 36% and 38% in fiscal 1996, 1995 and 1994, respectively.
Earnings per Share
Net income increased 24% to $1.9 million in the current year as compared to $1.5 million in the prior year. The Company's earnings per share was $.35 per share for fiscal 1996, compared to $.29 per share for fiscal 1995 and $.59 per share for fiscal 1994. As discussed above, fiscal 1994 included a tax benefit related to the decrease in the valuation allowance for deferred tax assets of $.22 per share. Earnings per share in fiscal 1994 reflect lower weighted average common and common equivalent shares outstanding relative to fiscal 1996 and fiscal 1995. The weighted average common and common equivalent shares outstanding in fiscal 1996 and fiscal 1995 reflected the impact of 1,600,000 shares of common stock issued in connection with the Company's initial public offering in July 1994.
Fourth Quarter of Fiscal 1996
Unaudited quarterly financial data is presented in Note 12 of the accompanying financial statements.
Sales for the fourth quarter increased 21% to $10.0 million, compared to $8.3 million in the comparable quarter of the prior year. The overall sales increase was primarily due to an increase in low-power sales of approximately 34%, compared to the comparable quarter of the prior year. This was primarily due to an increase in the number of units shipped, particularly for new SMT type products for automotive customers. This increase was partially offset by a 34% decrease in sales for frequency control module products, compared to the comparable quarter of the prior year, primarily due to a decrease in the average selling price and number of units shipped to Digital.
Gross profit margins were 40.0% in the fourth quarter, compared to 33.7% for the comparable quarter of the prior year. This was primarily due to improvement in margins for the low-power product line, resulting from a continued reduction in per-unit manufacturing costs for those products, particularly the new SMT products. This reduction in cost was due to increased productivity, improvements in yield and an increased number of units produced, allowing for fixed overhead expenses to be spread over a larger number of units. Also, there was an increase in average selling prices for these products due to changes in product mix toward higher-priced units. Margins for frequency control module products declined due to lower average selling prices associated with the introduction of a new line of lower-priced units and associated start- up costs.
Operating income for the fourth quarter was $1.1 million, or 11% of total sales compared to $.3 million, or 4% of total sales, for the comparable quarter of the prior year. The increase in operating income as a percentage of total sales was due to gross margins improving and revenues increasing faster than operating expenses. Operating expenses increased $.4 million in the fourth quarter, compared to the comparable quarter of the prior year. This increase was due to the additional costs of supporting the Company's increased level of sales, as well as an increase in product and market development programs. Earnings per share were $.13 in the fourth quarter, compared to $.05 per share for the comparable quarter of the prior year.
Liquidity and Capital Resources
Principal sources of liquidity at August 31, 1996, consisted of $6.1 million of cash, cash equivalents and short-term investments, and $4.0 million of unused credit under a line of credit agreement. As of August 31, 1996, the Company also had $2.8 million unused credit available under an equipment collateralized operating lease facility (Lease Facility) which was to be advanced in stages prior to October 18, 1996. No additional advances were made under the Lease Facility and the Company is currently under negotiations to extend it under current terms and conditions through the end of fiscal year 1997. The credit facilities contain financial covenants and restrictions relating to various matters, including a minimum net worth requirement, a minimum ratio of earnings before interest and taxes to interest expense and current maturity of the term loan, a minimum quick ratio and a maximum ratio of total liabilities to tangible net worth. As of August 31, 1996, the Company was in compliance with such covenants and restrictions.
Net cash from operations increased $2.3 million due to a $1.3 million increase in net income and noncash items included in net income, such as depreciation and amortization, and $1.0 million less cash used in working capital, such as trade receivables and inventory. As of August 31, 1996, inventory had been reduced almost $.8 million from the prior year.
Cash used in investing activities in the current year was $1.8 million lower than the prior year due to lower capital acquisitions. Fiscal year 1995 and 1994 capital acquisitions included significant purchases of property and equipment to construct the Company's SMT manufacturing facility. The Company expects to acquire approximately $4 million to $7 million of capital equipment by the end of fiscal 1997, consisting primarily of equipment needed for its manufacturing facilities. Some of this equipment may be acquired under the lease facility.
Net cash generated from financing activities was less than $.1 million. Funds raised from operations, borrowings on notes payable and exercises of stock options were mostly used to repay other debt and acquire property and equipment. In the prior year, financing activities resulted in $2.3 million of funds generated mainly from borrowings on notes payable used to finance increases in working capital and capital expenditures. In fiscal 1994, the IPO generated more than $8.5 million that was used to retire debt, pay preferred dividends and finance capital spending.
The Company believes that cash generated from operations, if any, banking facilities, and the $6.1 million balance in cash and short-term investments will be sufficient to meet the Company's operating cash requirements through fiscal 1997. To the extent that these sources of funds are insufficient to also meet the Company's capital expenditure requirements, the Company will be required to raise additional funds. No assurance can be given that additional financing for capital expenditures will be available or, if available, that it will be available on acceptable terms.
ITEM 8.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to Registrant's Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the 1996 Annual Meeting (the "Proxy Statement") under the heading "Nominees."
ITEM 11.
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.
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the Proxy Statement under the heading "Certain Transactions."
PART IV.
ITEM 14.
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 of Appendix A.
(a) 2. Financial Statement Schedules. All schedules are omitted since the required information is not present or is not present in amounts sufficient to require a submission of the schedules, or because the information required is included in the financial statements and notes thereto.
(a) 3. Exhibits. See Exhibit Index in part (c), below.
(b) On August 14, 1996, the Company filed a report on Form 8-K with the Commission in connection with the First Amendment to Rights Agreement which amended a Rights Agreement dated as of December 20, 1994.
(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) 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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 21st day of November, 1996.
RF MONOLITHICS, INC.
By: /s/ SAM L. DENSMORE -------------------- Sam L. Densmore President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears on the following page constitutes and appoints Cooley Godward LLP his attorneys-in-fact for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that the said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 21st day of November, 1996.
/s/ SAM L. DENSMORE /s/ FRANCIS J. HUGHES, JR. - --------------------- --------------------------- Sam L. Densmore Francis J. Hughes, Jr. CEO, President & Director Director
/s/ DEAN C. CAMPBELL /s/ CORNELIUS C. BOND, JR. - ---------------------- --------------------------- Dean C. Campbell Cornelius C. Bond, Jr. Director Director
RF MONOLITHICS, INC.
INDEX TO FINANCIAL STATEMENTS - ITEM 8 OF FORM 10-K - ---------------------------------------------------------------------------- PAGE INDEPENDENT AUDITORS' REPORT
FINANCIAL STATEMENTS AND NOTES:
BALANCE SHEETS AS OF AUGUST 31, 1996 AND 1995
STATEMENTS OF INCOME FOR THE YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
NOTES TO FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of RF Monolithics, Inc.;
We have audited the accompanying balance sheets of RF Monolithics, Inc. as of August 31, 1996 and 1995, and the related statements of income, stockholders' equity, and cash flows for each of the three years in the period ended August 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of RF Monolithics, Inc. as of August 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 1996, in conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
Dallas, Texas
October 23, 1996
RF MONOLITHICS, INC.
BALANCE SHEETS AUGUST 31, 1996 AND 1995 (In Thousands)
See notes to financial statements.
RF MONOLITHICS, INC.
STATEMENTS OF INCOME YEARS ENDED AUGUST 31, 1996, 1995 AND 1994 (In Thousands, Except Per-Share Amounts)
See notes to financial statements.
RF MONOLITHICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED AUGUST 31, 1996, 1995 AND 1994 (In Thousands)
See notes to financial statements.
RF MONOLITHICS, INC.
STATEMENTS OF CASH FLOWS YEARS ENDED AUGUST 31, 1996, 1995 AND 1994 (In Thousands)
See notes to financial statements.
RF MONOLITHICS, INC.
NOTES TO FINANCIAL STATEMENTS YEARS ENDED AUGUST 31, 1996, 1995 AND 1994 - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - RF Monolithics, Inc. (the Company) designs, develops, manufactures and markets a broad range of radio frequency (RF) component and module products in four areas: low-power components, low-power Virtual Wire radio systems, frequency control modules and filters. The Company's products, which are based on surface acoustic wave (SAW) technology, address the growing requirements in the electronics markets for miniaturization, reduced power consumption, increased precision, and greater reliability and durability. These products are incorporated into application designs in five primary markets: automotive, computer, industrial, consumer and telecommunications, and are sold primarily in North America, Europe and Asia.
BASIS OF PRESENTATION - In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses for the period. Actual results could differ significantly from those estimates.
SALES are recognized when products are shipped.
CASH EQUIVALENTS represent liquid investments with maturities at the date of acquisition of three months or less.
SHORT-TERM INVESTMENTS represent primarily government and corporate obligations with original maturities at the date of acquisition of three or more months which are classified as available-for-sale and are stated at fair value. At August 31, 1996, the original investment cost approximated fair value. At August 31, 1995, the original investment cost was $4,618,000, resulting in an unrealized gain of $35,000 ($22,000 net of taxes).
INVENTORIES are stated at the lower of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight- line method over the following estimated useful lives: machinery and equipment, three to seven years or the related capital lease term if shorter; capitalized SMT facility start-up costs, five years; leasehold improvements, three to eight years not exceeding the lease term; and office furniture, five years.
OTHER ASSETS include legal costs of obtaining patents. These costs are amortized over the lives of the respective patents.
FINANCIAL INSTRUMENTS consist of cash, short-term investments, receivables, payables and debt, the carrying value of which are a reasonable estimate of their fair values due to their short maturities or variable interest rates.
RESEARCH AND DEVELOPMENT COSTS are expensed as incurred. These costs do not include nonrecurring engineering costs related to contract technology development sales which are included in cost of sales.
DEFERRED INCOME TAXES are provided under the asset and liability method for temporary differences in recognition of income and expense for tax and financial reporting purposes.
EARNINGS PER SHARE are computed based on the weighted average number of common shares and dilutive common equivalent shares from common stock options (using the treasury stock method) and convertible preferred stock (using the if-converted method) outstanding in the applicable periods presented. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, all common shares issued and common stock options granted by the Company at a price less than the initial public offering price during the 12 months preceding the initial public offering in fiscal 1994 have been included in the pro forma computation for fiscal 1994 of common and common equivalent shares outstanding in accordance with the treasury stock method.
ACCOUNTING FOR STOCK-BASED COMPENSATION - In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," which will be effective for the Company beginning September 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply APB Opinion No. 25, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB Opinion No. 25 to its stock- based compensation awards to employees and will disclose the required pro forma effect on net income and earnings per share.
RECLASSIFICATIONS have been made to certain 1994 and 1995 amounts to conform to the 1996 presentation.
2. INVENTORIES
Inventories consist of the following (in thousands):
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
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):
5. NOTES PAYABLE
Notes payable at August 31, 1996 and 1995, consist of the following (in thousands):
Long-term debt matures as follows: $500 in 1998, $500 in 1999, $483 in 2000 and $22 in 2001.
At August 31, 1996, the available unused balance under the revolving line-of-credit facility is $4,000.
6. LEASES AND OTHER COMMITMENTS
The Company has entered into noncancelable capital and operating lease agreements for its manufacturing facility and certain equipment. Rent expense under the operating leases in 1996, 1995 and 1994 was $486,000, $294,000 and $287,000, respectively. Minimum future rental commitments under the capital and operating leases at August 31, 1996, are as follows (in thousands):
The Company has a $1,500,000 equipment lease facility with a bank which was fully utilized at August 31, 1996. Borrowings under this facility, which are presented as capital lease obligations, are due in monthly installments over a five-year period from the date of each advance.
The Company also has a $3,500,000 equipment lease facility with a bank which was to be advanced in stages prior to October 18, 1996. At August 31, 1996, the Company had utilized $687,308 of the equipment lease facility. Lease obligations under this facility, which are presented as operating lease obligations and are reflected in the table above, are due in monthly installments over a four-year period from the date of each advance. No additional advances were made under this facility prior to October 18, 1996. The Company is currently negotiating an extension of this lease facility.
CONSULTING AGREEMENT - In August 1996, the Company entered into a contract for future consulting services and noncompete agreement with a former officer of the Company. Pursuant to the agreement, the Company will pay the former officer $13,000 per month until February 28, 1998, unless terminated earlier by the former officer. The former officer has agreed not to compete with the Company for a period ending one year after the termination of the consulting agreement.
7. CAPITAL STOCK
In conjunction with the initial public offering (IPO), 1,600,000 shares of common stock were issued in August 1994, resulting in net proceeds to the Company of $8,536,000 after deduction of the related IPO costs incurred, including $674,000 accrued at August 31, 1994. Also, in connection with the IPO, all
series of preferred stocks were converted into 2,620,066 shares of common stock, and the Company declared dividends of $1,452,000 ($3.81 per share) on all Series A Preferred Stock. Preferred stock of 5,000,000 shares with $.001 par value is authorized; none was issued at August 31, 1996 and 1995. Rights, preferences and other terms of the preferred stock will be determined by the Board of Directors at the time of issuance.
STOCK OPTIONS - Under terms of the 1982 Stock Option Plan (1982 Plan), nonqualified and incentive options to purchase common stock may be granted to key employees at the discretion of the board of directors and subject to certain restrictions. Only incentive stock options have been granted under this plan. Generally, one forty-eighth of the shares optioned become exercisable each month beginning at the date of grant. The options expire ten years after the date of grant. At August 31, 1996, there are 312,499 options outstanding and 145,037 options available for grant under this plan. A summary of the activity for the 1982 Plan follows:
In October 1996, the Company granted, to certain employees, incentive options to purchase 75,000 shares of the Company's common stock at an exercise price of $8.125 per share.
Under terms of the 1986 Stock Option Plan (1986 Plan), nonqualified options to purchase common stock may be granted to key employees and consultants at the discretion of the board of directors, subject to certain restrictions. Generally, one forty-eighth of the shares optioned become exercisable each month beginning at the date of grant. The options expire ten years after the date of grant. At
August 31, 1996, there are 346,088 options outstanding and 17,839 options available for grant under this plan. A summary of the activity for the 1986 Plan is as follows:
Under the terms of the Non-Employee Director Stock Option Plan (Director Plan), options to purchase common stock may be granted to each non-employee director every January 1. One-fourth of the shares optioned become exercisable on the first anniversary of the date of grant and one forty- eighth of the shares optioned become exercisable each month thereafter, with all options fully exercisable four years after the date of grant. The options expire ten years after the date of grant. At August 31, 1996, there are 64,500 options outstanding and 110,500 options available for grants. A summary of the activity for the Director Plan is as follows:
Options under the above plans are granted at prices equal to or greater than the estimated fair value of the common stock at grant dates as determined by the board of directors.
EMPLOYEE STOCK PURCHASE PLAN - In 1994, the Company adopted an employee stock purchase plan (Purchase Plan). In connection with the adoption of the Purchase Plan, the Company reserved 175,000 shares of its common stock. Under terms of the Purchase Plan, rights to purchase common stock may be granted to eligible employees at the discretion of the board of directors, subject to certain
restrictions. The Purchase Plan enables eligible employees of the Company to purchase shares of common stock at not less than 85% of the fair market value of the common stock at the determination date through payroll withholding.
In November 1995, the Company initiated its first offering under the Purchase Plan. In connection with the offering, the board of directors approved of purchase dates on June 30, 1996, December 31, 1996, June 30, 1997, and December 31, 1997. At June 30, 1996, 24,310 shares were purchased by employees under the Purchase Plan for aggregate proceeds of $136,896.
Common shares reserved at August 31, 1996, for possible future conversion or issuance are as follows:
COMMON STOCK GRANTS - In January 1995, the Company granted 51,700 shares of its common stock to key employees of the Company. Based on a share price of $7.00 per share at the measurement date, the Company recorded unearned compensation of $361,900. One-fourth of the shares granted become exercisable on November 27, 1996, November 27, 1997, November 27, 1998, and November 27, 1999, respectively. During 1996, certain employees who were granted 17,000 shares terminated their employment with the Company. All shares granted to these employees were reacquired and retired. In 1996, compensation expense related to remaining common stock grants was approximately $33,000.
STOCKHOLDER RIGHTS PLAN - In December 1994, the Company adopted a stockholder rights plan. In connection with the adoption of such plan, the Company reserved 250,000 shares of its Series A Junior Participating Preferred Stock, $.001 par value, and declared a dividend of one preferred share purchase right (a Right) for each outstanding share of common stock, par value $.001 per share (the Common Shares), of the Company. The dividend of 4,965,847 Rights was issued to the stockholders of record on January 16, 1995. Each Right entitles the registered holder to purchase from the Company one one- hundredth of a share of Series A Junior Participating Preferred Stock, par value $.001 per share (the Preferred Share), at a price of $74.40 per one one-hundredth of a Preferred Share, subject to adjustment. The Rights become exercisable on the earlier of the tenth day after the public announcement of acquisition by a person or group of persons, not including an exempt person as defined by the stockholder rights plan, of 15% or more of the Company's common shares
outstanding or the tenth business day after the date of first public announcement of the intention of a person or group of persons to commence a tender or exchange offer to acquire 15% or more of the Company's common shares outstanding. The Rights may be redeemed by the Company at a redemption price of $.01 per Right in accordance with the Rights plan, and the Rights expire on December 20, 2004.
8. SIGNIFICANT CUSTOMER AND EXPORT SALES
Sales to a significant customer and export sales to foreign markets as a percent of the Company's total revenues are as follows:
9. INCOME TAXES
The tax effects of significant items comprising the Company's net deferred income tax benefits as of August 31, 1996 and 1995, are as follows (in thousands):
Management believes that no valuation allowance against the deferred tax benefits is necessary at August 31, 1996 or 1995.
The resulting income tax expense is shown below (in thousands):
A reconciliation between income taxes computed at the federal statutory rate and income tax expense is shown below (in thousands):
As of August 31, 1996, the following income tax carryforwards are available to reduce future federal income tax liabilities (in thousands):
10. EMPLOYEE BENEFIT PLAN
The Company has a profit sharing plan under Section 401(k) of the Internal Revenue Code, which covers substantially all employees. The Company may match employee contributions at a rate determined by the board of directors. No matching contributions were made in 1996, 1995 or 1994.
11. LITIGATION
In June 1996, the Company was served with a complaint filed by a certain customer. The complaint alleges breach of contract in that the Company failed to timely fulfill certain purchase orders issued in 1995. The complaint seeks damages of $900,000 based primarily on a claim of lost profits. The Company has since filed a countersuit against the customer alleging breach of contract and seeking repayment for goods delivered and attorney fees related to this litigation. Management believes that the outcome of this matter will not materially affect the financial position, results of operations or cash flows of the Company.
12. QUARTERLY INFORMATION (UNAUDITED)
Selected unaudited quarterly financial data is as follows (in thousands, except per-share amounts).
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