| RF MONOLITHICS INC /DE/ ITEM 1A RISK FACTORS You should consider the following risk factors in evaluating RFM and its business |
| Any of the following risks, as well as other risks and uncertainties, could harm our business and financial results and cause the value of our securities to decline |
| The risks below are not the only ones facing RFM Additional risks not currently known to us or that we currently deem immaterial also may impair our business |
| Strategic Risks Limited Experience in Business Combinations or Acquisitions Subsequent to the end of the current fiscal year, we closed two acquisitions that involved a material investment |
| The return on that investment is subject to those entities achieving expected performance and our ability to integrate those operations to achieve planned results |
| In those transactions, we have issued stock that dilutes our stockholders’ percentage ownership, incurred substantial debt, assumed contingent liabilities, and used other assets available at the time of acquisition |
| We have limited experience in acquiring other businesses, product lines and technologies |
| In addition, the attention of our management team may be diverted from our core business as we attempt to integrate these acquisitions with our other operations |
| Acquisitions also involve numerous risks, including, among others: • Problems assimilating the purchased operations, technologies or products; 13 ______________________________________________________________________ [35]Table of Contents • Costs associated with the acquisition; • Adverse effects on existing business relationships with suppliers and customers; • Sudden market changes; • Risks associated with entering markets in which we have no or limited prior experience; • Potential loss of key employees of the acquired companies; and • Potential litigation arising from the acquired company’s operations before the acquisition |
| Our inability to overcome problems encountered in connection with such acquisitions could divert the attention of management, utilize scarce corporate resources and harm our business |
| In addition, we may pursue a strategy of acquiring additional companies or businesses |
| Uncertainty of Market Acceptance or Profitability of New Products We have a large amount of continuing sales of older products that tend to decline in popularity and average selling price over time |
| Only by developing new products can we replace sales of declining products and partially offset the impact of lower average selling prices |
| Our future success depends on our ability to develop new products and product enhancements to keep up with technological advances and to meet customer needs |
| Any failure by us to anticipate or respond adequately to technological developments and customer requirements, or any significant delays in product development, could have a material adverse effect on our financial condition and results of operations |
| Additionally, we could incur additional operating costs with the introduction of new products |
| There can be no assurance that we will be successful in our planned product development or marketing efforts, or that we will have adequate financial or technical resources for our planned product development and promotion |
| The introduction of new products could require the expenditure of an unknown amount of funds for research and development, tooling, software development, manufacturing processes and inventory, as well as sales and marketing efforts |
| In order to successfully develop products, we will need to successfully anticipate market needs and may need to overcome rapid technological change and competition |
| In order to achieve high volume production, we may need to outsource production to third parties or enter into licensing arrangements and be successful in the management of sub-contractors overseas |
| There can be no assurance that our products will achieve or maintain market acceptance, result in increased revenues, or be profitable |
| Product Development and Technological Change Our industry is characterized by rapid technological change and is highly competitive with respect to timely product innovation |
| Our products are subject to obsolescence or price erosion because competitors are continuously introducing technologies with the same or greater capability as our technology |
| We are vulnerable to competitors that have much more resources than we do that are trying to develop products that are technologically superior to ours |
| Management of Growth, Diversification and Transition to Value Added Products Successful expansion or diversification of our operations will depend on our ability to obtain new customers, to attract and retain skilled management and other personnel, to secure adequate sources of supply on commercially reasonable terms and to successfully manage new product introductions |
| To manage growth or diversification effectively, we will have to continue to implement and improve our operational, financial and management information systems, procedures and controls |
| As we expand or diversify, we may from time to time experience constraints that will adversely affect our ability to satisfy customer demand in a timely fashion |
| Failure to manage growth or diversification effectively could adversely affect our financial condition and results of operations |
| 14 ______________________________________________________________________ [36]Table of Contents Our historical base business is declining |
| Only by successfully developing and introducing value added products to our customers can we offset this impact |
| The transition to Wireless Systems products involves new technologies and markets that are not similar to our other businesses |
| Business Risks Variability of Gross Margin We face the continuing negative impact of declining average selling prices as a result of competitive conditions in the markets we serve |
| We expect the trend of lower prices to continue |
| Therefore, our ongoing efforts to reduce manufacturing costs are an important factor in maintaining gross margins |
| The volume of units sold and produced has a negative impact when the number of units is decreased and relatively high levels of fixed manufacturing costs are spread over fewer units |
| Another negative impact we experience from time to time relates to start-up costs for new products entering the volume manufacturing process |
| We expect that our net sales and gross margin may vary significantly based on these and other factors, including the mix of products sold, the channels through which our products are sold, changes in product selling prices and component costs, the level of manufacturing efficiencies achieved and pricing by competitors |
| Our average sales prices have historically declined, and we anticipate that the average sales prices for our products will continue to decline and could negatively impact our gross profit margins |
| Depending upon our ability to achieve similar reductions in our cost of sales, this reduction in average selling prices could have a material adverse effect on our gross margins and could have a material adverse effect on our business, financial condition and results of operation |
| There can be no assurance that we will be able to increase unit sales volumes, introduce and sell new products or reduce our cost per unit in sufficient amounts to increase or even maintain gross margins |
| Liquidity We believe that cash generated from operations, our cash balances and the amounts available under our existing credit facility will be sufficient to meet our cash requirements for the next twelve months |
| If for any reason these sources of funds are not sufficient to meet our requirements, we may be required to raise additional funds |
| We cannot guarantee that we would be able to obtain additional financing or, if available, that it would be available to us on acceptable terms |
| Should that happen, there could be a significant adverse impact on our operations |
| Stock Price Volatility Existing stockholders may suffer with each adverse change in the market price of our common stock |
| The market price of our common stock may be affected by a variety of factors in the future |
| Most obviously, the price of our shares may suffer adversely if our future operating results are below the expectations of investors |
| The stock market in general, and the market for shares of technology companies in particular, experiences extreme price fluctuations |
| Our common stock market price is made more volatile because of the relatively low volume of trading in our common stock |
| When trading is sporadic, significant price movement can be caused by the trading in a relatively small number of shares |
| 15 ______________________________________________________________________ [37]Table of Contents Key Personnel Our performance depends substantially on the performance of our executive officers and key employees |
| Our future success will depend on our ability to attract, integrate, motivate and retain qualified technical, sales, operations and managerial personnel |
| Competition for qualified personnel in our business is intense, and we may not be able to continue to attract and retain qualified executive officers and key personnel necessary for our business to succeed |
| In addition, if we lose the services of any of our key personnel and are not able to find replacements in a timely manner, our business could be disrupted, other key personnel may decide to leave, and we may incur increased operating expenses in identifying and compensating their replacements |
| Sales Risks Competition We do business in markets that are noted for fierce competition and generally declining average selling prices |
| Most of our significant competitors are much larger and better financed than we are |
| These competitors could execute sales strategies that could take a considerable amount of our business very quickly |
| There can be no assurance that our products will be competitive with existing or future products, or that we will be able to establish or maintain a profitable price structure for our products |
| We expect to face competition from existing competitors and new and emerging companies that may enter our existing or future markets with similar or alternative products, which may be less costly or provide additional features |
| We also face competition from current and prospective customers that evaluate our capabilities against the merits of manufacturing products internally |
| Competition may arise due to the development of cooperative relationships among our current and potential competitors or third parties to increase the ability of their products to address the needs of our prospective customers |
| Accordingly, it is possible that new competitors or alliances among competitors will emerge and rapidly acquire significant market share |
| We expect our competitors will continue to improve the performance of their current products, reduce their prices and introduce new products that may offer greater performance and improved pricing, any of which could cause a decline in sales or loss of market acceptance of our products |
| In addition, our competitors may develop enhancements to or future generations of competitive products that may render our technology or products obsolete or uncompetitive |
| Decline of Demand for Product Due to Downturn of Related Industries We may experience substantial period-to-period fluctuations in operating results due to factors affecting the industrial, automotive, consumer, medical and telecommunications industries |
| From time to time, each of these industries has experienced downturns, often in connection with, or in anticipation of, declines in general economic conditions |
| A decline or significant shortfall in growth in any one of these industries or a technology shift could have a material adverse impact on the demand for our products, and therefore, a material adverse effect on our business, financial condition and results of operations |
| There can be no assurance that our net sales and results of operations will not be materially and adversely affected in the future due to changes in demand from individual customers or cyclical changes in the industries utilizing our products |
| 16 ______________________________________________________________________ [38]Table of Contents Cyclical Nature of Our Industry Our industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand |
| The industry has experienced significant downturns, often connected with, or in anticipation of, maturing product cycles of both the producing companies’ and their customers’ products and declines in general economic conditions |
| These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices |
| Any future downturns could have a material adverse effect on our business and operating results |
| Furthermore, any upturn in these industries could result in increased demand for, and possible shortages of, components we use to manufacture and assemble our products |
| Such shortages could have a material adverse effect on our business and operating results |
| Credit Risks and Dependence on Major Customers We grant credit to customers in a variety of commercial industries |
| Credit is extended based on an evaluation of the customer’s financial condition and collateral is not required |
| Our inability to collect receivables from a large customer could have a material adverse effect on our business, financial condition, and results of operations |
| There were four customers that each accounted for more than 10prca of sales in our fourth quarter |
| One of those manufacturers is Delphi Corporation, which is currently in Chapter 11 bankruptcy and involved in negotiations with its labor unions |
| While we are encouraged by the reported progress in those negotiations, a protracted strike in the North American automotive industry could have a significant adverse impact on our operations |
| Our strategy is to seek diversification in our sales |
| We believe we have achieved a significant level of diversification in our customers, markets, products and geographic areas |
| However, due to the very competitive nature of the markets in which we compete, we may not always be able to achieve such diversification |
| Reliance on OEMs To date, a substantial portion of our product sales has been to OEMs |
| The product and marketing decisions made by OEMs significantly affect the rate at which our products are used |
| We believe that because OEMs in certain industries receive a large portion of their revenues from sales of products and services to their installed base, these OEMs have tended to moderate the rate at which they incorporate our products into their products |
| Furthermore, OEMs that manufacture and promote products and technologies that compete or may compete with us may be particularly reluctant to employ our products and technologies to any significant extent, if at all |
| We may not be able to maintain or improve the current rate at which our products are accepted by OEMs and others, which could decrease our revenues |
| International Sales We consider all product sales with a delivery destination outside North America to be international sales |
| International sales are denominated primarily in US currency, although some European customers require that we sell in Euros |
| We have not entered into any hedging activities to mitigate the exchange risk associated with sales in foreign currency |
| We intend to continue our focus on international sales |
| We anticipate that international sales will continue to represent a significant portion of our business |
| However, international sales are subject to fluctuations as a result of local economic conditions and competition |
| Therefore, we cannot predict whether we will be able to continue to derive similar levels of our business from international sales |
| 17 ______________________________________________________________________ [39]Table of Contents International sales may be subject to certain risks, including changes in regulatory requirements, tariffs and other barriers, timing and availability of export licenses, political and economic instability, difficulties in accounts receivable collections, natural disasters, difficulties in staffing and managing foreign subsidiary and branch operations, difficulties in managing distributors, difficulties in obtaining governmental approvals, foreign currency exchange fluctuations, the burden of complying with a wide variety of complex foreign laws and treaties, potentially adverse tax consequences and uncertainties relative to regional, political and economic circumstances |
| Moreover, and as a result of currency changes and other factors, our competitors may have the ability to manufacture competitive products at a lower cost |
| Product Returns and Order Cancellation To the extent we have products manufactured in anticipation of future demand that does not materialize, or in the event a customer cancels an outstanding order, we could experience an unanticipated increase in our inventory |
| In addition, while we may not be contractually obligated to accept returned products, and have typically not done so in the past, we may determine that it is in our best interest to accept returns in order to maintain good relations with our customers |
| Product returns would increase our inventory and reduce our revenues |
| We have had to write-down inventory in the past for reasons such as obsolescence, excess quantities and declines in market value below our costs |
| We have no long-term volume commitments from our customers that are not subject to cancellation by the customer |
| Sales of our products are made through individual purchase orders and, in certain cases, are made under master agreements governing the terms and conditions of the relationships |
| Customers may change, cancel or delay orders with limited or no penalties |
| We have experienced cancellations of orders and fluctuations in order levels from period-to-period and we expect to continue to experience similar cancellations and fluctuations in the future that could result in fluctuations in our revenues |
| Operational Risks Parts Shortages, Over-Supplies and Dependence on Suppliers The electronics and components industry is characterized by periodic shortages or over-supplies of parts that have in the past and may in the future negatively affect our operations |
| We are dependent on a limited number of suppliers and contractors for packages and semiconductor devices used in our products, and we have no long-term supply contracts with any of them |
| Due to the cyclical nature of these industries and competitive conditions, we, or our sub-contractors, may experience difficulties in meeting our supply requirements in the future |
| Any inability to obtain adequate deliveries of parts, either due to the loss of a supplier or industry-wide shortages, could delay shipments of our products, increase our cost of goods sold and have a material adverse effect on our business, financial condition and results of operations |
| Reliance on Limited Contract Manufacturers If our contract manufacturers are unable to respond promptly and timely to changes in customer demand, we may be unable to produce enough products to respond to sudden increases in demand resulting in lost revenues, or alternatively, in the case of order cancellations or decreases in demand, we may be liable for excess or obsolete inventory or cancellation charges resulting from contractual purchase commitments that we have with our contract manufacturers |
| We regularly provide rolling forecasts of our requirements to our contract manufacturers for planning purposes, pursuant to our agreements, a portion of which is binding upon us |
| Additionally, we are committed to accept delivery on the forecasted terms for a portion of the rolling forecast |
| Cancellations of orders or changes to the forecasts provided to any of our contract manufacturers may result in cancellation costs payable by us |
| 18 ______________________________________________________________________ [40]Table of Contents By using contract manufacturers, our ability to directly control the use of all inventories is reduced since we do not have control over their operations |
| If we are unable to accurately forecast demand for our contract manufacturers and manage the costs associated with our contract manufacturers, we may be required to pay inventory carrying costs or purchase excess inventory |
| If we or our contract manufacturers are unable to utilize such excess inventory in a timely manner, and are unable to sell excess components or products due to their customized nature, our operating results and liquidity would be negatively impacted |
| A substantial majority of our products are manufactured overseas in Taiwan, the Philippines and Japan |
| Due to the geographic concentration, a disruption of the manufacturing operations, resulting from sustained process abnormalities, human error, governmental intervention or natural disasters such as earthquakes, fires or floods could cause us to cease or limit our manufacturing contractors operations and consequently could harm our business, financial condition and results of operations |
| Timely implementation of improved manufacturing processes We reduce our costs almost continually to offset the impacts of a reduction in our average selling prices |
| We need to do this through continuous cost reduction in both our facilities and those of our contractors |
| In addition our manufacturing processes are complex and involve procedures that are difficult to maintain if not carried out properly which could result in incremental cost increase |
| Terrorism and the Uncertainty of War The consequences of any terrorist attacks, or any armed conflicts that may result, are unpredictable, and we may not be able to foresee events that could have an adverse effect on our markets or business |
| These include, without limitation, the possibility that insurance policies are unable to pay claims and that insurance may become unavailable or unaffordable |
| Legal Risks Intellectual Property Rights Our ability to compete effectively is dependent on our proprietary know-how, technology and patent rights |
| We have applied for additional patents in the wireless area |
| There can be no assurance that our patent applications will be approved, that any issued patents will afford our products any competitive advantage or that any of our products will not be challenged or circumvented by third parties, or that patents issued to others will not adversely affect the sales, development or commercialization of our present or future products |
| We are involved from time to time in claims and litigation over intellectual property rights, which may adversely affect our ability to manufacture and sell our products |
| The wireless industry is characterized by vigorous protection and pursuit of intellectual property rights |
| We believe that it may be necessary, from time to time, to initiate litigation against one or more third parties to preserve our intellectual property rights |
| In addition, from time to time, we have received, and may continue to receive in the future, notices that claim we have infringed upon, misappropriated or misused other parties’ proprietary rights, which claims could result in litigation |
| Such litigation would likely result in significant expense to us and divert the efforts of our technical and management personnel |
| In the event of an adverse result in such litigation, we could be required to pay substantial damages, cease the manufacture, use and sale of certain products, expend significant resources to develop non-infringing technology, discontinue the use of certain processes or obtain licenses to use the infringed technology |
| Such a license may not be available on commercially reasonable terms, if at all |
| Our failure to obtain a license on commercially reasonable terms could cause us to incur substantial costs and suspend manufacturing products using such technology |
| If we obtain a license, we would likely be required to make royalty payments for sales under the license |
| Such payments would increase our costs of revenues and reduce our gross profit |
| 19 ______________________________________________________________________ [41]Table of Contents In addition, any litigation, whether as plaintiff or as defendant, would likely result in significant expense to us and divert the efforts of our technical and management personnel, whether or not such litigation is ultimately determined in our favor, and the results of any litigation are inherently uncertain |
| Effect of Regulatory Actions Many of our products and the industries in which they are used are subject to US and foreign regulation |
| Governmental regulatory action could greatly reduce the market for our products |
| Product Liability In the course of our business, we may be subject to claims for product liability for which our insurance coverage is excluded or inadequate |