-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IGknQuegWTULvCSkNF8MBLxahaWn78uHAGbXzBnTgMiEpnU6kH0VcHWQ24NYz+Mo NWgdUUr/N0FsFjazmkjxrQ== 0001047469-99-012951.txt : 19990402 0001047469-99-012951.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012951 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRIQUINT SEMICONDUCTOR INC CENTRAL INDEX KEY: 0000913885 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 953654013 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-22660 FILM NUMBER: 99582747 BUSINESS ADDRESS: STREET 1: 2300 NE BROOKWOOD PARKWAY CITY: HILLSBORO STATE: OR ZIP: 97124 BUSINESS PHONE: 5036159000 MAIL ADDRESS: STREET 1: 2300 NE BROOKWOOD PARKWAY STREET 2: 3625A SW MURRAY BLVD CITY: HILLSBORO STATE: OR ZIP: 97124 10-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 0-22660 ------------------------ TRIQUINT SEMICONDUCTOR, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-3654013 (State or other jurisdiction (I.R.S. Employer Identification of incorporation or organization) Number) 2300 N.E. BROOKWOOD PARKWAY HILLSBORO, OREGON 97124 (Address of principal executive office) Registrant's Telephone number, including area code: (503) 615-9000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, $.001 par value (Title of Class) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on February 26, 1999 as reported on the Nasdaq Stock Market's National Market, was approximately $147,592,744. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 26, 1999, registrant had outstanding 9,556,574 shares of Common Stock. The Index to Exhibits appears on page 16 of this document. DOCUMENTS INCORPORATED BY REFERENCE The Registrant has incorporated into Part III of Form 10-K by reference portions of its Proxy Statement, dated April 19, 1999. Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1998 are incorporated by reference in Parts II and IV of Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TRIQUINT SEMICONDUCTOR, INC. 1998 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
PAGE --------- PART I ITEM 1. BUSINESS................................................................................... 3 ITEM 2. PROPERTIES................................................................................. 13 ITEM 3. LEGAL PROCEEDINGS.......................................................................... 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 15 PART II ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................... 15 ITEM 6. SELECTED FINANCIAL DATA.................................................................... 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...... 15 ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................. 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................ 15 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....... 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................... 15 ITEM 11. EXECUTIVE COMPENSATION..................................................................... 16 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................. 16 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................. 16 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K............................ 16
2 PART I ITEM 1. BUSINESS The following contains forwarding-looking statements based on current expectations and entails various risks and uncertainties that could cause actual results to differ materially from those anticipated in these forward-looking statements as a result of certain factors discussed herein. These forward-looking statements include, but are not limited to, those regarding the Company's markets, customers, products and competition. Certain risks that the Company faces include, but are not limited to, the risk of lower than expected production yields, the risks associated with operating its own wafer fabrication facilities, the risks stemming from failure to receive orders to produce a high volume of products that are custom-designed, the risks associated with integrating recent acquisitions, the risks associated with customer inventory corrections, the risks posed by competing technologies, the risks of late product introductions and the risks associated with reliance on a limited number of suppliers, some of which are outside the United States. TriQuint Semiconductor, Inc. ("TriQuint" or the "Company") designs, develops, manufactures and markets a broad range of high performance analog and mixed signal integrated circuits for the communications markets. The Company utilizes its proprietary gallium arsenide ("GaAs") technology to enable its products to overcome the performance barriers of silicon devices in a variety of applications. The Company sells its products on a worldwide basis and its end user customers include Alcatel, Cellnet Data Systems, Ericsson, Hughes, Lucent Technologies, Motorola, Nokia, Northern Telecom, Qualcomm and Raytheon. On January 13, 1998, the Company acquired substantially all of the assets of the Monolithic Microwave Integrated Circuit ("MMIC") operations of the former Texas Instruments' Defense Systems & Electronics Group from Raytheon TI Systems, Inc. ("RTIS"), a Delaware corporation and a wholly owned subsidiary of Raytheon Company ("Raytheon"). The MMIC operations include the GaAs foundry and MMIC business of the R/F Microwave Business Unit that RTIS acquired on July 11, 1997 from Texas Instruments Incorporated ("TI") which MMIC business includes without limitation, TI's GaAs Operations Group, TI's Microwave GaAs Products Business Unit, the MMIC component of TI's Microwave GaAs Products Business Unit, the MMIC component of TI's Microwave Integrated Circuits Center of Excellence and the MMIC research and development component of TI's Systems Component Research Laboratory (collectively, "Millimeter Wave Communications"). INDUSTRY BACKGROUND Market demands for higher levels of performance in electronic systems have produced an increasing number of varied, complex applications. The increased capabilities of these new systems, in turn, are spawning new markets and a further proliferation of new, sophisticated applications. Many of these new applications have emerged in the wireless communications, telecommunications, computing and aerospace industries. The wireless communications industry is experiencing rapid growth with the advent of new applications such as digital cellular telephones, personal communication systems ("PCS"), pagers, handheld navigation products based on the global positioning satellite ("GPS") standard, satellite communications such as Direct Broadcast Satellite ("DBS"), wireless local area networks ("WLANs"), wireless data transmission systems such as Cellular Digital Packet Data ("CDPD") modems and wireless cable television. In addition, many of these new applications require battery powered portability. The proliferation of some of these new applications has led to increased communication traffic resulting in congestion of the historically assigned frequency bands. As a consequence, wireless communications are moving to higher, less congested frequency bands. The Company believes the increasing demand for wireless communications at higher frequencies, will lead to entirely new high volume applications. 3 The telecommunications industry is encountering increasing demand for higher transmission rates and increased capacity to accommodate the growth of traditional voice traffic and higher levels of data traffic arising from widely-used applications such as facsimile communications, computer networking and online and Internet services. Today's advanced telecommunications systems employ high speed switching networks and fiber optic cable operating in accordance with high frequency standards such as synchronous optical network ("SONET"), Synchronous Digital Hierarchy ("SDH"), integrated services digital network ("ISDN") and the asynchronous transfer mode ("ATM") standard. For example, high performance SONET telecommunications systems can operate at frequencies of 2.48 Gbits/sec or higher. The advent of video communications and multimedia (combinations of voice, video and data) are placing further demands on these systems for even higher data transmission rates. In the data communications industry, data processing speeds have increased rapidly, bringing enormous computing power to individual users. The demand to share data and peripheral equiqment among these users has led to the widespread use of networking systems operating at increasing speeds. Today's advanced data communication systems, based on standards such as Fibre Channel and Gigabit Ethernet as well as proprietary links are used to transmit data at rates up to 2.5 Gbits/sec. The microwave and millimeter wave communications industry utilizes advanced GaAs MMIC products for aerospace, defense and commercial applications. Aerospace and defense applications include high power amplifiers, low noise amplifiers, switches and attenuators for use in a variety of advanced requirements such as active array radar, missiles, electronic warfare systems and space communications systems. Commercial applications for products and services in this frequency range include wireless telephone applications, optical fiber links and switching networks, Local Multipoint Distribution System (LMDS) systems, phased-array radar and satellite earthstation transmitters. To address the market demands for higher performance, electronic system manufacturers have relied heavily on advances in semiconductor technology. In recent years, the predominant semiconductor technologies used in advance electronic systems have been silicon-based complementary metal oxide semiconductor ("CMOS"), bipolar complementary metal oxide semiconductor ("BiCMOS") and emitter coupled logic ("ECL") process technologies. However, the newest generation of high performance electronic systems requires further advances in semiconductor performance. One way to improve performance is to combine analog and digital circuitry on the same device. This combination, known as mixed signal technology, can provide higher levels of integration (smaller size and increased functionality), reduced power consumption and higher operating frequencies. Notwithstanding the benefits of mixed signal technology, the performance requirements of certain critical system functions generally cannot be achieved using silicon-based components. As a result, system manufacturers are seeking semiconductor products which can overcome the performance limitations of silicon devices in a variety of applications. GaAs semiconductor technology has emerged as an effective alternative or complement to silicon solutions in many high performance applications. GaAs has inherent physical properties which allow its electrons to move up to five times faster than those of silicon. This higher electron mobility permits the manufacture of GaAs integrated circuits which operate at much higher speeds than silicon devices, or operate at the same speeds with lower power consumption. The process technologies utilized in GaAs semiconductor fabrication include metal semiconductor field effect transistor ("MESFET"), pseudomorphic high electron mobility transistor ("PHEMT"), heterojunction bipolar transistor ("HBT") and heterostructure field effect transistor ("HFET"). In many new applications, GaAs integrated circuits enable high performance systems to process data more quickly, increasing system operating rates. In addition to enabling high performance systems to process data more quickly, the use of GaAs integrated circuits can reduce system power requirements, which is particularly important in battery powered portable applications. The high performance characteristics of GaAs, combined with the system requirements of the communications industry, have led to the use of GaAs components in high volumes to complement silicon devices in a wide range of commercial and aerospace systems. 4 The Company believes that the continuation and acceleration of these trends will result in increasing demand for GaAs integrated circuits, thereby creating substantial opportunities for market-focused manufacturers who can provide a broad range of cost effective GaAs integrated circuits in high volume. MARKETS AND CUSTOMERS TriQuint has focused on commercial and aerospace applications in the wireless communications, telecommunications, data communications and millimeter wave communications market areas, which can benefit significantly from the performance of GaAs and the Company's analog and mixed signal design expertise. WIRELESS COMMUNICATIONS GaAs design and manufacturing technologies are being applied to commercial communications in satellites, satellite receivers for TV broadcast, wireless transceivers for data networks, handheld navigation systems based on the GPS system, wireless LANs, cellular and PCS telephones. Frequency bands are allocated to the various wireless communications applications by government regulatory bodies throughout the world. The allocation is based, among other factors, upon the availability of unallocated frequency bands and the ability of equipment to operate effectively in these bands. As the lower frequency bands become fully allocated and congested, and the volume and rate of communications increases, the trend is toward the allocation and use of higher frequency bands. A major example is the U.S. government's auction of PCS licenses. PCS systems operate at approximately twice the frequency of conventional cellular systems. The speed of GaAs technology makes it well-suited for applications at these higher frequencies. The superior ability of GaAs to operate at higher frequencies also makes it well suited for use in defense applications. In addition, other key performance advantages of GaAs over silicon in key wireless communications system functions for both commercial and defense applications are improved signal reception, better signal processing in congested bands and greater power efficiency for longer battery life in portable applications. TELECOMMUNICATIONS GaAs technologies are well suited for the growing markets and applications which require the transmission or manipulation of large amounts of information at high speeds with high data integrity. These applications, which typically require customer specific solutions and include digital, analog and mixed signal functions, are found primarily in the telecommunications industry, but also span other industries such as instrumentation, aerospace and defense. For many of these applications, the Company's products provide better price/performance value than silicon. The intrinsic electrical properties of GaAs result in higher speed, lower noise and less power consumption compared to silicon. The Company believes that the increasing use of fiber optic cable in telecommunications and data communications systems has created a significant growth opportunity for the Company's GaAs products. Because data transmission rates in fiber optic cable can be many times greater than those of copper line, a single fiber line can cost-effectively replace multiple copper lines. In order to take advantage of the potential cost advantages of fiber optic communications, information must be transmitted at higher rates generally achievable only through the use of GaAs products such as those manufactured by TriQuint. The telecommunication industry has established a series of standards, most notably SONET, ISDN and ATM, which define transmission rates, protocols, signal quality and reliability. GaAs based products address the performance requirements of these standards, as well as higher speed communication links (2.48 Gbits/sec and above). 5 DATA COMMUNICATIONS Data communications equipment is typically used to interconnect mainframe computers, clients and servers, workstations, disk storage arrays and other peripheral devices. Other applications, which require transmission of large amounts of data at high speed include multimedia computing, supercomputing, multiprocessor systems, interactive computer aided design/computer aided manufacturing ("CAD/CAM"), medical imaging and high speed, high resolution printing. As new applications requiring higher volume data transfer have proliferated, and as microprocessor speeds have increased, a critical bottleneck has developed in these communications links. The computation speed of today's microprocessors is 10 to 100 times faster than currently available communications equipment based on communications standards such as Ethernet and Small Computer System Interface ("SCSI"). A solution to this problem is the use of high speed serial data transmission by means of coaxial or fiber optic cable in combination with the Company's mixed signal transmitting and receiving devices. For example, leading computer manufacturers have acknowledged the need for high speed serial data communications links by supporting the Fibre Channel standard which can operate up to 1.25 Gbits/sec. TriQuint's products, using the Company's mixed signal technology, enable high speed data transmission with high data integrity. MILLIMETER WAVE COMMUNICATIONS A broad array of customers and applications are served by the Company's Millimeter Wave Communications operation. In aerospace applications, the Company's history of involvement in the federal government's DARPA-based MIMIC program has led to the development of MMIC products for phased-array radar antenna modules. This advanced antenna/system technology finds application in military aircraft, ships and spacecraft. It is also emerging as a key technology in next-generation commercial spacecraft and mobile earth station platforms. Two important commercial applications served by the Company in this area are point-to-point and point-to-multipoint digital radio markets. The point-to-point radio market is driven by expansion of the wireless telephone market, as these radios serve as the infrastructure to link the various remote towers to the switching centers. The point-to-multipoint radio market is being driven by both the LMDS auctions by the FCC for wireless distribution of phone, video and two-way data services and the growing demand for high-speed wireless networks not based on expensive or fixed-location fiber optic cable systems. The Company's products are enabling radio system suppliers to greatly reduce microwave and millimeter wave module costs by increasing the amount of circuitry integrated on GaAs chips. CUSTOMERS The Company has a broad customer base of leading systems manufacturers and shipped products or provided manufacturing services directly to approximately 265 end user customers and distributors in 1998. The Company's largest customers include Nokia and Raytheon TI Systems, which accounted for approximately 12.0% and 11.7%, respectively, of the Company's total revenues in 1998. In 1997, Northern Telecom accounted for approximately 12.0% of the Company's total revenues. No other customer of the Company accounted for greater than 10% of total revenues during these periods. If the Company were to lose any major customer or if sales were to otherwise decrease, the Company's operating results would be adversely affected. The markets in which the Company's customers compete are characterized by rapidly changing technology, evolving industry standards and continuous improvements in products and services. If technologies or standards supported by the Company's or its customers' products become obsolete or fail to gain widespread commercial acceptance, the Company's business may be materially adversely affected. 6 PRODUCTS The Company's broad range of standard and customer-specific integrated circuits, combined with its manufacturing and design services, allow customers to select the specific integrated circuit solution which best fulfills their technical and time-to-market requirements. STANDARD PRODUCTS TriQuint offers families of standard products for each of its target markets. WIRELESS COMMUNICATIONS. The Company's standard products for this varied market are used as building blocks for multi-purpose applications in radio frequency ("RF") and microwave systems. These systems include personal communications networks, cellular telephones, satellite communications and navigation systems and wireless computer networks. TriQuint's wireless communications standard products leverage the advantages of the Company's proprietary GaAs technology by addressing the needs of system designers for low noise, power efficient amplification, low loss switching and efficient and accurate frequency conversion. TELECOMMUNICATIONS While most of the Company's telecommunications products are customer-specific, the Company also offers standard telecommunications products, such as SONET and SDH multiplexers and demultiplexers to provide low bit-error-rate performance in standard transmission applications and SONET/SDH compatible transceivers that support clock and data recovery and ATM framing, as well as high performance crosspoint switches. DATA COMMUNICATIONS For this market, TriQuint offers families of standard products which are targeted at high speed data communication applications. MILLIMETER WAVE COMMUNICATIONS The Company offers a wide variety of standard MMIC and discrete devices covering the DC to 45 Ghz frequency range. The devices are adapted for both general purpose and application-specific signal amplification or control purposes. CUSTOMER-SPECIFIC PRODUCTS AND SERVICES TriQuint offers its customers a variety of product options and services for the development of customer-specific products. Services offered by the Company include design, wafer fabrication, test engineering, package engineering, assembly and test. Customer-specific products and services generally provide revenue at two stages: first when the design is developed and engineered, and second when TriQuint manufactures the device. The Company focuses the development of its customer specific-products on its target markets in applications involving volume production requirements. As is typical in the semiconductor industry, customer-specific products are developed for specific applications. As a result, the Company expects to generate production revenues only from those customer-specific products that are subsequently produced in high volume. Customer-specific designs are generally implemented by one of two methods. Under the first method, the customer supplies the Company with detailed performance specifications and TriQuint performs the complete design, development and subsequent manufacturing of the integrated circuits. These designs are generated using either the Company's in-house design engineering group or independent third-party design organizations qualified by the Company. Under the second method, TriQuint supplies circuit design and process rules to its customer and the customer's internal engineering staff designs products which TriQuint then manufactures. A substantial portion of the Company's products are designed to address the needs of individual customers. Frequent product introductions by systems manufacturers make the Company's future success dependent on its ability to select customer-specific development projects which will result in sufficient production volume to enable the Company to achieve manufacturing efficiencies. Because customer- 7 specific products are developed for unique applications, the Company expects that some of its current and future customer-specific products may never be produced in high volume. In addition, in the event of significant delays in completing designs or the Company's failure to obtain development contracts from customers whose systems achieve and sustain commercial market success, the Company's results of operations could be materially adversely affected. DESIGN AND PROCESS TECHNOLOGY In order to develop and introduce new products rapidly and cost-effectively which address the needs of its target markets, the Company has made substantial investments in building its capabilities in digital, analog and mixed signal circuit design. The Company has developed an extensive library of digital and analog cells and associated software tools and databases which it uses to facilitate the design of its integrated circuits. The Company has also developed and documented process and design rules which allow customers to design proprietary circuits themselves. Mixed signal products, which generally involve varied and complex functions operating at high frequencies, generally present design and testing challenges. The Company believes that its extensive cell library, optimized mixed signal process technology and design and test engineering expertise in high performance mixed signal integrated circuits address these challenges and provide a significant competitive advantage. TriQuint's manufacturing strategy is primarily to use high volume process technologies which enables it to provide cost-effective solutions for its customers. The Company's advanced wafer manufacturing process emphasizes stability, uniformity and repeatability. Unlike its GaAs competitors who have typically concentrated on either digital or analog products, TriQuint has intentionally pursued process technologies that are cost-effective for digital, analog and mixed signal applications. As a result of the ability to primarily utilize core processes in the manufacture of its products, the Company is able to enjoy the cost advantages associated with standard high volume semiconductor manufacturing practices. The core process technology in the Company's Oregon wafer fabrication operation employs all implanted structures, 4 micron metal pitch and 0.5 to 0.7 micron geometries, involves 10 to 16 mask steps, has a cutoff frequency of up to 21 GHz and is scalable. This scalability facilitates further cost reduction and performance improvement. The process technology employed in the Company's Texas wafer fabrication operation includes five advanced performance production processes: 0.5 micron gate length MesFET for amplifier applications; 0.25 and 0.5 micron gate length pHEMT for high power and high frequency applications; HBT for high voltage, high linearity, and high power density; 0.5 micron gate length HFET for high voltage, high power amplifiers and switches; and VPIN for signal control devices such as switches, limiters and attenuators. The Company applies the technological advances within the silicon and related support industries to its design and manufacturing processes. TriQuint utilizes popular CAD and process control tools and test equipment. The Company primarily uses standard silicon industry packages and subcontracts its product assembly operations. MANUFACTURING The Company's Oregon wafer manufacturing facility is located at its leased headquarters location in Hillsboro. The Company moved its executive, administrative, test and technical offices to a new 124,000 square foot leased facility in Hillsboro, Oregon in the first quarter of 1997. Prior to that time, such functions were conducted at the Company's former headquarters in Beaverton, Oregon. During the fourth quarter of 1997, the Company relocated its wafer fabrication and all other remaining operations to the new Hillsboro site. The Company's lease of its former wafer fabrication and manufacturing facility, a facility located in Beaverton, Oregon and owned by Maxim Integrated Products, Inc., expired in January, 1998. The Hillsboro wafer fabrication facility consists of 38,000 square feet, of which 17,000 is operated as a class 10 performance clean room. 8 The Company's Texas facility is located in Dallas, Texas. The Texas facility comprises approximately 100,000 square feet, of which 15,000 square feet is operated as a Class 10 performance clean room. The Texas facility is subleased from RTIS, which leases the premises from Texas Instruments, through July 10, 2002. The Company has the right to renew its sublease of this facility for up to three additional five year periods in the event that RTIS exercises its rights to renew its lease from Texas Instruments. There can be no assurance, however, that RTIS will extend its lease beyond July 10, 2002. The fabrication of semiconductor products is highly complex and sensitive to dust and other contaminants, requiring production in a highly controlled, clean environment. Minute impurities, difficulties in the fabrication process or defects in the masks used to print circuits on the wafers can cause a substantial percentage of the wafers to be rejected or numerous die on each wafer to be nonfunctional. As compared to silicon technology, the less mature stage of GaAs technology leads to somewhat greater difficulty in circuit design and in controlling parametric variations, thereby yielding fewer good die per wafer. The more brittle nature of GaAs wafers can lead to higher processing losses than experienced with silicon wafers. To maximize wafer yield and quality, the Company tests its products in various stages in the fabrication process, maintains continuous reliability monitoring and conducts numerous quality control inspections throughout the entire production flow using analytical manufacturing controls. A sustained failure to maintain acceptable yields would have a material adverse effect on the Company's operating results. The Company's operation of its own manufacturing facilities entails a high level of fixed costs. Such fixed costs consist primarily of facility occupancy costs, investment in manufacturing equipment, repair, maintenance and depreciation costs related to equipment and fixed labor costs related to manufacturing and process engineering. The Company's manufacturing yields vary significantly among its products, depending upon a given product's complexity and the Company's experience in manufacturing such product. The Company has in the past and may in the future experience substantial delays in product shipments due to lower than expected production yields. In addition, during periods of low demand, high fixed wafer fabrication costs could have a material adverse effect on the Company's operating results. Employees of the Company have performed studies of the reliability of the Company's processes and have published more than 25 technical papers in such field. In October 1994, the Company received the ISO 9001 Quality System Certification with respect to its operations. The Company has successfully fabricated devices for "High Reliability" applications in commercial and military spacecraft since 1988. Through accelerated test techniques, the Company has demonstrated expected device failure rates of less than 100FITs (100 failures in 1 billion device-hours of operation) in the first twenty years of operation at maximum junction temperatures of 150 degrees Celsius. The reliability of the Company's processes may be inadvertently reduced by future engineering changes and the reliability of any given integrated circuit may be strongly influenced by design details, and there can be no assurance that circuits designed and manufactured in the future will achieve this level of reliability. Wafer fabrication equipment used by the Company is generally the same as that used in a submicron silicon metal oxide semiconductor ("MOS") fabrication facility. While many of the process steps are also similar to those commonly used in silicon wafer manufacturing, TriQuint's GaAs manufacturing process has important differences. The GaAs process requires fewer steps and may be conducted at lower temperatures than those typically required in high performance silicon processes. Furthermore, GaAs wafers require more rigorous handling procedures than do silicon wafers. The raw materials and equipment used in the production of the Company's integrated circuits are available from several suppliers. The Company currently has approximately seven fully qualified wafer vendors, at least three of which are located in the United States, and two fully qualified mask set vendors, one of which is located in the United States. The Company assembles its products using outside assembly contractors. Outside assembly and tape and reel services for volume production are contracted to ten vendors, three of which are located in the 9 United States. The Company purchases high performance, multilayer ceramic packages from two vendors, one of which is located in the United States. TriQuint believes it was the first supplier of GaAs integrated circuits to introduce plastic packages in volume production. The Company currently purchases plastic packaging services from six suppliers, one of which is located in the United States. A reduction or interruption in the performance of assembly services by subcontractors or a significant increase in the price changed for such services could adversely affect the Company's operating results. SALES AND DISTRIBUTION The Company sells its products through independent manufacturer's representatives and distributors and through a direct sales staff. As of December 31, 1998, TriQuint had 21 independent manufacturer's representative firms and two distributors in North America. TriQuint's seven person direct sales management staff provides sales direction and support to the manufacturer's representatives and distributors. Domestic sales management offices are located in the metropolitan areas of Los Angeles, California; Philadelphia, Pennsylvania; Portland, Oregon; San Jose, California and Raleigh, North Carolina. International business is supported by a network of 15 manufacturer's representatives and distributors in Europe and the Pacific Rim. The Company has also established a foreign subsidiary, TriQuint Semiconductor GmbH, with offices in Germany and France. The primary activity of this subsidiary is sales and marketing. Sales outside of the United States were $26.8 million, $24.3 million and $18.1 million in 1998, 1997 and 1996, respectively. All international sales of the Company's products are denominated in U.S. dollars in order to reduce the exchange rate risks. Sales outside of the United States involve a number of inherent risks, including reduced protection for intellectual property rights in some countries, the impact of recessionary environments in economies outside of the United States and generally longer receivables collection periods, as well as tariffs and other trade barriers. In addition, due to the technological advantage provided by GaAs in military applications, all export sales must be licensed by the Office of Export Administration of the U.S. Department of Commerce. Although the Company has experienced no difficulty in obtaining these licenses, failure to obtain these licenses in the future could have a material adverse effect on the Company's results of operations. The Company includes in its backlog all purchase orders and contracts for products requested by the customer for delivery within twelve months. The Company's business is characterized by long-term purchase contracts predominantly relating to customer-specific products, which are typically cancelable without significant penalty, at the option of the purchaser. Cancellations of such purchase contracts or rescheduling of delivery dates have occurred in the past and may occur in the future. The Company also produces standard products which frequently can be shipped from inventory within a short time after receipt of an order and therefore such orders may not be reflected in backlog. Accordingly, backlog as of any particular date may not necessarily be representative of actual sales for any future period. RESEARCH AND DEVELOPMENT The Company's research and development efforts are focused on the design of new integrated circuits, improvement of existing device performance, development of new processes, cost reductions in the manufacturing process and improvements in device packaging. New product developments include standard and customer-specific devices for satellite communications, cellular and PCS telephones, wireless local area networks, wireless modems, high performance switching, transmission and data conversion products and data communications chipsets. The Company's research, development and engineering ("RD&E") expenses in 1998, 1997 and 1996 were approximately $19.0 million, $11.5 million and $10.9 million, respectively, and include non-recurring engineering ("NRE") expenses funded by customers. Expenses in 1998 related to RD&E increased substantially from the level incurred in 1997 primarily due to the inclusion of the new Millimeter Wave Communications operation. As of December 31, 1998, there were approximately 245 employees engaged 10 in activities related to process and product research and development. The Company expects that it will continue to spend substantial funds on research and development. The Company is continually in the process of designing new and improved products to maintain its competitive position. While the Company has patented a number of aspects of its process technology, the market for the Company's products is characterized by rapid changes in both GaAs and competing silicon process technologies. Because of continual improvements in these technologies, the Company believes that its future success will depend on its ability to continue to improve its products and processes and develop new technologies in order to remain competitive. Additionally, the Company's future success will depend on its ability to develop and introduce new products for its target markets in a timely manner. The success of new product introductions is dependent upon several factors, including timely completion and introduction of new product designs, achievement of acceptable fabrication yields and market acceptance. The development of new products by the Company and their design into customers' systems can take as long as three years, depending upon the complexity of the device and the application. Accordingly, new product development requires a long-term forecast of market trends and customer needs. Furthermore, the successful introduction of the Company's ongoing products may be adversely affected by the competing products or technologies serving markets addressed by the Company's products. In addition, new product introductions frequently depend on the Company's development and implementation of new process technologies. If the Company is unable to design, develop, manufacture and market new products successfully, its future operating results will be adversely affected. No assurance can be given that the Company's product and process development efforts will be successful or that its new products will be available on a timely basis or achieve market acceptance. In addition, as is characteristic of the semiconductor industry, the average selling prices of the Company's products have historically decreased over the products' lives and are expected to continue to do so. To offset such decreases, the Company relies primarily on obtaining yield improvements and corresponding cost reductions in the manufacture of existing products and on introducing new products which incorporate advanced features and which therefore can be sold at higher average selling prices. To the extent that such cost reductions and new product introductions do not occur in a timely manner or the Company's or its customers' products do not achieve market acceptance, the Company's operating results could be adversely affected. COMPETITION The market for high performance semiconductors is highly competitive and subject to rapid technological change. Due to the increasing requirements for high speed components, the Company expects intensified competition from existing silicon device suppliers and the entry of new competition producing either silicon or GaAs components or components incorporating new technologies such as silicon germanium. The Company currently competes against silicon products offered principally by large semiconductor manufacturers such as AMCC, Motorola and Philips. In addition, the Company also currently competes against other GaAs semiconductor manufacturers, such as Anadigics, Vitesse, RF Microdevices and Raytheon. It is expected that additional future competition will primarily come from large semiconductor companies that have developed GaAs integrated circuit capabilities such as Fujitsu, Motorola and NEC. Such companies have substantially greater technical, financial and marketing resources and name recognition than the Company. Increased competition could adversely affect the Company's revenue and profitability. GaAs integrated circuits have been used mostly in the wireless communications market on a production basis for products or subsystems operating below 1 GHz, such as spread spectrum and cellular telephone applications. As the lower frequency bands become more crowded, more applications will utilize frequencies above 1 GHz. At such higher frequencies, GaAs integrated circuit solutions generally provide superior performance as compared to silicon alternatives. TriQuint competes with both GaAs and silicon suppliers in the telecommunications market. In the computing market, TriQuint supplies standard products to a variety of data communication systems manufacturers. In the computing market, the Company's 11 competition comes from established silicon semiconductor companies and GaAs suppliers, and is generally based on performance elements such as speed, power dissipation, price, product quality and service. In the microwave and millimeter wave markets, the Company's competition is primarily from a limited number of military and aerospace based suppliers who are in the process of expanding their products to cover commercial opportunities as well. The Company's prospective customers are typically systems designers and manufacturers who are considering the use of GaAs semiconductors in their next high performance systems. Competition is primarily based on performance elements such as speed, complexity and power dissipation, as well as price, product quality and ability to deliver products in a timely fashion. The Company believes that it currently competes favorably with respect to these factors. Due to the proprietary nature of the Company's products, competition occurs almost exclusively at the system design stage. As a result, a design win by the Company or its competitors typically limits further competition with respect to manufacturing a given design. Some potential customers may be reluctant to adopt the Company's products because of perceived risks relating to GaAs technology generally, including perceived risks related to manufacturing costs, novel design and unfamiliar manufacturing processes. In addition, potential customers may have questions about the relative performance advantages of the Company's products compared to more familiar silicon semiconductors, or concerns about risks associated with reliance on a smaller, less well-capitalized company for a critical component. While GaAs integrated circuits have inherent speed advantages over silicon devices, the speed of products based upon silicon processes is continually improving. The Company's products are generally sole sourced to its customers, and the Company's operating results could be adversely affected if its customers were to develop other sources for the Company's products. The production of GaAs integrated circuits has been and continues to be more costly than the production of silicon devices. This cost differential relates primarily to higher costs of the raw wafer material, lower production yields associated with the relatively immature GaAs technology and higher unit costs associated with lower production volumes. Although the Company has reduced production costs through decreasing raw wafer costs, increasing fabrication yields and achieving higher volumes, there can be no assurance that the Company will be able to continue to decrease production costs. In addition, the Company believes its costs of producing GaAs integrated circuits will continue to exceed the costs associated with the production of silicon devices. As a result, the Company must offer devices which provide superior performance to that of silicon such that the perceived price/performance of its products is competitive with silicon devices. There can be no assurance that the Company can continue to identify markets which require performance superior to that offered by silicon solutions or that the Company will continue to offer products which provide sufficiently superior performance to offset the cost differentials. PATENTS AND LICENSES The Company aggressively seeks the issuance of patents to protect inventions and technology which are important to its business. The Company has been awarded numerous patents for circuit design and wafer processing; with various expiration dates, none earlier than April 2005. These include both U.S. and foreign patents. As part of the acquisition of the Millimeter Wave Communications operation in January 1998, the Company acquired certain patents and also received licenses and sublicenses for certain additional patents. In addition, the Company has both U.S. and foreign registered trademarks. The Company has also routinely protected its numerous original mask sets under the copyright laws. There can be no assurance that the Company's pending patent or trademark applications will be allowed or that the issued or pending patents will not be challenged or circumvented by competitors. Notwithstanding the Company's active pursuit of patent protection, the Company believes that its future success will depend primarily upon the technical expertise, creative skills and management abilities of its officers and key employees rather than on patent ownership. The Company also relies substantially on trade secrets and proprietary technology to protect its technology and manufacturing know-how, and works actively to foster continuing technological innovation to maintain and protect its competitive position. There can be no assurance that the Company's competitors will not independently develop or patent substantially equivalent or superior technologies. 12 On February 26, 1999, a lawsuit was filed against 88 firms, including the Company, in the United States District Court for the District of Arizona. The suit alleges that the defendants infringe upon certain patents held by The Lemelson Medical, Education and Research Foundation, Limited Partnership. The Company believes that the suit is without merit and intends to vigorously defend itself against the charges. The Company's involvement in any patent dispute or other intellectual property dispute or action to protect trade secrets and know-how could have a material adverse effect on the Company's business. Adverse determinations in any litigation could subject the Company to significant liabilities to third parties, require the Company to seek licenses from third parties and prevent the Company from manufacturing and selling its products. Any of these situations could have a material adverse effect on the Company's business. ENVIRONMENTAL MATTERS Federal, state and local regulations impose various environmental controls on the storage, handling, discharge and disposal of chemicals and gases used in TriQuint's manufacturing process. For the manufacturing facilities located at Hillsboro, Oregon, the Company is providing for its own manufacturing waste treatment and disposal. The Company is required by the State of Oregon Department of Environmental Quality to report usage of environmentally hazardous materials and has retained the appropriate personnel to help ensure compliance with all applicable environmental regulations. At the Texas facility, the Company utilizes TI's waste treatment and waste storage facilities and services for the treatment, storage, disposal and discharge of wastes generated by the Company, pursuant to the Asset Purchase Agreement dated January 8, 1998. The Company's waste streams are commingled with those of TI and are covered by the TI waste water permit. The Company believes that its activities conform to present environmental regulations. Increasing public attention has, however, been focused on the environmental impact of semiconductor operations. While the Company has not experienced any materially adverse effects on its operations from environmental regulations, there can be no assurance that changes in such regulations will not impose the need for additional capital equipment or other requirements. Any failure by the Company, or by TI with respect to the Texas facility, to adequately restrict the discharge of hazardous substances could subject the Company to future liabilities or could cause its manufacturing operations to be suspended. EMPLOYEES As of December 31, 1998, the Company employed a total of 679 persons, including 316 in manufacturing, 18 in quality and reliability, 245 in process, product and development engineering, 41 in marketing and sales and 59 in finance and administration. None of the Company's employees are represented by a collective bargaining agreement, nor has the Company experienced any work stoppage. The Company considers its relations with employees to be good. ITEM 2. PROPERTIES The Company moved its executive, administrative, test and technical offices to a new 124,000 square foot leased facility in Hillsboro, Oregon in the first quarter of 1997. Prior to that time, such functions were conducted at the Company's former headquarters in Beaverton, Oregon. During the fourth quarter of 1997, the Company completed the relocation of its wafer fabrication and all other remaining operations to the new Hillsboro site. The leased Hillsboro wafer fabrication facility consists of 38,000 square feet, of which 17,000 is operated as a class 10 performance clean room. In May 1996, the Company entered into a five year synthetic lease through a Participation Agreement (the "Agreement") with Wolverine Leasing Corp. ("Wolverine"), Matisse Holding Company ("Matisse") and United States National Bank of Oregon ("USNB"). The lease provides for the construction and 13 occupancy of the Company's Hillsboro facility under an operating lease from Wolverine and provides the Company with an option to purchase the property or renew its lease for an additional five years. Pursuant to the terms of the Agreement, the USNB and Matisse made loans to Wolverine who in turn advanced the funds to the Company for the construction of the Hillsboro facility and other costs and expenses associated therewith. The loan from USNB is collateralized by investment securities pledged by the Company. Such investment securities are classified on the Company's balance sheet as restricted investments. In addition, restrictive covenants in the Agreement require the Company to maintain (i) a total liability to tangible net worth ratio of not more than 0.75 to 1.00, (ii) minimum tangible net worth greater than $50.0 million and (iii) cash and liquid investment securities, including restricted securities, greater than $45.0 million. As of December 31, 1998, the Company was in compliance with the covenants described above, and the Company anticipates that it will be in compliance with the covenants as of March 31, 1999. However, there can be no assurance that the Company will continue to be in compliance with these covenants in the future. In November 1997, the Company entered into a $1.5 million lease agreement for additional land adjacent to its Hillsboro facility. Pursuant to the terms of that agreement, USNB provided loans to Matisse to purchase the land, who in turn leased it to the Company under a renewable one year lease agreement. The loan from USNB is partially collateralized by a guarantee from the Company. The agreement contains restrictive covenants substantially the same as those contained in the Company's line of credit. As of December 31, 1998 the Company was in compliance with the terms of the agreement. However, there can be no assurance that the Company will continue to be in compliance with these terms as of any subsequent date. In January 1998, the Company acquired the Millimeter Wave Communications operations of the former Texas Instruments' Defense Systems & Electronics Group from RTIS. The Millimeter Wave Communications facilities are located in Dallas, Texas. The Texas facility comprises approximately 100,000 square feet, of which 15,000 square feet is operated as a Class 10 performance clean room. The Texas facility is subleased from RTIS, which leases the premises from Texas Instruments, through July 10, 2002. The Company has the right to renew its sublease of the Texas facility for up to three additional five year periods in the event that RTIS exercises its rights to renew its lease from Texas Instruments. There can be no assurance, however, that RTIS will extend its lease beyond July 10, 2002. ITEM 3. LEGAL PROCEEDINGS On July 12, 1994, a stockholder class action lawsuit was filed against the Company, its underwriters, and certain of its officers, directors and investors in the United States District Court for the Northern District of California. The suit alleged that the Company, its underwriters, and certain of its officers, directors and investors intentionally misled the investing public regarding the financial prospects of the Company. Following the filing of the complaint, the plaintiffs dismissed without prejudice a director defendant, the principal stockholder defendant, the underwriter defendants and certain analyst defendants. On June 21, 1996, the Court granted the Company's motion to transfer the litigation to the District of Oregon. The pretrial discovery phase of the lawsuit ended July 1, 1997. The Court had established a January 1999 trial date for this action. During the year ended December 31, 1998, the Company settled this action and recorded a special charge of $1.4 million associated with the settlement of this lawsuit and related legal expenses, net of accruals. On February 26, 1999, a lawsuit was filed against 88 firms, including the Company, in the United States District Court for the District of Arizona. The suit alleges that the defendants infringe upon certain patents held by The Lemelson Medical, Education and Research Foundation, Limited Partnership. The Company believes that the suit is without merit and intends to vigorously defend itself against the charges. 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Certain of the information required by this item is included under the caption COMMON STOCK PRICES AND MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS contained in the Company's 1998 Annual Report to Stockholders and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is included under the caption SELECTED FINANCIAL DATA contained in the Company's 1998 Annual Report to Stockholders and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is included under the caption MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS contained in the Company's 1998 Annual Report to Stockholders and is incorporated herein by reference. ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to minimal market risks. Sensitivity of results of operations to these risks is managed by maintaining a conservative investment portfolio, which is comprised solely of highly-rated, short-term investments. The Company does not hold or issue derivative, derivative commodity instruments or other financial instruments for trading purposes. The Company is exposed to interest rate risk, as additional financing is periodically utilized primarily to fund capital expenditures. The interest rate that the Company may be able to obtain on financings will depend on market conditions at that time and may differ from the rates the Company has secured in the past. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA The information required by this item is listed in Item 14 of Part IV of this report and includes the caption SUPPLEMENTARY UNAUDITED FINANCIAL DATA contained in the Company's 1998 Annual Report to Stockholders and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is included under the captions ELECTION OF DIRECTORS, EXECUTIVE OFFICERS and SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE contained in the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders, to be held May 26, 1999, to be filed by the 15 Company with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year pursuant to General Instructions G(3) of Form 10-K and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information required by this item is included under the caption EXECUTIVE COMPENSATION contained in the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item is included under the caption SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT contained in the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is included under the caption CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS contained in the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a)(1) CONSOLIDATED FINANCIAL STATEMENTS The Consolidated Financial Statements, together with the report thereon of KPMG Peat Marwick LLP are included in the Company's 1998 Annual Report to Stockholders and are incorporated herein by reference. TriQuint Semiconductor, Inc.: Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Shareholders' Equity December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements Independent Auditors' Report (a)(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULE The following schedule and independent auditors' report are filed herewith:
PAGE NO. ------------- Schedule II Valuation and Qualifying Accounts....................................... F1 Independent Auditors' Report on Consolidated Financial Statement Schedule........... F2
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is included in the Consolidated Financial Statements or notes thereto. 16 (a)(3) EXHIBITS
EXHIBIT NO. - ------------ 3.1(7) Certificate Incorporation of Registrant 3.2(7) Bylaws of Registrant 4.1(3) Preferred Shares Rights Agreement, dated as of June 30, 1998 between TriQuint Semiconductor, Inc. and ChaseMellon Shareholder Services, L.L.C., including the Certificate of Determination, the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A, B and C, respectively. 10.1 Reserved 10.2(2) 1987 Stock Incentive Program, as amended, and forms of agreements thereunder. 10.3(5) 1992 Employee Stock Purchase Plan, as amended, and forms of agreement thereunder. 10.4(1) Letter Agreement dated November 22, 1991 between the Registrant and Steven J. Sharp. 10.5 Reserved 10.6(1) Letter Agreement dated March 1, 1992 between Registrant and Edward C.V. Winn, as amended to date. 10.7(1) Registration Rights Agreement dated May 17, 1991 between the Registrant and certain of its shareholders and warrantholders, as amended September 5, 1991, September 3, 1992, July 1, 1993 and September 24, 1993. 10.8(1) Supply Agreement dated October 11, 1990 by and between DuPont Photomasks, Inc. and Registrant. 10.9(1) Amended and Restated Exclusive Distributor Agreement dated September 20, 1991, as amended between Registrant and Giga A/S. 10.10 Reserved 10.11 Reserved 10.12 Reserved 10.13.1(1) Asset Purchase Agreement dated August 31, 1993 by and between American Telephone and Telegraph Company ("AT&T") and Registrant 10.13.2(1*) Joint Development and Technology Transfer Agreement dated August 31, 1993 between AT&T and Registrant. 10.13.3(1*) Foundry Agreement dated August 31, 1993 between AT&T and Registrant. 10.13.4(1*) Patent License Agreement dated August 31, 1993 between AT&T and Registrant. 10.13.5(1) Letter Agreement dated August 31, 1993 between AT&T and Registrant. 10.13.6(1) Warrant to Purchase Shares of Series D Convertible Preferred Stock of Registrant dated August 31, 1993 issued to AT&T. 10.14(1*) Agreement dated May 6, 1993 between Comlinear Corporation and the Registrant. 10.15(1*) Agreement of Purchase and Sale for Semiconductor Products between Northern Telecom Canada Limited and Registrant dated July 8, 1993.
17
EXHIBIT NO. - ------------ 10.16(4) Participation Agreement dated May 17, 1996 among the Registrant, Wolverine Leasing Corp., Matisse Holding Company and United States National Bank of Oregon 10.17(4) Lease dated May 17, 1996 between the Registrant and Wolverine Leasing Corp. 10.18(6) 1996 Stock Incentive Program and forms of agreement thereunder. 10.19(7) Form of Indemnification Agreement executed by Registrant and its officers and directors pursuant to Delaware reincorporation. 10.20(8) Master Lease Agreement between Registrant and General Electric Capital Corporation, dated June 27, 1997, and Equipment Schedules G-1, G-2, and G-3, each dated January 13, 1998. 10.21(8) Asset Purchase Agreement, dated as of January 8, 1998, by and between Raytheon TI Systems, Inc. and the Company, and related exhibits. 10.22(9) 1998 Nonstatutory Stock Option Plan, and forms of agreement thereunder. 10.23(10) 1998 Employee Stock Purchase Plan, and forms of agreement thereunder. 13.1 Portions of Annual Report to Stockholders dated 12/31/98 23.1 Independent Auditors' Consent 27.1 Financial Data Schedule
- ------------------------ (*) Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. (1) Incorporated by reference to the Registration Statement on Form S-1 (File No. 33-70594) as declared effective by the Securities and Exchange Commission December 13, 1993. (2) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 as filed with the Securities and Exchange Commission on March 29, 1995. (3) Incorporated by reference to the Registrant's Report on Form 8-A (File No. 000-22660) as declared effective by the Securities and Exchange Commission on July 24, 1998. (4) Incorporated by reference to the exhibits filed with the Registrant's Report on Form 8-K filed with the Securities and Exchange Commission on June 14, 1996. (5) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 333-08891) as declared effective by the Securities and Exchange Commission on August 14, 1996. (6) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 333-08893) as declared effective by the Securities and Exchange Commission on August 14, 1996. (7) Incorporated by reference to the Registrant's Registration Statement on Form 8-B (File No. 000-22660) as declared effective by the Securities and Exchange Commission on February 18, 1997. (8) Incorporated by reference to the Registrant's Registration Statement on Form 8-K (File No. 000-22660) filed with the Securities and Exchange Commission on January 27, 1998. (9) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 333-48883) as declared effective by the Securities and Exchange Commission on March 30, 1998, as amended by the Registrant's Registration Statement on Form S-8 (File 333-66707) as declared effective by the Securities and Exchange Commission on November 3, 1998. (10) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 333-66707) as declared effective by the Securities and Exchange Commission on November 3, 1998. (b) REPORTS ON FORM 8-K The Company filed a Registration Statement on Form 8-K (File No. 000-22660) with the Securities and Exchange Commission on January 27, 1998, amended as of March 27, 1998, to report the acquisition of certain assets pursuant to that certain Asset Purchase Agreement, dated as of January 8, 1998, by and between Raytheon TI Systems, Inc. and the Company. (c) EXHIBITS See Item 14(a)(3) above. (d) FINANCIAL STATEMENT SCHEDULES See Item 14(a)(2) above. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. TRIQUINT SEMICONDUCTOR, INC. By: /s/ STEVEN J. SHARP ----------------------------------------- Steven J. Sharp PRESIDENT, CHIEF EXECUTIVE OFFICER AND Date: March 31, 1999 CHAIRMAN OF THE BOARD OF DIRECTORS
POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven J. Sharp and Edward C.V. Winn, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, to sign any and all amendments (including post-effective amendments) to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, or any of them, shall do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- President, Chief Executive /s/ STEVEN J. SHARP Officer and Chairman - ------------------------------ (Principal Executive March 31, 1999 Steven J. Sharp Officer) Executive Vice President, Finance and /s/ EDWARD C.V. WINN Administration, Chief - ------------------------------ Financial Officer and March 31, 1999 Edward C.V. Winn Secretary (Principal Financial and Accounting Officer) /s/ PAUL A. GARY - ------------------------------ Director March 31, 1999 Paul A. Gary
19
SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ CHARLES SCOTT GIBSON - ------------------------------ Director March 31, 1999 Charles Scott Gibson /s/ E. FLOYD KVAMME - ------------------------------ Director March 31, 1999 E. Floyd Kvamme /s/ WALDEN C. RHINES - ------------------------------ Director March 31, 1999 Walden C. Rhines /s/ EDWARD F. TUCK - ------------------------------ Director March 31, 1999 Edward F. Tuck
20 EXHIBITS
SEQUENTIAL EXHIBIT NO. PAGE NO. - ------------ ---------- 3.1(7) Certificate Incorporation of Registrant 3.2(7) Bylaws of Registrant 4.1(3) Preferred Shares Rights Agreement, dated as of June 30, 1998 between TriQuint Semiconductor, Inc. and ChaseMellon Shareholder Services, L.L.C., including the Certificate of Determination, the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A, B and C, respectively. 10.1 Reserved 10.2(2) 1987 Stock Incentive Program, as amended, and forms of agreements thereunder. 10.3(5) 1992 Employee Stock Purchase Plan, as amended, and forms of agreement thereunder. 10.4(1) Letter Agreement dated November 22, 1991 between the Registrant and Steven J. Sharp. 10.5 Reserved 10.6(1) Letter Agreement dated March 1, 1992 between Registrant and Edward C.V. Winn, as amended to date. 10.7(1) Registration Rights Agreement dated May 17, 1991 between the Registrant and certain of its shareholders and warrantholders, as amended September 5, 1991, September 3, 1992, July 1, 1993 and September 24, 1993. 10.8(1) Supply Agreement dated October 11, 1990 by and between DuPont Photomasks, Inc. and Registrant. 10.9(1) Amended and Restated Exclusive Distributor Agreement dated September 20, 1991, as amended between Registrant and Giga A/S. 10.10(1) Reserved 10.11(1) Reserved 10.12(3) Reserved 10.13.1(1) Asset Purchase Agreement dated August 31, 1993 by and between American Telephone and Telegraph Company ("AT&T") and Registrant. 10.13.2(1*) Joint Development and Technology Transfer Agreement dated August 31, 1993 between AT&T and Registrant. 10.13.3(1*) Foundry Agreement dated August 31, 1993 between AT&T and Registrant. 10.13.4(1*) Patent License Agreement dated August 31, 1993 between AT&T and Registrant. 10.13.5(1) Letter Agreement dated August 31, 1993 between AT&T and Registrant. 10.13.6(1) Warrant to Purchase Shares of Series D Convertible Preferred Stock of Registrant dated August 31, 1993 issued to AT&T. 10.14(1*) Agreement dated May 6, 1993 between Comlinear Corporation and the Registrant. 10.15(1*) Agreement of Purchase and Sale for Semiconductor Products between Northern Telecom Canada Limited and Registrant dated July 8, 1993.
21
SEQUENTIAL EXHIBIT NO. PAGE NO. - ------------ ---------- 10.16(4) Participation Agreement dated May 17, 1996 among the Registrant, Wolverine Leasing Corp., Matisse Holding Company and United States National Bank of Oregon. 10.17(4) Lease dated May 17, 1996 between the Registrant and Wolverine Leasing Corp. 10.18(6) 1996 Stock Incentive Program and forms of agreement thereunder. 10.19(7) Form of Indemnification Agreement executed by Registrant and its officers and directors pursuant to Delaware reincorporation. 10.20(8) Master Lease Agreement between Registrant and General Electric Capital Corporation, dated June 27, 1997, and Equipment Schedules G-1, G-2, and G-3, each dated January 13, 1998. 10.21(8) Asset Purchase Agreement, dated as of January 8, 1998, by and between Raytheon TI Systems, Inc. and the Company, and related exhibits. 10.22(9) 1998 Nonstatutory Stock Option Plan, and forms of agreement thereunder. 10.23(10) 1998 Employee Stock Purchase Plan, and forms of agreement thereunder. 13.1 Portions of Annual Report to Stockholders dated 12/31/98. 24 23.1 Independent Auditors' Consent 71 27.1 Financial Data Schedule
- ------------------------ (*) Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. (1) Incorporated by reference to the Registration Statement on Form S-1 (File No. 33-70594) as declared effective by the Securities and Exchange Commission December 13, 1993. (2) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 as filed with the Securities and Exchange Commission on March 29, 1995. (3) Incorporated by reference to the Registrant's Report on Form 8-A (File No. 000-22660) as declared effective by the Securities and Exchange Commission on July 24, 1998. (4) Incorporated by reference to the exhibits filed with the Registrant's Report on Form 8-K filed with the Securities and Exchange Commission on June 14, 1996. (5) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 333-08891) as declared effective by the Securities and Exchange Commission on August 14, 1996. (6) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 333-08893) as declared effective by the Securities and Exchange Commission on August 14, 1996. (7) Incorporated by reference to the Registrant's Registration Statement on Form 8-B (file No. 000-22660) as declared effective by the Securities and Exchange Commission on February 18, 1997. (8) Incorporated by reference to the Registrant's Registration Statement on Form 8-K (File No. 000-22660) filed with the Securities and Exchange Commission on January 27, 1998. (9) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 333-48883) as declared effective by the Securities and Exchange Commission on March 30, 1998. As amended by the Registrant's Registration Statement on Form S-8 (File 333-66707) as declared effective by the Securities and Exchange Commission on November 3, 1998. (10) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 333-66707) as declared effective by the Securities and Exchange Commission on November 3, 1998. 22 TRIQUINT SEMICONDUCTOR, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF OF PERIOD EXPENSES DEDUCTIONS PERIOD ----------- ----------- ----------- ----------- Year ended December 31, 1996: Allowance for doubtful accounts................................ $ 202 119 102 219 Inventory valuation reserve.................................... 2,309 3,668 3,594 2,383 Year ended December 31, 1997: Allowance for doubtful accounts................................ 219 0 23 196 Inventory valuation reserve.................................... 2,383 4,539 5,598 1,324 Year ended December 31, 1998: Allowance for doubtful accounts................................ 196 99 33 262 Inventory valuation reserve.................................... 1,324 7,429 6,331 2,422
F1 INDEPENDENT AUDITORS' REPORT ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE The Board of Directors TRIQUINT SEMICONDUCTOR, INC.: Under date of February 11, 1999, except as to note 13 which is as of February 26, 1999, we reported on the consolidated balance sheets of TriQuint Semiconductor, Inc. and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, as contained in the 1998 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year ended December 31, 1998. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as listed in Item 14(a)(2) of this Form 10-K. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. KPMG PEAT MARWICK LLP Portland, Oregon February 11, 1999, except as to note 13 which is as of February 26, 1999 F2 EX-13.1 2 EXHIBIT 13.1 EXHIBIT 13.1 OVERVIEW TriQuint Semiconductor designs, develops, manufactures and markets a broad range of high-performance analog and mixed-signal gallium arsenide (GaAs) integrated circuits and transistors for the wireless communications, telecommunications, data communications and millimeter wave communications markets. TriQuint's engineers apply the company's proprietary GaAs technology to produce high-performance, low-cost devices that give customers a competitive edge in their product strategy. TriQuint offers a broad range of standard and customer-specific products as well as manufacturing services. Inherent physical properties allow electrons to move approximately five times faster in GaAs than in silicon. This enables GaAs integrated circuits to operate at much higher frequencies than silicon devices--or to perform as fast while using substantially less power. GaAs also provides lower distortion amplification, can receive weaker signals due to its low-noise characteristics, and can transmit strong clean signals at lower voltages. TriQuint's wafer fabrication facilities, located in Oregon and Texas, produce 4-inch wafers using high-volume, low-cost ion-implanted metal semiconductor field effect transistor (MESFET) processes, high power and efficiency pseudomorphic high electron mobility transfer (PHEMT), heterojunction bipolar transistor (HBT) and heterojunction field effect transistor (HFET) processes. All TriQuint operations are ISO 9001 certified. End-user customers include market-leading equipment manufacturers such as Alcatel, Cellnet Data Systems, Ericsson, Hughes, Lucent Technologies, Motorola, Nokia, Nortel, Qualcomm, and Raytheon. TRIQUINT SEMICONDUCTOR, INC. FINANCIAL HIGHLIGHTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
YEAR ENDED DECEMBER 31, 1998 1997 Total revenues $111,605 $ 71,367 Income (loss) from operations (6,345) 5,633 Income (loss) before income taxes (3,861) 7,750 Net income (loss) (3,955) 6,860 Diluted net income (loss) per share (0.42) 0.75 Cash and investments 66,225 64,625 Shareholders' equity 107,615 90,038
- -------------------------------------------------------------------------------- COMMON STOCK PRICES
Quarter High Low Q4 1998 $ 22 5/8 11 Q3 1998 21 5/8 14 1/2 Q2 1998 25 16 5/8 Q1 1998 27 1/2 19 3/4 Q4 1997 45 3/8 17 3/8 Q3 1997 45 1/2 32 1/4 Q2 1997 40 3/4 21 1/8 Q1 1997 37 7/8 20 1/2
TOTAL REVENUES BY QUARTER - - Description of graphic: Graphic representation of total revenues (in millions) by quarter. Data used to produce the graphic is as follows: Q4 1998 30.9 Q3 1998 29.1 Q2 1998 27.9 Q1 1998 23.7 Q4 1997 18.5 Q3 1997 17.6 Q2 1997 18.5 Q1 1997 16.8
DILUTED NET INCOME PER SHARE BY QUARTER - - Description of graphic: Graphic representation of net income per share by quarter. Data used to produce the graphic is as follows: Q4 1998 0.35 Q3 1998 0.29 Q2 1998 0.21 Q1 1998 (1.33) Q4 1997 0.17 Q3 1997 0.14 Q2 1997 0.25 Q1 1997 0.20
TO OUR SHAREHOLDERS: 1998 SAW OUR COMPANY'S REVENUES PASS THE $100 MILLION MILESTONE. WE GREATLY EXPANDED OUR TECHNOLOGY CAPABILITIES AND MARKET BASE WITH THE ACQUISITION OF THE MILLIMETER WAVE BUSINESS AND ARE EXTREMELY WELL POSITIONED TO SUCCESSFULLY PARTICIPATE IN A BROAD ARRAY OF HIGH GROWTH COMMUNICATIONS MARKET OPPORTUNITIES. FINANCIAL PERFORMANCE. 1998 revenues increased by 56% over 1997 to a record $111.6 million. For the year, we reported a net loss of $4.0 million. Excluding the first quarter, which produced a loss due to special charges primarily associated with the acquisition of the Millimeter Wave business, our net profit for 1998 was $8.3 million. Our balance sheet remains very strong. MILLIMETER WAVE COMMUNICATIONS. Early in the year we announced the acquisition of the Gallium Arsenide (GaAs) millimeter wave integrated circuit operation of the former Texas Instruments Defense Systems and Electronics Group from Raytheon for approximately $39 million. This operation is a world leader in millimeter wave integrated circuit technology. Millimeter wave devices operate at frequencies above 10 GHz and are a perfect complement to our Oregon product lines. I am happy to report that the integration of the Millimeter Wave business, which is located in Dallas, has gone extremely well and results have exceeded our expectations. We are very pleased with the strong performance of the Millimeter Wave team. With the addition of Millimeter Wave, we now possess the full range of advanced GaAs processes - MESFET, PHEMT, HBT and HFET - that provide the performance capability required for the wide array of present and emerging high growth communications opportunities. CUSTOMER AND MARKET DIVERSITY. Rather than be dependent on a relatively narrow customer and applications base, we have purposely sought to engage with all the leading participants in each of the major communications markets where our proprietary technologies provide a competitive advantage. In 1998, just two customers represented over 10% of our revenues. Nokia, the leading wireless telephone handset manufacturer was our largest customer at 12% and Raytheon was the second largest at 11.7%. Twenty-one end-customers contributed over $1 million in revenue during the year. Our applications portfolio was also well balanced with approximately 45% of revenues from wireless communications applications, 18% in the telecom/ datacom arena and 37% from millimeter wave systems. The addition of millimeter wave technologies to our product offerings has allowed us to expand our participation in entirely new market areas including satellite communications, point-to-point and point-to-multipoint broadband communications, Local Multipoint Distribution Systems (LMDS) and advanced aerospace systems. DESIGN WINS AND NEW PRODUCTS. By focusing our marketing and sales efforts, we were able to achieve a record 246 major design wins during the year, up from 131 in 1997. Since all our products are proprietary, sole source devices, design wins are a critical activity and, we believe, are a good leading indicator of future business. Wireless product introductions during the year included a family of three volt power amplifiers for wireless handset transmitters and further expansion of our handset receiver product line. We also announced the inclusion of a new mixer/downconverter in the reference design chip set for implementation of Motorola's ReFlex two-way messaging protocol. The telecom product line was expanded with the introduction of two high speed cross-point switches and a 2.5 Gigabit per second transceiver for high performance networks and SONET fiber optic communications applications. The millimeter wave product line announced a family of high efficiency and high linearity power transistors in the DC to 12GHz frequency range, a high power 6.5 to 11.5 GHz amplifier for digital radio, phased array radar, and telecommunications applications and also a 28 GHz Amplifier for the Digital Radio, LMDS and satellite communications markets. OPERATIONS. During the first quarter of the year, we transitioned to our new state-of-the-art Oregon wafer fab facility. Since that time, we have seen a steady improvement in output and yields from the new fab. We estimate that this facility, combined with the Texas wafer fab, provides us with the physical capacity to support up to $300M in annual sales. Both facilities have been certified to the requirements of the ISO 9001 International Quality Standard. ORGANIZATION. Until mid 1998, we maintained our foundry services operations as part of the Wireless Communications organization. In June, we formed a separate Foundry Services Division to focus on the unique requirements of our foundry customers. TriQuint's design tools and technical support enable our customers to design their own circuits for manufacture by us on our proprietary processes. The foundry relationship enables our customers to rapidly introduce leadership devices while protecting their intellectual property. Bruce Fournier, formerly Vice President of Sales heads the new Foundry Services Division. Replacing Bruce is Paul Kollar who brings more than thirty years of experience in semiconductor marketing and sales management to his new position. Paul was most recently Vice President of sales at Lattice Semiconductor and is a strong addition to our management team. We continue to see excellent results from our company-wide continuous process improvement initiatives. Employee participation in the continuous improvement of all our business processes has become even more firmly embedded in our culture during the past 12 months. THE COMING YEAR. Looking ahead, we anticipate continued revenue growth in 1999. The wireless communications market is expected to drive much of this growth. The market for our high performance telecom products should also be strong and we expect to see exceptional design win opportunities in satellite communications and LMDS applications. We will continue to concentrate on driving our design win activities and on maintaining our broad, well-balanced product portfolio and market base. In summary, 1998 was another very successful year for TriQuint. We significantly strengthened our product offerings, broadened our market and customer base and positioned our manufacturing operations to support the anticipated rapid growth of our business. The enthusiasm and teamwork of our employees and the support of our customers, suppliers, and shareholders has made this possible and is sincerely appreciated. We look forward to continuing our success in this very exciting and opportunity-filled business. Sincerely, Steven J. Sharp CHAIRMAN, PRESIDENT & CHIEF EXECUTIVE OFFICER TRIQUINT SEMICONDUCTOR, INC. SELECTED FINANCIAL DATA IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
YEAR ENDED DECEMBER 31,(1) 1998 1997 1996 1995 1994 STATEMENT OF OPERATIONS DATA: Total revenues $111,605 $71,367 $59,526 $45,943 $30,261 Operating costs and expenses: Cost of goods sold 72,784 40,028 34,258 25,509 19,790 Research, development and engineering 18,984 11,518 10,858 9,210 9,945 Selling, general and administrative 15,962 14,188 10,975 9,009 10,013 Restructuring of operations - - - - 443 Special charges 10,220 - - - - -------------------------------------------------------------------- Total operating costs and expenses 117,950 65,734 56,091 43,728 40,191 -------------------------------------------------------------------- Income (loss) from operations (6,345) 5,633 3,435 2,215 (9,930) Other income (expense), net 2,484 2,117 3,083 930 198 -------------------------------------------------------------------- Income (loss) before income taxes (3,861) 7,750 6,518 3,145 (9,732) Income tax expense 94 890 231 83 - -------------------------------------------------------------------- Net income (loss) ($3,955) $6,860 $6,287 $3,062 ($9,732) -------------------------------------------------------------------- -------------------------------------------------------------------- PER SHARE DATA: Net income(loss): Basic ($0.42) $0.82 $0.78 $0.48 ($1.82) Diluted ($0.42) $0.75 $0.72 $0.42 ($1.82) Weighted average shares: Basic 9,400 8,373 8,045 6,358 5,346 Diluted 9,400 9,108 8,763 7,237 5,346 BALANCE SHEET DATA: Working capital $44,494 $35,180 $37,591 $65,513 $16,409 Total assets 141,306 121,418 107,596 94,024 34,227 Long-term obligations, less current installments 9,369 12,550 9,891 7,392 4,062 Shareholders' equity 107,615 90,038 80,246 72,644 20,785 - ---------------------------------------------------------------------------------------------------------------------------
(1) In 1996, 1997 and 1998, the Company's fiscal year ended on December 31. In 1994 and 1995, the Company's fiscal year ended on the Saturday nearest December 31. For convenience, the Company has indicated in this Annual Report that its fiscal years ended on December 31. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IN ADDITION TO THE OTHER INFORMATION IN THIS ANNUAL REPORT TO SHAREHOLDERS AND IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR 1998 INTO WHICH THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A) IS INCORPORATED BY REFERENCE, CERTAIN STATEMENTS IN THE FOLLOWING MD&A ARE FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS REPORT, THE WORD "EXPECTS," "ANTICIPATES," "ESTIMATES," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. SUCH RISKS AND UNCERTAINTIES ARE SET FORTH BELOW UNDER "FACTORS AFFECTING FUTURE OPERATING RESULTS." INTRODUCTION TriQuint Semiconductor, Inc. (TriQuint or the Company) designs, develops, manufactures and markets a broad range of high performance analog and mixed signal integrated circuits for the communications markets. The Company utilizes its proprietary gallium arsenide (GaAs) technology to enable its products to overcome the performance barriers of silicon devices in a variety of applications. The Company sells its products on a worldwide basis and its end user customers include Alcatel, Cellnet Data Systems, Ericsson, Hughes, Lucent Technologies, Motorola, Nokia, Northern Telecom, Qualcomm and Raytheon. On January 13, 1998, the Company acquired substantially all of the assets of the Monolithic Microwave Integrated Circuit (MMIC) operations of the former Texas Instruments' Defense Systems & Electronics Group from Raytheon TI Systems, Inc. (RTIS), a Delaware corporation and a wholly owned subsidiary of Raytheon Company (Raytheon). The MMIC operations include the GaAs foundry and MMIC business of the R/F Microwave Business Unit that RTIS acquired on July 11, 1997 from Texas Instruments Incorporated (TI) which MMIC business includes without limitation, TI's GaAs Operations Group, TI's Microwave GaAs Products Business Unit, the MMIC component of TI's Microwave GaAs Products Business Unit, the MMIC component of TI's Microwave Integrated Circuits Center of Excellence and the MMIC research and development component of TI's Systems Component Research Laboratory (collectively, Millimeter Wave Communications). The Millimeter Wave Communications operation designs, develops, produces and sells advanced GaAs MMIC products which are used in defense and commercial applications. In the area of defense applications, the Millimeter Wave Communications operation supplies military contractors with MMIC products and services for applications such as high power amplifiers, low noise amplifiers, switches and attenuators for active array radar, missiles, electronic warfare systems and space communications systems. In commercial applications, the Millimeter Wave Communications operation provides products and services for wireless and space-based communications. Pursuant to an Asset Purchase Agreement with RTIS, TriQuint acquired the Millimeter Wave Communications operation for approximately $19.5 million in cash and 844,613 shares of TriQuint Common Stock valued at approximately $19.5 million for a total purchase consideration of approximately $39 million. The cash portion of the purchase price was financed through an operating lease arrangement involving certain assets pursuant to the Agreement. 1 RESULTS OF OPERATIONS The following table sets forth the statement of operations data of the Company expressed as a percentage of total revenues for the periods indicated.
YEAR ENDED DECEMBER 31, 1998 1997 1996 ---- ---- ---- Total revenues 100.0 % 100.0 % 100.0 % Operating costs and expenses: Cost of goods sold 65.2 56.1 57.6 Research, development and engineering 17.0 16.1 18.2 Selling, general and administrative 14.3 19.9 18.4 Special charges 9.2 0.0 0.0 ----------- --------- -------- Total operating costs and expenses 105.7 92.1 94.2 ----------- --------- -------- Income from operations 5.8 (5.7) 7.9 Other income, net 2.2 3.0 5.2 ----------- --------- -------- Income before income taxes (3.5) 10.9 11.0 Income tax expense 0.1 1.3 0.4 ----------- --------- -------- Net income (3.6) % 9.6 % 10.6 % ----------- --------- -------- ----------- --------- --------
The fiscal years ended December 31, 1998, December 31, 1997 and December 31, 1996 are hereinafter referred to as Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively. COMPARISON OF 1998 AND 1997 TOTAL REVENUES The Company derives revenues from the sale of standard and customer-specific products and services. The Company's revenues also include non-recurring engineering (NRE) revenues relating to the development of customer-specific products. Total revenues for Fiscal 1998 increased 56.4% to $111.6 million from $71.4 million for Fiscal 1997. The increase in total revenues primarily reflects the inclusion of revenues from the newly acquired Millimeter Wave Communications operation since the date of acquisition and a strong demand for wireless communication products, offset by a reduction in demand for telecommunication products. Domestic and international revenues for Fiscal 1998 were $84.8 million and $26.8 million, respectively, as compared to $47.1 million and $24.3 million, respectively, for Fiscal 1997. The Company currently anticipates an overall increase in the volume of product revenues from existing and new customers. COST OF GOODS SOLD Cost of goods sold includes all direct material, labor and overhead expenses and certain NRE production costs. The factors affecting product mix include the relative demand in the various markets incorporating the Company's customer-specific products and standard products, as well as the number of NRE contracts which result in volume requirements for customer-specific products. Cost of goods sold was $72.8 million in Fiscal 1998 and increased from $40.0 million in Fiscal 1997. Cost of goods sold for Fiscal 1998 increased as a percentage of total revenues to 65.2% from 56.1% for Fiscal 1997. The increase in absolute dollar value of cost of goods sold was primarily attributable to the related increase in sales volume. The increase in cost of goods sold as a percentage of total revenues was due to an increase in lower-margin products in the mix of products sold and costs related to the transition to the Company's new Hillsboro wafer fabrication facility. However, cost of goods sold, as a percentage of total revenues, improved sequentially over each quarter of Fiscal 1998 due to continued yield improvements and increases in economies of scale from higher production volumes. 2 The Company has at various times in the past experienced lower than expected production yields which have delayed shipments of a given product and adversely affected gross margins. There can be no assurance that the Company will be able to maintain acceptable production yields in the future and, to the extent that it does not achieve acceptable production yields, its operating results would be materially adversely affected. The Company's operation of its own leased wafer fabrication facility entails a high degree of fixed costs and requires an adequate volume of production and sales to be profitable. During periods of decreased demand, high fixed wafer fabrication costs would have a material adverse effect on the Company's operating results. RESEARCH, DEVELOPMENT AND ENGINEERING Research, development and engineering (RD&E) expenses include the costs incurred in the design of products associated with NRE revenues, as well as ongoing product development and research and development expenses. The Company's RD&E expenses for Fiscal 1998 increased 64.8% to $19.0 million from $11.5 million for Fiscal 1997. RD&E expenses as a percentage of total revenues increased to 17.0% for Fiscal 1998 from 16.1% for Fiscal 1997. The increase in RD&E expenses in both absolute dollar amount and as a percentage of total revenues reflects the inclusion of RD&E expenses related to the newly acquired MMIC Business and increases in product development activities and NRE expenses. The Company is committed to substantial investments in RD&E and expects such expenses will increase in absolute dollar amount in the future. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative (SG&A) expenses for Fiscal 1998 increased 12.5% to $16.0 million from $14.2 million for Fiscal 1997. SG&A decreased as a percentage of total revenues to 14.3% for 1998 from 19.9% for 1997. The increase in absolute dollar value in SG&A expenses was primarily attributable to the inclusion of SG&A expenses related to the newly acquired Millimeter Wave Communications operation and increased selling expenses associated with increased sales volume. As a percentage of total revenues, the decrease in SG&A expenses was due to revenues increasing at a faster rate than SG&A expenses. SPECIAL CHARGES During Fiscal 1998, special charges of $8.8 million were recorded. These were special charges associated with the Company's acquisition of the MMIC Business from Raytheon TI Systems, Inc. and involve the write-off of the fair value of in-process research and development. On July 12, 1994, a stockholder class action lawsuit was filed against the Company, its underwriters, and certain of its officers, directors and investors in the United States District Court for the Northern District of California. The suit alleged that the Company, its underwriters, and certain of its officers, directors and investors intentionally misled the investing public regarding the financial prospects of the Company. Following the filing of the complaint, the plaintiffs dismissed without prejudice a director defendant, the principal stockholder defendant, the underwriter defendants and certain analyst defendants. On June 21, 1996, the Court granted the Company's motion to transfer the litigation to the District of Oregon. The pretrial discovery phase of the lawsuit ended July 1, 1997. The Court had established a January 1999 trial date for this action. During Fiscal 1998, the Company settled this action and recorded a special charge of $1.4 million associated with the settlement of this lawsuit and related legal expenses, net of accruals and insurance proceeds. OTHER INCOME, NET Other income, net for Fiscal 1998 increased to $2.5 million as compared to $2.1 million for Fiscal 1997. This increase resulted primarily from lower interest expense, gain on sale of assets and other miscellaneous receipts, partially offset by lower interest income. 3 INCOME TAX EXPENSE Income tax expense for Fiscal 1998 decreased to $94,000 from $890,000 for Fiscal 1997. The decrease in income tax expense was attributable to the Company's operating loss in Fiscal 1998. At December 31, 1998, the Company had federal and Oregon state net operating loss carryforwards for tax reporting purposes of approximately $45.7 million and $22.0 million, respectively. The Company's ability to use its net operating loss carryforwards against taxable income is subject to additional restrictions and limitations under Section 382 of the Internal Revenue Code of 1986, as amended, in the event of a change of ownership of the Company as defined therein. See Note 7 of Notes to Consolidated Financial Statements. COMPARISON OF 1997 AND 1996 TOTAL REVENUES Total revenues for Fiscal 1997 increased 19.9% to $71.4 million from $59.5 million for Fiscal 1996. The increase in total revenues was due to significantly increased demand for products in all three product areas: wireless communications, telecommunications, and computing revenues. Domestic and international revenues for Fiscal 1997 were $47.1 million and $24.3 million, respectively, as compared to $41.4 million and $18.1 million, respectively, for Fiscal 1996. COST OF GOODS SOLD Cost of goods sold was $40.0 million in Fiscal 1997 and increased from $34.3 million in Fiscal 1996. Cost of goods sold for Fiscal 1997 decreased slightly as a percentage of total revenues to 56.1% from 57.6% for Fiscal 1996. The decrease in cost of goods sold as a percentage of total revenues was primarily attributable to improvements in production yields and increased volume, which were partially offset by certain costs associated with the Company's startup of its new wafer fabrication facility and variances associated with expediting costs. RESEARCH, DEVELOPMENT AND ENGINEERING The Company's RD&E expenses for Fiscal 1997 increased 6.1% to $11.5 million from $10.9 million for Fiscal 1996. RD&E expenses as a percentage of total revenues decreased to 16.1% for Fiscal 1997 from 18.2% for Fiscal 1996. The increase in RD&E expenses in absolute dollar level was primarily due to increased product development activities and NRE expenses in response to increased demand from customers. The number of major design wins for Fiscal 1997 increased 17% from Fiscal 1996. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative (SG&A) expenses for Fiscal 1997 increased 29.3% to $14.2 million from $11.0 million for Fiscal 1996. SG&A increased as a percentage of total revenues to 19.9% for 1997 from 18.4% for 1996. The increase in the level of SG&A expenses was primarily due to costs associated with the Company's move to its new facility in Hillsboro, increased information technology support costs, increased sales commissions in connection with the increase in the level of total revenues, and professional fees. OTHER INCOME , NET Other income, net for Fiscal 1997 decreased to $2.1 million as compared to $3.1 million for Fiscal 1996. This decrease resulted from a one-time gain of $680,000 from the sale of the Company's minority interest in its primary distributor in Europe in Fiscal 1996 and from higher interest expense in Fiscal 1997 associated with an increase in capital lease obligations. 4 INCOME TAX EXPENSE The effective tax rate for Fiscal 1997 was 11.5%, which is less than the federal and state statutory rate of approximately 40% due to the use of net operating loss carryforwards. The effective tax rate for Fiscal 1996 was 3.5%. NEW ACCOUNTING STANDARDS In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities", ("SOP 98-5"), which is effective for financial statements for fiscal years beginning after December 15, 1998. SOP 98-5 broadly defines start-up activities and requires costs of start-up activities and organization costs to be expensed as incurred. The Company does not expect implementation to have a significant impact on its consolidated financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 also requires that changes in the derivative's fair value be recognized currently in results of operations unless specific hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The Company does not expect SFAS No. 133 to have a significant impact on its consolidated financial statements. FACTORS AFFECTING FUTURE RESULTS VARIABILITY OF OPERATING RESULTS - The Company's quarterly and annual results of operations have varied in the past and may vary significantly in the future due to a number of factors, including cancellation or delay of customer orders or shipments; market acceptance of the Company's or its customers' products; the Company's success in achieving design wins; variations in manufacturing yields; timing of announcement and introduction of new products by the Company and its competitors; changes in revenue and product mix; competitive factors; changes in manufacturing capacity and variations in the utilization of such capacity; variations in average selling prices; variations in operating expenses; the long sales cycles associated with the Company's customer specific products; the timing and level of product and process development costs; the cyclicality of the semiconductor industry; the timing and level of nonrecurring engineering ("NRE") revenues and expenses relating to customer specific products; changes in inventory levels; and general economic conditions. Any unfavorable changes in these or other factors could have a material adverse effect on the Company's results of operations. For example, in June 1994, Northern Telecom, then the Company's largest customer, requested that the Company delay shipment of certain of its telecommunications devices to Northern Telecom. This decision, together with a general softness of orders in the telecommunications market, materially adversely affected the Company's revenues and results of operations in the second quarter of 1994 and for the balance of that year. The Company expects that its operating results will continue to fluctuate in the future as a result of these and other factors. The Company's expense levels are based, in part, on its expectations as to future revenue and, as a result, net income would be disproportionately and adversely affected by a reduction in revenue. Due to potential quarterly fluctuations in operating results, the Company believes that quarter-to-quarter comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indicators of future performance. Furthermore, it is likely that in some future quarter the Company's net sales or operating results will be below the expectations of public market securities analysts or investors. In such event, the market price of the Company's Common Stock would likely be materially adversely affected. INTEGRATION OF ACQUISITIONS - Company management frequently evaluates the strategic opportunities available to it and may in the near-term or long-term future pursue acquisitions of complementary products, technologies or businesses. For example, on January 13, 1998, the Company acquired substantially all of the assets of the Millimeter Wave Communications operation of the former Texas Instruments' Defense Systems & Electronics Group from RTIS. Acquisition transactions are accompanied by a number of risks, including, among other things, the difficulty of assimilating the operations and personnel of the acquired companies, the potential disruption of the Company's ongoing business, the inability of management to maximize the financial and strategic position of the Company through the successful incorporation of acquired technology and rights into the Company's products, expenses associated with the transactions, expenses associated with acquired in-process research and development, additional operating expenses, the maintenance of uniform standards, controls, procedures and policies, the impairment of relationships with employees and customers as a result of any integration of new management personnel, and the 5 potential unknown liabilities associated with acquired businesses. There can be no assurance that the Company will be successful in overcoming these risks or any other problems encountered in connection with its acquisition of the Millimeter Wave Communications operation or any other future acquisitions. In addition, future acquisitions by the Company have the potential to result in dilutive issuances of equity securities, the incurrence of additional debt, and amortization expenses related to goodwill and other intangible assets that may materially adversely affect the Company's results of operations. MANUFACTURING RISKS - The fabrication of integrated circuits, particularly GaAs devices such as those sold by the Company, is a highly complex and precise process. Minute impurities, difficulties in the fabrication process, defects in the masks used to print circuits on a wafer, wafer breakage or other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be nonfunctional. As compared to silicon technology, the less mature stage of GaAs technology leads to somewhat greater difficulty in circuit design and in controlling parametric variations, thereby yielding fewer good die per wafer. In addition, the more brittle nature of GaAs wafers can result in higher processing losses than those experienced with silicon wafers. The Company has in the past experienced lower than expected production yields, which have delayed product shipments and materially adversely affected the Company's results of operations. This was experienced in the fourth quarter of 1995 and during 1996. There can be no assurance that the Company will be able to maintain acceptable production yields in the future. Because the majority of the Company's costs of manufacturing are relatively fixed, the number of shippable die per wafer for a given product is critical to the Company's results of operations. To the extent the Company does not achieve acceptable manufacturing yields or experiences product shipment delays, its results of operations could be materially adversely affected. In addition, the Company leases and operates its own wafer fabrication facilities, which entails a high level of fixed costs and which requires an adequate volume of production and sales to be profitable. During periods of decreased demand, high fixed wafer fabrication costs could have a material adverse effect on the Company's results of operations. PRODUCT QUALITY, PERFORMANCE AND RELIABILITY - The fabrication of GaAs integrated circuits is a highly complex and precise process. The Company expects that its customers will continue to establish demanding specifications for quality, performance and reliability that must be met by the Company's products. GaAs integrated circuits as complex as those offered by the Company often encounter development delays and may contain undetected defects or failures when first introduced or after commencement of commercial shipments. As has occurred with most other semiconductor manufacturers, the Company has from time to time experienced product quality, performance or reliability problems, although no such problems have had a material adverse effect on the Company's operating results. There can be no assurance, however, that defects or failures will not occur in the future relating to the Company's product quality, performance and reliability that may have a material adverse effect on the Company's results of operations. If such failures or defects occur, the Company could experience lost revenue, increased costs (including warranty expense and costs associated with customer support), delays in or cancellations or rescheduling of orders or shipments and product returns or discounts, any of which would have a material adverse effect on the Company's business, financial condition and results of operations. RELIANCE ON SIGNIFICANT CUSTOMERS; CUSTOMER CONCENTRATION - A significant portion of the Company's revenues in each fiscal period has historically been concentrated among a limited number of customers. In recent periods, sales to certain of the Company's major customers as a percentage of total revenues have fluctuated. In Fiscal 1998, Nokia and RTIS accounted for approximately 12.0% and 11.7%, respectively of total revenues. In Fiscal 1997, Northern Telecom accounted for approximately 12.0% of total revenues. The Company expects that sales to a limited number of customers will continue to account for a substantial portion of its total revenues in future periods. The Company does not have long-term agreements with any of its customers. Customers generally purchase the Company's products pursuant to cancelable short-term purchase orders. The Company's business, financial condition and results of operations have been materially adversely affected in the past by the failure of anticipated orders to materialize and by deferrals or cancellations of orders. If the Company were to lose a major customer or if orders by or shipments to a major customer were to otherwise decrease or be delayed, the Company's business, financial condition and results of operations would be materially adversely affected. DEPENDENCE ON CUSTOMER SPECIFIC PRODUCTS - A substantial portion of the Company's products are designed to address the needs of individual customers. Frequent product introductions by systems manufacturers make the Company's future success dependent on its ability to select customer specific development projects which will result in sufficient production volume to enable the Company to achieve manufacturing efficiencies. Because customer specific products are developed for unique applications, the Company expects that some of its current and future customer specific products may 6 never be produced in volume. In addition, in the event of delays in completing designs or the Company's failure to obtain development contracts from customers whose systems achieve and sustain commercial market success, the Company's business, financial condition and results of operations could be materially adversely affected. DEPENDENCE ON NEW PRODUCTS AND PROCESSES - The Company's future success depends on its ability to develop and introduce in a timely manner new products and processes which compete effectively on the basis of price and performance and which adequately address customer requirements. The success of new product and process introductions is dependent on several factors, including proper selection of such products and processes, the ability to adapt to technological changes and to support emerging and established industry standards, successful and timely completion of product and process development and commercialization, market acceptance of the Company's or its customers' new products, achievement of acceptable wafer fabrication yields and the Company's ability to offer new products at competitive prices. No assurance can be given that the Company's product and process development efforts will be successful or that its new products or processes will achieve market acceptance. In addition, as is characteristic of the semiconductor industry, the average selling prices of the Company's products have historically decreased over the products' lives and are expected to continue to do so. To offset such decreases, the Company relies primarily on achieving yield improvements and corresponding cost reductions in the manufacture of existing products and on introducing new products which incorporate advanced features and which therefore can be sold at higher average selling prices. To the extent that such cost reductions and new product or process introductions do not occur in a timely manner or the Company's or its customers' products do not achieve market acceptance, the Company's business, financial condition and results of operations could be materially adversely affected. PRODUCT AND PROCESS DEVELOPMENT AND TECHNOLOGICAL CHANGE - The market for the Company's products is characterized by frequent new product introductions, evolving industry standards and rapid changes in product and process technologies. Because of continual improvements in these technologies, including those in high performance silicon where substantially more resources are invested than in GaAs technologies, the Company believes that its future success will depend, in part, on its ability to continue to improve its product and process technologies and to develop in a timely manner new technologies in order to remain competitive. In addition, the Company must adapt its products and processes to technological changes and to support emerging and established industry standards. There can be no assurance that the Company will be able to improve its existing products and process technologies, develop in a timely manner new technologies or effectively support industry standards. The failure of the Company to improve its products and process technologies, develop new technologies and support industry standards would have a material adverse effect on the Company's business, financial condition and results of operations. EVOLVING INDUSTRY STANDARDS - The markets in which the Company and its customers compete are characterized by rapidly changing technology, evolving industry standards and continuous improvements in products and services. If technologies or standards supported by the Company's or its customers' products become obsolete or fail to gain widespread commercial acceptance, the Company's business, financial condition and results of operations may be materially adversely affected. In addition, the increasing demand for wireless communications has exerted pressure on regulatory bodies worldwide to adopt new standards for such products, generally following extensive investigation of and deliberation over competing technologies. The delays inherent in the regulatory approval process may in the future cause the cancellation, postponement or rescheduling of the installation of communications systems by the Company's customers. These delays have in the past had and may in the future have a material adverse effect on the sale of products by the Company and on its business, financial condition and results of operations. COMPETITION - The semiconductor industry is intensely competitive and is characterized by rapid technological change, rapid product obsolescence and price erosion. Currently, the Company competes primarily with manufacturers of high performance silicon semiconductors such as AMCC, Motorola and Philips and with manufacturers of GaAs semiconductors such as Anadigics, Vitesse, RF Microdevices and Raytheon. The Company expects increased competition both from existing competitors and from a number of companies which may enter the GaAs integrated circuit market, as well as future competition from companies which may offer new or emerging technologies such as silicon germanium. Most of the Company's current and potential competitors have significantly greater financial, technical, manufacturing and marketing resources than the Company. Additionally, manufacturers of high performance silicon semiconductors have achieved greater market acceptance of their existing products and technologies in certain applications. There can be no assurance that the Company will not face increased competition or that the Company will be able to compete successfully in the future. The 7 failure of the Company to successfully compete in its markets would have a material adverse effect on the Company's business, financial condition and results of operations. ADOPTION OF GaAs COMPONENTS BY SYSTEMS MANUFACTURERS - Silicon semiconductor technologies are the dominant process technologies for integrated circuits and these technologies continue to improve in performance. TriQuint's prospective customers are frequently systems designers and manufacturers who are utilizing such silicon technologies in their existing systems and who are evaluating GaAs integrated circuits for use in their next generation high performance systems. Customers may be reluctant to adopt TriQuint's products because of perceived risks relating to GaAs technology generally. Such perceived risks include the unfamiliarity of designing systems with GaAs products as compared with silicon products, concerns related to manufacturing costs and yields, novel design and unfamiliar manufacturing processes and uncertainties about the relative cost effectiveness of the Company's products compared to high performance silicon integrated circuits. In addition, customers may be reluctant to rely on a smaller company such as TriQuint for critical components. There can be no assurance that additional systems manufacturers will design the Company's products into their respective systems, that the companies that have utilized the Company's products will continue to do so in the future or that GaAs technology will achieve widespread market acceptance. Should the Company's GaAs products fail to achieve market acceptance or be utilized in manufacturers' systems, the Company's business, financial condition and results of operations would be materially adversely affected. GaAs COMPONENTS MORE COSTLY TO PRODUCE - The production of GaAs integrated circuits has been and continues to be more costly than the production of silicon devices. This cost differential relates primarily to higher costs of the raw wafer material, lower production yields associated with the relatively immature GaAs technology and higher unit costs associated with lower production volumes. Although the Company has reduced unit production costs by increasing wafer fabrication yields, by achieving higher volumes and by obtaining lower raw wafer costs, there can be no assurance that the Company will be able to continue to decrease production costs. In addition, the Company believes that its costs of producing GaAs integrated circuits will continue to exceed the costs associated with the production of silicon devices. As a result, the Company must offer devices which provide superior performance to that of silicon-based devices such that the perceived price/performance of its products is competitive. There can be no assurance that the Company can continue to identify markets which require performance superior to that offered by silicon solutions, or that the Company will continue to offer products which provide sufficiently superior performance to offset the cost differential. MANAGEMENT OF GROWTH - The growth in the Company's business has placed, and is expected to continue to place, a significant strain on the Company's personnel, management and other resources. The Company's ability to manage any future growth effectively will require it to attract, train, motivate, manage and retain new employees successfully, to integrate new employees into its overall operations and in particular its manufacturing operations, and to continue to improve its operational, financial and management information systems. DEPENDENCE ON KEY PERSONNEL - The Company's future success depends in large part on the continued service of its key technical, marketing and management personnel and on its ability to continue to identify, attract and retain qualified technical and management personnel, particularly highly skilled design, process and test engineers involved in the manufacture of existing products and the development of new products and processes. Furthermore, there may be only a limited number of persons in the Company's geographic area with the requisite skills to serve in these positions. There are many other semiconductor companies located in the Company's geographic area and it may become increasingly difficult for the Company to attract and retain such personnel. The competition for such personnel is intense, and the loss of key employees could have a material adverse effect on the Company. SOLE SOURCES OF MATERIALS AND SERVICES - The Company currently procures certain components and services for its products from single sources, such as ceramic packages from Kyocera. The Company purchases these components and services on a purchase order basis, does not carry significant inventories of these components and does not have any long-term supply contracts with its sole source vendors. If the Company were to change any of its sole source vendors, the Company would be required to requalify the components with each new vendor. Requalification could prevent or delay product shipments which could materially adversely affect the Company's results of operations. In addition, the Company's reliance on sole source vendors involves several risks, including reduced control over the price, timely delivery, reliability and quality of the components. Any inability of the Company to obtain timely deliveries of components of acceptable quality in required 8 quantities or any increases in the prices of components for which the Company does not have alternative sources could materially adversely affect the Company's business, financial condition and results of operations. CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY - The semiconductor industry has historically been characterized by wide fluctuations in product supply and demand. From time to time, the industry has also experienced significant downturns, often in connection with, or in anticipation of, major additions of wafer fabrication capacity, maturing product cycles or declines in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity and subsequent accelerated price erosion, and in some cases have lasted for extended periods of time. The Company's business has in the past been and could in the future be materially adversely affected by industry-wide fluctuations. The Company's continued success will depend in large part on the continued growth of the semiconductor industry in general and its customers' markets in particular. No assurance can be given that the Company's business, financial condition and results of operations will not be materially adversely affected in the future by cyclical conditions in the semiconductor industry or in any of the markets served by the Company's products. PROPRIETARY TECHNOLOGY - The Company's ability to compete is affected by its ability to protect its proprietary information. The Company relies on a combination of patents, trademarks, copyrights, trade secret laws, confidentiality procedures and licensing arrangements to protect its intellectual property rights. The Company currently has patents granted and pending in the United States and in foreign countries and intends to seek further international and United States patents on its technology. There can be no assurance that patents will issue from any of the Company's pending applications or applications in preparation or that patents will be issued in all countries where the Company's products can be sold or that any claims allowed from pending applications or applications in preparation will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to the Company. Also, competitors of the Company may be able to design around the Company's patents. The laws of certain foreign countries in which the Company's products are or may be developed, manufactured or sold, including various countries in Asia, may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States, increasing the possibility of piracy of the Company's technology and products. Although the Company intends to vigorously defend its intellectual property rights, there can be no assurance that the steps taken by the Company to protect its proprietary information will be adequate to prevent misappropriation of its technology or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. RISK OF THIRD PARTY CLAIMS OF INFRINGEMENT - The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which have resulted in significant and often protracted and expensive litigation. If it is necessary or desirable, the Company may seek licenses under such patents or other intellectual property rights. However, there can be no assurance that licenses will be offered or that the terms of any offered licenses will be acceptable to the Company. The failure to obtain a license from a third party for technology used by the Company could cause the Company to incur substantial liabilities and to suspend the manufacture of products. Furthermore, the Company may initiate claims or litigation against third parties for infringement of the Company's proprietary rights or to establish the validity of the Company's proprietary rights. Litigation by or against the Company could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel, whether or not such litigation results in a favorable determination for the Company. In the event of an adverse result in any such litigation, the Company could be required to pay substantial damages, indemnify its customers, cease the manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology, discontinue the use of certain processes or obtain licenses to the infringing technology. There can be no assurance that the Company would be successful in such development or that such licenses would be available on reasonable terms, or at all, and any such development or license could require expenditures of substantial time and other resources by the Company. In the event that any third party makes a successful claim against the Company or its customers and a license is not made available to the Company on commercially reasonable terms, the Company's business, financial condition and results of operations would be materially adversely affected. On February 26, 1999, a lawsuit was filed against 88 firms, including the Company, in the United States District Court for the District of Arizona. The suit alleges that the defendants infringe upon certain patents held by The Lemelson Medical, Education and Research Foundation, Limited Partnership. Although the Company believes that the suit is without merit and intends to vigorously defend itself against the charges, there can be no assurance that such defense will be successful. Moreover, such litigation may require expenditures of substantial time and money and could distract management from the Company's day-to-day operations. 9 ENVIRONMENTAL REGULATIONS - The Company is subject to a variety of federal, state and local laws, rules and regulations related to the discharge or disposal of toxic, volatile or other hazardous chemicals used in its 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 require the Company to acquire significant equipment or to incur substantial other expenses to comply with environmental regulations. Any failure by the Company, or by TI with respect to the Company's Texas facility, to control the use of, or to adequately restrict the discharge of, hazardous substances could subject the Company to future liabilities or could cause its manufacturing operations to be suspended, resulting in a material adverse effect on the Company's business, financial condition and results of operations. RISKS ASSOCIATED WITH INTERNATIONAL SALES - Sales outside of the United States were $26.8 million, $24.3 million, and $18.1 million, in Fiscal 1998, Fiscal 1997, and Fiscal 1996, respectively. These sales involve a number of inherent risks, including imposition of government controls, currency exchange fluctuations, potential insolvency of international distributors and representatives, reduced protection for intellectual property rights in some countries, the impact of recessionary environments in economies outside the United States, political instability and generally longer receivables collection periods, as well as tariffs and other trade barriers. In addition, due to the technological advantage provided by GaAs in many military applications, all of the Company's sales outside of North America must be licensed by the Office of Export Administration of the U.S. Department of Commerce. Although the Company has not experienced significant difficulty in obtaining these licenses, failure to obtain such licenses or delays in obtaining such licenses in the future could have a material adverse effect on the Company's results of operations. Furthermore, because substantially all of the Company's foreign sales are denominated in U.S. dollars, increases in the value of the dollar would increase the price in local currencies of the Company's products in foreign markets and make the Company's products less price competitive. There can be no assurance that these factors will not have a material adverse effect on the Company's future international sales and, consequently, on the Company's business, financial condition and results of operations. DEPENDENCE ON ASSEMBLY CONTRACTORS - The Company's finished GaAs wafers are assembled and packaged by ten independent subcontractors, seven of which are located outside of the United States. Any prolonged work stoppages or other failure of these contractors to supply finished products would have a material adverse effect on the Company's business, financial condition and results of operations. YEAR 2000 RISKS - Many information technology ("IT") hardware and software systems, as well as other non-IT equipment utilizing microprocessors, can accept only two digit entries in the date code field. To operate using dates after December 31, 1999, the date code fields will need to accept four digit entries to distinguish twenty-first century dates from twentieth century dates. This is commonly referred to as the "Year 2000" or "Y2K" issue. The Company has initiated a comprehensive Y2K audit program, which consists of a six step plan to inventory and correct any non-compliant systems. These six steps are: inventory, assessment, planning, remediation, testing and implementation. The audit program encompasses a review of IT systems used in the Company's internal business as well as non-IT systems such as manufacturing systems and building systems. It also includes an audit and evaluation of third party vendors, manufacturers and suppliers. The Company has completed the audit program through the planning phase and is currently in the remediation phase, for both IT and non-IT systems as well as third-party vendors, manufacturers and suppliers. Because of the existence of numerous systems and related components within the Company and the interdependency of these systems, it is possible that certain systems at the Company, or systems at entities that provide services or goods for the Company, may fail to operate in the Year 2000. Although it is not currently anticipated, the inability of the Company to become Y2K compliant on a timely basis or the failure of a system at the Company or at an entity that provides services or goods to the Company may have a material impact on future operating results or financial condition. LIQUIDITY AND CAPITAL RESOURCES The Company completed a follow-on public offering in September 1995 raising approximately $48.1 million, net of offering expenses. In December 1993 and January 1994, the Company completed its initial public offering raising approximately $16.7 million, net of offering expenses. In addition, the Company has funded its operations to date through other sales of equity, bank borrowing, equipment leases, and cash flow from operations. As of December 31, 1998, the Company had working capital of approximately $44.5 million, including $26.1 million in cash, cash equivalents, and 10 investments. The Company has a $10.0 million unsecured revolving line of credit with a financial institution. Restrictive covenants included in the line of credit require the Company to maintain (i) a total liability to tangible net worth ratio of not more than 0.75 to 1.00, (ii) a current ratio of not less than 1.75 to 1.00 and (iii) minimum tangible net worth greater than $79.7 million and (iv) cash and investments, including restricted investments, greater than $45.0 million. As of December 31, 1998 the Company was in compliance with the restrictive covenants contained in this line of credit. However, there can be no assurance that the Company will continue to be in compliance with these covenants as of any subsequent date. In May 1996, the Company entered into a five year synthetic lease through a Participation Agreement (the "Agreement") with Wolverine Leasing Corp. ("Wolverine"), Matisse holding Company ("Matisse") and United States National Bank of Oregon ("USNB"). The lease provides for the construction and occupancy of the Company's new headquarters and wafer fabrication facility in Hillsboro under an operating lease from Wolverine and provides the Company with an option to purchase the property or renew its lease for an additional five years. Pursuant to the terms of the Agreement, USNB and Matisse made loans to Wolverine who in turn advanced the funds to the Company for the construction of the Hillsboro facility and other costs and expenses associated therewith. The loan from USNB is collateralized by investment securities pledged by the Company. Such investment securities are classified on the Company's balance sheet as restricted securities. In addition, restrictive covenants in the Agreement require the Company to maintain (i) a total liability to tangible net worth ration of not more than 0.75 to 1.00, (ii) minimum tangible net worth greater than $50.0 million and (iii) cash and liquid investment securities, including restricted securities, greater than $45.0 million. As of December 31, 1998, the Company was in compliance with the covenants described above. However, there can be no assurance that the Company will continue to be in compliance with these covenants as of any subsequent date. In November 1997, the Company entered into a $1.5 million lease for additional land adjacent to its Hillsboro facility. Pursuant to the terms of that agreement, USNB provided loans to Matisse to purchase the land, who in turn leased it to the Company under a renewable one year lease agreement. The loan from USNB is partially collateralized by a guarantee from the Company. The agreement contains restrictive covenants substantially the same as those contained in the Company's line of credit. As of December 31, 1998 the Company was in compliance with the terms of the agreement. However, there can be no assurance that the Company will continue to be in compliance with these terms as of any subsequent date. In January 1998, the Company acquired the Millimeter Wave Communications operation of the former Texas Instruments' Defense Systems & Electronics Group from RTIS. Pursuant to an Asset Purchase Agreement with RTIS, the Company acquired the Millimeter Wave Communications operation for approximately $19.5 million in cash and 844,613 shares of TriQuint Common Stock valued at approximately $19.5 million for a total purchase consideration of approximately $39 million. The cash portion of the purchase price was financed through an operating lease arrangement involving certain assets pursuant to the Agreement. The following table presents a summary of the Company's cash flows ( IN THOUSANDS):
YEAR ENDED DECEMBER 31, 1998 1997 1996 Net cash and cash equivalents provided by operating activities $ 10,218 $ 4,152 $ 5,374 Net cash and cash equivalents provided (used) by investing activities (10,874) 3,266 (25,687) Net cash and cash equivalents provided (used) by financing activities (3,476) (1,591) (1,831) ------------------ --------------- -------------- Net increase (decrease) in cash and cash equivalents $ (4,132) $ 5,827 $(22,144) ------------------ --------------- --------------
Net cash provided by operating activities in Fiscal 1998 and Fiscal 1997 of $10.2 million and $4.2 million, respectively, related primarily to profitable operations before special charges. Net cash provided by operating activities in Fiscal 1996 was $5.4 million. Cash used by investing activities in Fiscal 1998 of $10.9 million was primarily the result of the purchase of $68.0 million of investments and capital expenditures of $5.6 million. This cash used by investing activities was partially offset by the sale and/or maturity of $62.3 million of investments. Cash provided by investing activities in Fiscal 1997 relates 11 primarily to the net sale and/or maturity of investment securities of $3.9 million and capital expenditures of $1.4 million. Cash used by investing activities in Fiscal 1996 relates primarily to the net purchase of investments of $21.9 million and capital expenditures of $4.1 million. The Company will continue to monitor interest rates to enhance return on its cash and short term investments while maintaining a high degree of liquidity. Cash used by financing activities of $3.5 million, $1.6 million and $1.8 million in Fiscal 1998, Fiscal 1997, and Fiscal 1996, respectively, is primarily the result of net principal payments under capital lease obligations and installment notes, partially offset by the proceeds of the issuance of common stock upon option exercises. For Fiscal 1998, the Company established approximately $2.2 million in new capital lease equipment financing. The Company's balances of current installments of capital lease and installment note obligations of $4.9 million and capital lease and installment note obligations, less current installments, of $9.4 million as of December 31,1998 are related to the financing of machinery and equipment through equipment financing obligations. The Company expects to make continued investments in its capital equipment, including manufacturing and test equipment and computer hardware and software, in order to enhance its technology and competitive position. The Company expects to make total capital expenditures of approximately $15 million over the next twelve months. The Company believes that its current cash and cash equivalent balances, together with cash anticipated to be generated from operations and anticipated financing arrangements, will satisfy the Company's projected working capital and capital expenditure requirements, at a minimum, through the end of 1999. However, the Company may be required to finance any additional requirements through additional equity, debt financings, or credit facilities. There can be no assurance that such additional financings or credit facilities will be available, or if available, that they will be on satisfactory terms. YEAR 2000 COMPLIANCE Many information technology ("IT") hardware and software systems, as well as other non-IT equipment utilizing microprocessors, can accept only two digit entries in the date code field. To operate using dates after December 31, 1999, the date code fields will need to accept four digit entries to distinguish twenty-first century dates from twentieth century dates. This is commonly referred to as the "Year 2000" or "Y2K" issue. STATE OF READINESS - The Company has initiated a comprehensive Y2K audit program, which consists of a six step plan to inventory and correct any non-compliant systems. These six steps are: inventory, assessment, planning, remediation, testing and implementation. The audit program encompasses a review of IT systems used in the Company's internal business as well as non-IT systems such as manufacturing systems and building systems. It also includes an audit and evaluation of third party vendors, manufacturers and suppliers. The Company has completed the audit program through the planning phase and is currently in the remediation phase, for both IT and non-IT systems as well as third-party vendors, manufacturers and suppliers. The Company's products have no specific date functions or date dependencies and will operate according to specifications through the Year 2000 date rollover and thereafter. COSTS - The Company does not believe that the historical or anticipated costs of remediation have had, or will have, a material effect on the Company's financial condition or results of operations. For IT systems and most non-IT systems, the costs of remediation have been or will be encompassed in the normal anticipated expenditures for maintenance contracts and version upgrades. Total incremental cost of remediation is estimated at $150,000. RISKS, CONTINGENCY PLAN AND REASONABLY LIKELY WORST CASE SCENARIO - While the Company is heavily reliant upon its computer systems, software applications and other electronics containing date-sensitive, embedded technology as part of its business operations, such components upon which the Company primarily relies were developed with current state-of-the-art technology and, accordingly, the Company reasonably anticipates that its six-step audit and remediation program will demonstrate that many of its high-priority systems do not present material Y2K compliance issues. For computer systems, software applications and other electronics containing date-sensitive embedded technology that have met the Company's desired level of Y2K readiness, the Company will use its existing contingency plans to mitigate or eliminate problems it may experience if an unanticipated system failure were to occur. For components that have not met the Company's desired level of readiness specific contingency plans will be developed to determine the actions the Company would take if such a component failed. At the present time, the Company has not developed a most reasonably likely worst case scenario for failure to achieve Y2K compliance. The Company will be better able to develop such a scenario as it moves through the testing phase of the audit program and as it continues to monitor progress of critical third-party vendors, manufacturers and suppliers. Because of the existence of numerous systems and related components within the 12 Company and the interdependency of these systems, it is possible that certain systems at the Company, or systems at entities that provide services or goods for the Company, may fail to operate in the Year 2000. Although it is not currently anticipated, the inability of the Company to become Y2K compliant on a timely basis or the failure of a system at the Company or at an entity that provides services or goods to the Company may have a material impact on future operating results or financial condition. 13 TRIQUINT SEMICONDUCTOR, INC. Consolidated Financial Statements For Inclusion in the Annual Report for the year ended December 31, 1998 (With Independent Auditors' Report Thereon) INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders TriQuint Semiconductor, Inc.: We have audited the accompanying consolidated balance sheets of TriQuint Semiconductor, Inc. and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. 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 consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TriQuint Semiconductor, Inc. and subsidiary as of December 31, 1998 and 1997, and the results of its operations, and its cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. Portland, Oregon February 11, 1999, except as to note 13 which is as of February 26, 1999 TRIQUINT SEMICONDUCTOR, INC. Consolidated Statements of Operations (In thousands, except per share and share amounts)
YEARS ENDED DECEMBER 31 -------------------------------------------------------------- 1998 1997 1996 ------------------- ------------------- ------------------ Total revenues $ 111,605 $ 71,367 $ 59,526 Operating costs and expenses: Cost of goods sold 72,784 40,028 34,258 Research, development and engineering 18,984 11,518 10,858 Selling, general and administrative 15,962 14,188 10,975 Special charges 10,220 -- -- ------------------- ------------------- --------------- Total operating costs and expenses 117,950 65,734 56,091 ------------------- ------------------- --------------- Income (loss) from operations (6,345) 5,633 3,435 ------------------- ------------------- --------------- Other income (expense): Interest income 3,375 3,497 3,460 Interest expense (1,454) (1,463) (1,015) Other, net 563 83 638 ------------------- ------------------- --------------- 2,484 2,117 3,083 ------------------- ------------------- --------------- Income (loss) before income taxes (3,861) 7,750 6,518 Income tax expense 94 890 231 ------------------- ------------------- --------------- Net income (loss) $ (3,955) $ 6,860 $ 6,287 ------------------- ------------------- --------------- ------------------- ------------------- --------------- Per share data: Net income (loss): Basic $ (0.42) $ 0.82 $ 0.78 ------------------- ------------------- --------------- ------------------- ------------------- --------------- Diluted $ (0.42) $ 0.75 $ 0.72 ------------------- ------------------- --------------- ------------------- ------------------- --------------- Weighted average shares: Basic 9,399,656 8,373,310 8,044,581 Diluted 9,399,656 9,108,215 8,762,717
See accompanying notes to consolidated financial statements. 2 TRIQUINT SEMICONDUCTOR, INC. Consolidated Balance Sheets (In thousands, except share amounts)
DECEMBER 31 ------------------------------------------ ASSETS 1998 1997 ------------------- -------------------- Current assets: Cash and cash equivalents $ 14,602 $ 18,734 Investments 11,460 5,729 Trade accounts receivable, net 21,020 15,986 ------------------- ------------------- 47,082 40,449 ------------------- ------------------- Inventories, net: Raw material 5,066 2,776 Work in process 10,749 7,708 Finished goods 3,891 1,804 ------------------- ------------------- 19,706 12,288 ------------------- ------------------- Prepaid expenses and other assets 2,028 1,273 ------------------- ------------------- Total current assets 68,816 54,010 ------------------- ------------------- Property, plant and equipment, net 30,529 27,235 Other non-current assets, net 1,798 11 Restricted investments 40,163 40,162 ------------------- ------------------- Total assets $ 141,306 $ 121,418 ------------------- ------------------- ------------------- ------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of capital lease and installment 4,934 5,045 note obligations Accounts payable 10,027 8,737 Other accrued liabilities 6,237 2,609 Accrued payroll 3,124 2,439 ------------------- ------------------- Total current liabilities 24,322 18,830 Capital lease and installment note obligations, less current installments 9,369 12,550 ------------------- ------------------- Total liabilities 33,691 31,380 ------------------- ------------------- Commitments and contingency Shareholders' equity: Preferred stock, $.001 par value. Authorized 5,000,000 shares at December 31, 1998 and 1997; none issued and outstanding at December 31, 1998 and 1997 -- -- Common stock, $.001 par value. Authorized 25,000,000 shares at December 31, 1998 and 1997; issued and outstanding 9,551,780 and 8,494,232 shares at December 31, 1998 and 1997, respectively 10 8 Additional paid-in capital 133,582 112,052 Accumulated deficit (25,977) (22,022) ------------------- ------------------- Total shareholders' equity 107,615 90,038 ------------------- ------------------- Total liabilities and shareholders' equity $ 141,306 $ 121,418 ------------------- ------------------- ------------------- -------------------
See accompanying notes to consolidated financial statements. 3 TRIQUINT SEMICONDUCTOR, INC. Consolidated Statements of Shareholders' Equity (In thousands, except share amounts)
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL ----------------- -------------------- PAID-IN ACCUMULATED SHAREHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY -------- ------- ----------- ------- ---------- ----------- ------------- Balance, December 31, 1995 -- $ -- 7,929,881 $ 8 $ 107,805 $ (35,169) $ 72,644 Issuance of common stock under option plans and warrant exercises -- -- 237,465 -- 897 -- 897 Issuance of common stock under stock purchase plan -- -- 22,779 -- 264 -- 264 Tax benefit of stock option exercises -- -- -- -- 154 -- 154 Net income -- -- -- -- -- 6,287 6,287 -------- ------- ----------- ------- ---------- ----------- ------------- Balance, December 31, 1996 -- -- 8,190,125 8 109,120 (28,882) 80,246 Issuance of common stock under option plans and warrant exercises -- -- 256,076 -- 1,428 -- 1,428 Issuance of common stock under stock purchase plan -- -- 48,031 -- 996 -- 996 Tax benefit of stock option exercises -- -- -- -- 508 -- 508 Net income -- -- -- -- -- 6,860 6,860 -------- ------- ----------- ------- ---------- ----------- ------------- Balance, December 31, 1997 -- -- 8,494,232 8 112,052 (22,022) 90,038 Issuance of common stock under option plans and warrant exercises -- -- 101,839 -- 498 -- 498 Issuance of common stock under stock purchase plan -- -- 111,096 -- 1,924 -- 1,924 Issuance of common stock for acquisition of Millimeter Wave Communications -- -- 844,613 2 19,108 -- 19,110 Net loss -- -- -- -- -- (3,955) (3,955) -------- ------- ----------- ------- ---------- ----------- ------------- Balance, December 31, 1998 -- -- 9,551,780 $ 10 $ 133,582 $ (25,977) $ 107,615 -------- ------- ----------- ------- ---------- ----------- ------------- -------- ------- ----------- ------- ---------- ----------- -------------
See accompanying notes to consolidated financial statements. 4 TRIQUINT SEMICONDUCTOR, INC. Consolidated Statements of Cash Flows (In thousands)
YEARS ENDED DECEMBER 31 ------------------------------------------------------------- 1998 1997 1996 ------------------- ------------------ ------------------- Cash flows from operating activities: Net income $ (3,955) $ 6,860 $ 6,287 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,889 4,249 3,068 Non-cash special charge 8,820 -- -- Gain on sale of assets (475) (32) (728) Change in assets and liabilities: Receivables 939 (3,984) (4,614) Inventories (2,795) (2,438) (1,141) Prepaid expenses and other assets (66) (710) (79) Accounts payable (453) (896) 2,637 Other accrued liabilities 2,314 1,103 (56) ------------------- ------------------ ------------------- Net cash provided by operating activities 10,218 4,152 5,374 ------------------- ------------------ ------------------- Cash flows from investing activities: Purchase of investments (67,993) (42,410) (97,266) Sale of investments 62,262 46,290 75,415 Decrease (increase) in restricted cash -- 504 (504) Capital expenditures (5,618) (1,388) (4,060) Proceeds from sale of assets 475 270 728 ------------------- ------------------ ------------------- Net cash provided (used) by investing activities (10,874) 3,266 (25,687) ------------------- ------------------ ------------------- Cash flows from financing activities: Principal payments under capital lease and installment note obligations (5,508) (4,015) (2,992) Issuance of common stock, net 2,032 2,424 1,161 ------------------- ------------------ ------------------- Net cash used by financing activities (3,476) (1,591) (1,831) ------------------- ------------------ ------------------- Net increase (decrease) in cash and cash equivalents (4,132) 5,827 (22,144) Cash and cash equivalents at beginning of year 18,734 12,907 35,051 ------------------- ------------------ ------------------- Cash and cash equivalents at end of year $ 14,602 $ 18,734 $ 12,907 ------------------- ------------------ ------------------- ------------------- ------------------ ------------------- Supplemental disclosures of cash flow information: Cash paid for: Interest $ 1,452 $ 1,489 $ 1,015 ------------------- ------------------ ------------------- ------------------- ------------------ ------------------- Income taxes $ 4 $ 54 $ 20 ------------------- ------------------ ------------------- ------------------- ------------------ ------------------- Supplemental schedule of non-cash investing and financing activities: Purchase of assets through capital lease and installment notes 2,216 8,346 6,535 Tax benefit of stock option exercises -- 508 154 Recorded in acquisition of Millimeter Wave: Receivables 5,973 -- -- Inventories 4,623 -- -- Prepaid expenses and other assets 2,839 -- -- Equipment 987 -- -- Accounts payable 1,743 -- -- Accrued liabilities 1,999 -- -- Common stock 19,500 -- --
See accompanying notes to consolidated financial statements. 5 TRIQUINT SEMICONDUCTOR, INC. Notes to Consolidated Financial Statements December 31, 1998 and 1997 (In thousands, except share information) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) DESCRIPTION OF THE COMPANY TriQuint Semiconductor, Inc. (the Company) is engaged in the design, development, manufacture and sale of a broad range of high performance analog and mixed signal integrated circuits for the wireless communications, telecommunications, data communication and millimeter wave markets. The Company utilizes its proprietary gallium arsenide (GaAs) technology to manufacture its products. (b) PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant inter-company accounts and transactions are eliminated in consolidation. (c) MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (d) REVENUE RECOGNITION Standard product revenue is recognized upon shipment of product. The Company recognizes revenue on foundry and customer-specific products based on certain design, manufacturing and other milestones. The Company recognizes revenue on cost plus contracts as work is performed. (e) CASH EQUIVALENTS The Company considers all highly liquid debt and equity instruments purchased with an original maturity of three months or less to be cash equivalents. 6 (Continued) TRIQUINT SEMICONDUCTOR, INC. Notes to Consolidated Financial Statements December 31, 1998 and 1997 (In thousands, except share information) (f) INVESTMENTS The Company's investments, both restricted and unrestricted, are comprised of medium term corporate notes, commercial paper and market auction preferred stock and have been classified as available-for-sale securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES at December 31, 1998 and 1997. The carrying value of available-for-sale securities approximates fair value at December 31, 1998 and 1997. (g) TRADE ACCOUNTS RECEIVABLE Trade accounts receivable are shown net of allowance for doubtful accounts of $262 and $196 at December 31, 1998 and 1997, respectively. (h) INVENTORIES Inventories are stated at the lower of cost (approximates actual cost on a first-in, first-out basis) or market (net realizable value). Inventories are shown net of a valuation reserve of $2,422 and $1,324 at December 31, 1998 and 1997, respectively. (i) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Machinery and equipment under capital leases are stated at the lower of the present value of the minimum lease payments at the beginning of the lease term or the fair value of the leased assets at the inception of the lease. Depreciation is provided using the straight-line method over their estimated useful lives, which are as follows: five years for machinery and equipment, furniture and fixtures and computer equipment; three to seven years for leasehold improvements; and ten years for buildings. Leasehold improvements are amortized over the shorter of the estimated life of the asset or the term of the related lease. Depreciation begins on assets in process at the time the related assets are placed in service. Maintenance and repairs are expensed as incurred. (j) RESEARCH AND DEVELOPMENT COSTS The Company charges all research and development costs associated with the development of new products to expense when incurred. Engineering and design costs related to revenues on non-recurring engineering services billed to customers are classified as research, development and engineering expense. Additionally, certain related contract engineering costs are also included in research, development and engineering expense. 7 (Continued) TRIQUINT SEMICONDUCTOR, INC. Notes to Consolidated Financial Statements December 31, 1998 and 1997 (In thousands, except share information) (k) COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130, REPORTING COMPREHENSIVE INCOME. The objective of SFAS No. 130 is to report all changes in equity that result from transactions and economic events other than transactions with owners. There is no difference between net income (loss) and comprehensive income (loss) for the years ended December 31, 1998, 1997 and 1996. (l) NET INCOME PER SHARE The Company has adopted SFAS No. 128, EARNINGS PER SHARE. SFAS No. 128 requires presentation of basic and diluted net income per share. Basic net income per share is net income available to common shareholders divided by the weighted-average number of common shares outstanding. Diluted net income per share is similar to basic except that the denominator includes potential common shares that, had they been issued, would have had a dilutive effect. The reconciliation of shares used to calculate basic and diluted income per share consists of the following as of December 31:
1998 1997 1996 --------------- --------------- --------------- Basic weighted average shares of common stock 9,399,656 8,373,310 8,044,581 Effect of dilutive securities: Stock options and warrants -- 734,905 718,136 --------------- --------------- --------------- Diluted weighted average shares of common stock 9,399,656 9,108,215 8,762,717 --------------- --------------- --------------- --------------- --------------- ---------------
Common stock equivalents related to stock options and warrants totaling 442,831, 37,572 and 263,984 are anti-dilutive and, therefore, were not included in the diluted net loss per share calculation for the years ended December 31, 1998, 1997 and 1996, respectively. 8 (Continued) TRIQUINT SEMICONDUCTOR, INC. Notes to Consolidated Financial Statements December 31, 1998 and 1997 (In thousands, except share information) (m) INCOME TAXES The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. (n) FINANCIAL INSTRUMENTS The carrying amount of cash equivalents, investments, trade accounts receivable and accounts payable approximate fair value because of the short-term nature of these instruments. The fair value of long-term borrowings were estimated by discounting the future cash flows using market interest rates and does not differ significantly from that reflected in the accompanying financial statements. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (o) STOCK OPTION PLANS The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. The Company also applies SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS No. 123 had been applied. (p) RECLASSIFICATIONS Certain reclassifications have been made to the 1996 and 1997 statements to conform with the 1998 presentation. 9 (Continued) TRIQUINT SEMICONDUCTOR, INC. Notes to Consolidated Financial Statements December 31, 1998 and 1997 (In thousands, except share information) (2) MILLIMETER WAVE COMMUNICATIONS ACQUISITION On January 13, 1998, the Company acquired substantially all of the assets of the Millimeter Wave Communications operation of the former Texas Instruments' Defense Systems and Electronics Group from Raytheon TI Systems, Inc. (RTIS), a Delaware corporation and a wholly owned subsidiary of Raytheon company. The Millimeter Wave Communications business designs, develops, produces and sells advanced GaAs MMIC products which are used in defense and commercial applications. Pursuant to an Asset Purchase Agreement (the Agreement) with RTIS, the Company acquired the Millimeter Wave Communications business for approximately $19,500 in cash and 844,613 shares of the Company's common stock valued at approximately $19,500 for total purchase consideration of approximately $39,000. The cash portion of the purchase price was financed through an operating lease arrangement involving certain assets pursuant to the Agreement. The purchase accounting allocations resulted in charges for in-process research and development of $8,820 recorded as a special charge, and other intangibles of approximately $2,132. These other intangible assets, classified as other non-current assets, are amortized on a straight-line basis over 7 years, and are shown net of related accumulated amortization of $362 and $-0- at December 31, 1998 and 1997, respectively. The pro forma results shown below assume the acquisition described above occurred as of the beginning of the earliest year presented, and exclude special charges for in-process research and development totaling $8,820:
YEARS ENDED DECEMBER 31 ------------------------------------------ 1998 1997 ------------------- ------------------- Revenues $ 112,407 95,170 Net income 4,417 4,383 Diluted net income per share .47 .44
The pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been in effect for the periods presented. In addition, they are not intended to be a projection of future results that may be achieved from the combined operations. 10 (Continued) TRIQUINT SEMICONDUCTOR, INC. Notes to Consolidated Financial Statements December 31, 1998 and 1997 (In thousands, except share information) (3) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
DECEMBER 31 ------------------------------------------ 1998 1997 -------------------- ------------------- Machinery and equipment $ 47,539 40,834 Leasehold improvements 2,507 424 Building and equipment 103 -- Furniture and fixtures 1,657 1,556 Computer equipment 11,841 9,893 Assets in process 7,192 10,058 Other 619 618 ------------------- ------------------- 71,458 63,383 Less accumulated depreciation and amortization 40,929 36,148 ------------------- ------------------- $ 30,529 27,235 ------------------- ------------------- ------------------- -------------------
(4) CAPITAL LEASE AND INSTALLMENT NOTE OBLIGATIONS At December 31, 1998 and 1997, the Company had outstanding $14,304 and $7,595, respectively of capital leases and installment notes with interest rates ranging from 7.9% to 9.9%. The notes are payable in monthly installments of principal and interest through 2003 and are secured by equipment with a net book value of $14,002 and $16,991 at December 31, 1998 and 1997, respectively. 11 (Continued) TRIQUINT SEMICONDUCTOR, INC. Notes to Consolidated Financial Statements December 31, 1998 and 1997 (In thousands, except share information) Additionally, the Company leases certain equipment under capital and operating leases. The future minimum lease payments under installment notes and non-cancelable leases as of December 31, 1998 are as follows:
INSTALLMENT NOTES AND CAPITAL OPERATING LEASES LEASES ------------------- ------------------- Year ending: 1999 $ 5,944 10,024 2000 5,181 5,485 2001 3,091 3,195 2002 1,705 1,024 2003 389 -- ------------------- ------------------- Total 16,310 $ 19,728 ------------------- ------------------- Less amounts representing interest 2,007 ------------------- Present value of minimum payments 14,303 Less current installments 4,934 ------------------- $ 9,369 ------------------- -------------------
Balances applicable to capital leases and installment notes, which are included in machinery and equipment, are summarized as follows:
DECEMBER 31 ------------------------------------------ 1998 1997 ------------------- -------------------- Machinery and equipment $ 26,149 24,922 Less accumulated amortization 12,147 7,931 ------------------- -------------------- $ 14,002 16,991 ------------------- -------------------- ------------------- --------------------
Rent expense under operating leases was $9,779, $2,736 and $1,065 during the years ended December 31, 1998, 1997 and 1996, respectively. 12 (Continued) TRIQUINT SEMICONDUCTOR, INC. Notes to Consolidated Financial Statements December 31, 1998 and 1997 (In thousands, except share information) The Company entered into a five year agreement to construct and lease an office building and fabrication facility in Hillsboro, Oregon (Hillsboro Facility) in 1996. Rent obligations began in February of 1997 and are equal to the lessor's debt service costs. At the end of the lease term, the Company may (i) renew the lease for up to five additional years, (ii) exercise its purchase option, or (iii) cause the leased assets to be sold to a third party whereby the Company guarantees up to a maximum of 85% of the original cost. The future minimum lease payments stated above exclude any payments required at the end of the lease term. As part of the above lease, the Company restricted $40,163 of its securities as collateral for specified obligations of the lessor under the lease. These securities will be restricted as to withdrawal and will be managed by the Company subject to certain limitations under its investment policy. In addition, the Company must maintain a minimum consolidated tangible net worth of $50 million total liabilities to net worth ratio equal to or less than .75 to 1 and maintain cash and liquid investments, including restricted investments, greater than $45 million. In November 1997, the Company entered into a $1,500 lease agreement for additional property adjacent to its Hillsboro Facility. Pursuant to the terms of that agreement, the transaction is partially collateralized by a guarantee from the Company. In 1997 and 1998, the Company entered into two-year agreements to lease equipment in Dallas, Texas and Hillsboro, Oregon. Rent obligations are equal to the lessor's debt service costs and will expire at the end of the initial lease terms. At the end of the lease terms, the Company may (i) renew the leases for up to three additional years, (ii) exercise its purchase options, or (iii) cause the equipment to be sold to a third party whereby the Company guarantees residual values to the lessor. The future minimum lease payments stated above exclude any payments required at the end of the lease term. The Company intends to renew the leases for three additional years at the end of each initial lease term. (5) DEBT The Company has a line of credit agreement for general corporate purposes with a commercial bank. The agreement is unsecured, and provides for aggregate borrowings of $10,000. The interest rate is based on three pricing options (LIBOR, bankers' acceptance, and prime) plus an interest rate spread which is determined quarterly based on the Company's ratio of total liabilities to tangible net worth. Interest is payable periodically with maturity set at May 31, 2000. No amount was outstanding on the line of credit at December 31, 1998 or 1997. The line of credit is subject to loan covenants for which the Company is in compliance at December 31, 1998 and 1997. 13 (Continued) TRIQUINT SEMICONDUCTOR, INC. Notes to Consolidated Financial Statements December 31, 1998 and 1997 (In thousands, except share information) (6) SHAREHOLDERS' EQUITY (a) STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLANS Under the 1987 and 1996 Stock Incentive Programs and the 1998 Nonstatutory Stock Option Plan (the Plans), the Company has authorized the issuance of 1,897,768, 1,250,000 and 500,000 common shares, respectively, of which a total of 302,881 shares are available to grant. The Plans provide for the grant of incentive stock options to officers and other employees of the Company or any parent or subsidiary, and non-qualified stock options to officers and other employees of the Company, directors, and consultants of the Company. Subject to the discretion of the Board of Directors, options granted under the Plans generally vest and become exercisable at the rate of 28% at the end of the first year, and thereafter at a rate of 2% per month and have a ten-year term. The exercise price of all incentive stock options granted under the Plans must be at least equal to the fair market value of the shares on the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting rights of the Company's outstanding capital stock, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the grant date. The exercise price of all non-statutory stock options granted under the Plans must be at least 50% of the fair market value of the common stock on the date of grant. However, it is the Company's practice to issue options at fair market value. The terms of all options granted under the Plans may not exceed ten years. The fair value of each stock based compensation award is estimated on the date of grant using the Black Scholes option-pricing model assuming no dividend yield and the following weighted-average assumptions for stock based compensation awards during the years ended December 31:
STOCK OPTION PLANS ----------------------------------------------------- 1998 1997 1996 --------------- --------------- --------------- Risk-free interest rate 5.2% 6.2% 6.3% Expected lives in years 5 5 5 Expected volatility 62% 78% 75% EMPLOYEE STOCK PURCHASE PLANS ----------------------------------------------------- 1998 1997 1996 --------------- --------------- --------------- Risk-free interest rate 4.8% 5.1% 5.3% Expected lives in years .5 .5 .5 Expected volatility 66% 56% 57%
14 (Continued) TRIQUINT SEMICONDUCTOR, INC. Notes to Consolidated Financial Statements December 31, 1998 and 1997 (In thousands, except share information) The weighted average fair value of stock based compensation awards under the various plans are as follows for the years ended December 31:
1998 1997 1996 --------------- --------------- --------------- Stock Options Plans $ 11 $ 16 $ 11 Employee Stock Purchase Plans $ 6 $ 15 $ 5
The Company applies APB Opinion No. 25 in accounting for its Plans and, accordingly, no compensation cost has been recognized for its stock based compensation awards in the financial statements. Had the Company determined compensation cost based on the fair value at the date of grant for its stock based compensation awards under SFAS No. 123, the Company's net income would have been reduced to the pro forma amounts indicated below:
YEARS ENDED DECEMBER 31 ------------------------------------------------------ 1998 1997 1996 ---------------- ---------------- ---------------- Net income (loss) As reported $ (3,955) 6,860 6,287 Pro forma (8,314) 4,136 5,481 Diluted net income per share: Basic As reported (.42) .82 .78 Pro forma (.88) .49 .68 Diluted As reported (.42) .75 .72 Pro forma (.88) .45 .62
Pro forma net income (loss) reflects only stock based compensation awards granted in 1998, 1997 and 1996. Therefore, the full impact of calculating compensation cost for stock based compensation awards under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period of 4 years and compensation cost for options granted prior to January 1, 1996 is not considered and additional stock based compensation awards are anticipated in future years. 15 (Continued) TRIQUINT SEMICONDUCTOR, INC. Notes to Consolidated Financial Statements December 31, 1998 and 1997 (In thousands, except share information) Activity under the Company's stock option plans is as follows:
WEIGHTED- NUMBER AVERAGE OF EXERCISE SHARES PRICE --------------- --------------- Options outstanding at December 31, 1995 1,138,716 $ 5.53 Options: Granted 271,759 18.00 Exercised (237,465) 3.86 Canceled (85,483) 11.09 --------------- Options outstanding at December 31, 1996 1,087,527 8.58 Options: Granted 681,521 23.83 Exercised (256,076) 5.61 Canceled (138,784) 25.66 --------------- Options outstanding at December 31, 1997 1,374,188 14.94 Options: Granted 1,621,167 19.13 Exercised (101,839) 4.88 Canceled (790,170) 22.53 --------------- Options outstanding at December 31, 1998 2,103,346 $ 15.80 --------------- ---------------
16 (Continued) TRIQUINT SEMICONDUCTOR, INC. Notes to Consolidated Financial Statements December 31, 1998 and 1997 (In thousands, except share information) In September 1998, the Compensation Committee of the Board of Directors adopted a resolution to offer employees holding stock options for 883,212 shares the opportunity to exchange their existing stock options for new stock options. The exchange allowed employees to receive options for the same number of shares at $16.125 per share, which exceeded the market price during the employee decision period, instead of an average original exercise price of $22.12. The new options vest over one to four years. The offer was made because the Board of Directors believe the lower priced options provide greater retention advantage and incentive. Options for directors and officers were not repriced. Option holders elected to exchange options covering 704,627 shares, which is included as both options granted and canceled during 1998 in the preceding table. The following table summarizes information concerning stock options outstanding and exercisable at December 31, 1998:
NUMBER WEIGHTED- NUMBER OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED- RANGE OF AS OF REMAINING AVERAGE AS OF AVERAGE EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE PRICES 1998 LIFE PRICE 1998 PRICE ----------------------- ------------------- --------------- --------------- ----------------- --------------- $ 1.400 - 6.3750 395,766 5.04 $ 5.2101 385,999 $ 5.1837 6.500 - 15.8750 153,831 6.91 12.4425 117,667 12.1878 16.0000 - 16.1250 710,907 9.73 16.1249 10,164 16.1250 16.1875 - 21.0000 536,526 9.08 19.1873 84,759 19.2376 21.2500 - 40.0625 306,316 7.34 24.5012 102,697 25.7794 ------------------- --------------- --------------- ----------------- --------------- $ 1.4000 - 40.0625 2,103,346 8.13 $ 15.8029 701,286 $ 11.2321 ------------------- --------------- --------------- ----------------- --------------- ------------------- --------------- --------------- ----------------- ---------------
Under the 1992 and 1998 Employee Stock Purchase Plans (the Purchase Plans), the Company has authorized the issuance of 600,000 common shares, of which 418,094 are available at December 31, 1998. The Purchase Plans allow eligible employees to purchase the Company's common stock through payroll deductions, which may not exceed 15% of an employee's base compensation, not to exceed $25 per year, including commissions, bonuses and overtime, at a price equal to 85% of the lower of the fair value at the beginning or end of each enrollment period. 17 (Continued) TRIQUINT SEMICONDUCTOR, INC. Notes to Consolidated Financial Statements December 31, 1998 and 1997 (In thousands, except share information) (b) WARRANTS On August 31, 1993, the Company issued a warrant to purchase of up to 125,000 shares of common stock at $24.00 per share and is exercisable through August 2000. On December 19, 1994, the Company issued an additional warrant to purchase of up to 75,000 shares of common stock at $24.00 per share and is exercisable through December 2001. (c) PREFERRED SHARES RIGHTS AGREEMENT On June 30, 1998, the Company adopted a Preferred Shares Rights Agreement (the "Agreement"). Pursuant to the Agreement, rights were distributed as a dividend at the rate of one right for each share of TriQuint common stock, par value $0.001 per share of the Company held by stockholders of record as of the close of business on July 24, 1998. The rights will expire on June 29, 2008, unless redeemed or exchanged. Under the Agreement, each right initially will entitle the registered holder to buy one unit of a share of preferred stock for $125.00. The rights will become exercisable only if a person or group (other than stockholders currently owning 15% of the Company's common stock) acquires beneficial ownership of 15% or more of Company's common stock, or commences a tender offer or exchange offer upon consummation of which such person or group would beneficially own 15% or more of the Company's common stock. (7) INCOME TAXES The provision for income taxes consists of:
YEARS ENDED DECEMBER 31 ----------------------------------------------------------------- 1998 1997 1996 ------------------- ------------------- -------------------- Current: Federal $ -- $ 637 $ 145 State 94 200 86 Foreign -- 53 -- ------------------- ------------------- -------------------- Total current 94 890 231 ------------------- ------------------- -------------------- Deferred: Federal -- State -- -- -- Foreign -- -- -- ------------------- ------------------- -------------------- Total deferred -- -- -- ------------------- ------------------- -------------------- Total $ 94 $ 890 $ 231 ------------------- ------------------- -------------------- ------------------- ------------------- --------------------
18 (Continued) TRIQUINT SEMICONDUCTOR, INC. Notes to Consolidated Financial Statements December 31, 1998 and 1997 (In thousands, except share information) The effective tax rate differs from the federal statutory income tax rate as follows:
YEARS ENDED DECEMBER 31 ----------------------------------------------------- 1998 1997 1996 --------------- --------------- --------------- Tax computed at federal statutory rate (34.0)% 34.0% 34.0% State income tax, net of federal effect (4.3) 4.4 4.4 Increase (decrease) in valuation allowance 55.8 (6.7) (16.3) Differences between financial and tax reporting for stock option exercises (13.3) (25.0) (19.2) Other (1.8) 4.8 .6 --------------- --------------- --------------- Effective tax rate 2.4% 11.5% 3.5% --------------- --------------- --------------- --------------- --------------- ---------------
The deferred income tax provision (benefit) results from changes in deferred tax assets and liabilities as follows:
YEARS ENDED DECEMBER 31 ----------------------------------------------------- 1998 1997 1996 --------------- --------------- --------------- Reserves not currently deductible $ (379) 382 (45) Tax depreciation and amortization (1,813) (20,509) 384 Capital leases 7,896 20,417 -- Accrued liabilities (233) 231 85 Net operating loss carryforward (7,528) 207 801 Valuation allowance 2,207 (517) (1,060) Other (150) (211) (165) --------------- --------------- --------------- Total $ -- -- -- --------------- --------------- --------------- --------------- --------------- ---------------
19 (Continued) TRIQUINT SEMICONDUCTOR, INC. Notes to Consolidated Financial Statements December 31, 1998 and 1997 (In thousands, except share information) The tax effects of significant items comprising the Company's deferred tax asset and liability are as follows:
DECEMBER 31 ------------------------------------------ 1998 1997 Deferred tax liabilities: Amortization $ 686 -- Capital leases 28,313 20,417 ------------------- ------------------- Total deferred tax liability 28,999 20,417 ------------------- ------------------- Deferred tax assets: Accounts receivable 81 75 Inventory 1,002 629 Accrued liabilities 628 395 Net operating loss carryforwards 16,805 9,277 Depreciation 22,031 19,532 Other 794 644 ------------------- ------------------- Total deferred tax asset before valuation allowance 41,341 30,552 Valuation allowance (12,342) (10,135) ------------------- ------------------- Total deferred tax asset 28,999 20,417 ------------------- ------------------- Net deferred tax liability (asset) $ -- -- ------------------- ------------------- ------------------- -------------------
The valuation allowance for deferred tax assets as of January 1, 1996 was $11,712. The net change in total valuation allowance for the years ended December 31, 1998, 1997 and 1996 was an increase (decrease) of $2,207, $(517) and $(1,060), respectively. Approximately $5,151 of the valuation allowance for deferred tax assets will be credited directly to shareholders' equity in the event tax benefits of net operating losses that resulted from stock option exercises are subsequently recognized. At December 31, 1998, the Company had approximately $45,700 of net operating loss carryforwards to offset against future income for federal income tax purposes which expire from 2003 through 2018, and $22,003 for Oregon state income tax purposes which expire in years 2006 through 2013. The Company's ability to use its net operating loss carryforwards to offset future taxable income is subject to annual restrictions contained in the United States Internal Revenue Code of 1986, as amended (the Code). These restrictions act to limit the Company's future use of its net operating losses following certain substantial stock ownership changes enumerated in the Code and referred to hereinafter as an "ownership change." 20 (Continued) TRIQUINT SEMICONDUCTOR, INC. Notes to Consolidated Financial Statements December 31, 1998 and 1997 (In thousands, except share information) Consummation of the Company's initial public offering created an ownership change that has resulted in approximately $12,600 of the pre - 1994 net operating loss carryforwards being limited to approximately $1,750 per year. In addition, approximately $7,108 are further limited to approximately $967 per year due to changes in the Company's ownership structure during 1991. (8) CONTINGENCIES EMPLOYMENT AGREEMENTS The Company has employment contracts with two key officers that in the event of their termination provide for total payments up to approximately $365. (9) BENEFIT PLANS The Company sponsors a voluntary contribution profit sharing and savings plan under Section 401(k) of the Internal Revenue Code which is available to substantially all employees. Employees can make voluntary contributions up to limitations prescribed by the Internal Revenue Code. Company matching contributions are discretionary. For the years ended December 31, 1998, 1997 and 1996 the Company made no discretionary matching contributions. (10) CONCENTRATION OF RISK (a) SUPPLIERS The Company currently procures certain components and services for its products from single sources. The Company purchases these components and services on a purchase order basis, does not carry significant inventories of these components and does not have any long-term supply contracts with its sole source vendors. If the Company were to change any of its sole source vendors, the Company would be required to requalify the components with each new vendor. Requalification could prevent or delay product shipments which could materially adversely affect the Company's results of operations. In addition, the Company's reliance on sole source vendors involves several risks, including reduced control over the price, timely delivery, reliability and quality of the components. Any inability of the Company to obtain timely deliveries of components of acceptable quality in required quantities or any increases in the prices of components for which the Company does not have alternative sources could materially adversely affect the Company's business, financial condition and results of operations. (b) CREDIT RISK The Company generally sells its products to customers engaged in the design and/or manufacture of high technology products either recently introduced or not yet introduced to the marketplace. Substantially all the Company's trade accounts receivable are due from such sources. 21 (Continued) TRIQUINT SEMICONDUCTOR, INC. Notes to Consolidated Financial Statements December 31, 1998 and 1997 (In thousands, except share information) The Company performs continuing credit evaluations of its customers and generally does not require collateral; however, in certain circumstances, the Company may require letters of credit from its customers. (11) SEGMENT INFORMATION The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED Information. SFAS No. 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas and major customers. The method for determining what information to report is based on the way that management organizes the segments within the Company for making operating decisions and assessing financial performance. The Company's chief operating decision maker is considered to be the President and Chief Executive Officer (CEO). The Company's CEO evaluates both consolidated and disaggregated financial information in deciding how to allocate resources and assess performance. The CEO uses certain disaggregated financial information for the Company's three product lines: Wireless Communications; Telecommunications and Data Communications; and Millimeter Wave Communications. The Company has aggregated its three product lines into a single reportable segment as allowed under SFAS No. 131 because these product lines have similar long-term economic characteristics, such as average gross margin, and product lines are similar in regards to (a) nature of products and production processes, (b) type of customers, and (c) method used to distribute products. Accordingly, the Company describes its reportable segment as gallium arsenide integrated circuits for the communications market. All of the Company's revenues result from sales in its product lines. The Company's operating expenses are allocated to its three product lines, with the exception of certain manufacturing variances (cost of goods sold) and, to a lesser extent, certain general and administrative expenses for all years presented and, for 1998, the Company's legal settlement discussed in note 12. Unallocated Corporate operating expenses totaled $12,103, $8,538 and $4,651 for the years ended December 31, 1998, 1997 and 1996, respectively. In addition, all non-operating income and expenses are recorded in Corporate. The Company does not allocate assets to its product lines. Revenues by product line (as defined by the Company) as a percentage of total revenues for years ended December 31, 1998, 1997 and 1996 were as follows: Wireless Communications, 45%, 47% and 49%, respectively; Telecommunications and Data Communications, 18%, 53% and 51%, respectively; Millimeter Wave Communications, 37%, -0-% and -0-%, respectively. Revenues outside of the United States were approximately $26,800, $24,300 and $18,100 in 1998, 1997 and 1996, respectively, of which sales to Canada comprised $10,524, $ 8,527 and $6,100, respectively. There were no other foreign countries to which sales represented 5% or more of total revenues. 22 (Continued) TRIQUINT SEMICONDUCTOR, INC. (In thousands, except share information) Revenues for significant customers, those representing approximately 10% or more of total revenues for each period, are summarized as follows:
YEARS ENDED DECEMBER 31 ----------------------------------------------------- 1998 1997 1996 --------------- --------------- --------------- Customer A 10% 12% 12% Customer B -- -- 17 Customer C -- -- 13 Customer D 12 -- -- Customer E 12 -- --
Related receivables from such customers were 26% and 31% of trade accounts receivable at December 31, 1998 and 1997, respectively. (12) LITIGATION SETTLEMENT OF LAWSUIT On July 12, 1994, a stockholder class action lawsuit was filed against the Company, its underwriters, and certain of its officers, directors and investors in the United States District Court for the Northern District of California. The suit alleged that the Company, its underwriters, and certain of its officers, directors and investors intentionally misled the investing public regarding the financial prospects of the Company. Following the filing of the complaint, the plaintiffs dismissed without prejudice a director defendant, the principal stockholder defendant, the underwriter defendants and certain analyst defendants. During 1998, the Company settled the action and recorded a special charge of $1,400 associated with the settlement of the lawsuit and the related legal expenses, net of accruals. From time to time the Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company's consolidated financial position, results of operations or cash flows. (13) SUBSEQUENT EVENT On February 26, 1999, a lawsuit was filed against 88 firms, including the Company, in the United States District Court for the District of Arizona. The suit alleges that the defendants infringe upon certain patents held by The Lemelson Medical, Education and Research Foundation, Limited Partnership. The Company believes the suit is without merit and intends to vigorously defend itself against the charges. 23 TRIQUINT SEMICONDUCTOR, INC. SUPPLEMENTARY UNAUDITED FINANCIAL DATA IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
1998 1997 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 STATEMENT OF OPERATIONS DATA: Total revenues $30,938 $29,112 $27,874 $23,681 $18,454 $17,569 $18,544 $16,800 Operating costs and expenses: Cost of goods sold 18,900 17,933 17,610 18,341 11,097 10,242 9,559 9,130 Research, development and engineering 4,917 4,568 5,075 4,424 3,050 2,668 3,257 2,543 Selling, general and administrative 4,654 4,288 3,560 3,460 3,574 3,856 3,332 3,426 Special charges - - - 10,220 - - - - --------------------------------------------------------------------------------------- Total operating costs and expenses 28,471 26,789 26,245 36,445 17,721 16,766 16,148 15,099 Income from operations 2,467 2,323 1,629 (12,764) 733 803 2,396 1,701 Other income, net 1,002 567 441 474 558 511 508 540 --------------------------------------------------------------------------------------- Income before income taxes 3,469 2,890 2,070 (12,290) 1,291 1,314 2,904 2,241 Income tax expense(benefit) - 29 65 - (222) - 638 474 --------------------------------------------------------------------------------------- Net income $3,469 $2,861 $2,005 ($12,290) $1,513 $1,314 $2,266 $1,767 --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- PER SHARE DATA: Net income: Basic $0.37 $0.30 $0.21 ($1.33) $0.18 $0.16 $0.27 $0.22 Diluted $0.35 $0.29 $0.21 ($1.33) $0.17 $0.14 $0.25 $0.20 Weighted average shares: Basic 9,497 9,453 9,401 9,245 8,486 8,425 8,340 8,234 Diluted 9,920 9,802 9,724 9,245 8,994 9,231 9,129 9,020 - -----------------------------------------------------------------------------------------------------------------------------------
MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company made its initial public offering on December 13, 1993 at a price of $11.00 per share. The Company's Common Stock is quoted on the Nasdaq Stock Market's National Market under the symbol "TQNT". As of February 26, 1999, there were 235 holders of record of the Company's Common Stock. The Company has never declared or paid cash dividends on its Common Stock and does not anticipate paying cash dividends in the foreseeable future. The Company's line of credit with a financial institution contains a restrictive covenant which could limit the Company's ability to pay cash dividends or make stock repurchases. Any future determination to pay cash dividends will also be at the discretion of the Board of Directors and will be dependent upon the Company's financial condition, results of operations, capital requirements, general business conditions and such other factors as the Board of Directors deems relevant. AREA SALES OFFICES NORTH AMERICA NORTHWEST AREA (408) 370-6125 Telephone TriQuint Semiconductor (408) 370-6140 Fax Heritage Village Offices 51 E. Campbell Ave., Ste. 100-G Campbell, CA 95008 EASTERN AREA (919) 380-0805 Telephone TriQuint Semiconductor (919) 380-7009 Fax 1135 Kildaire Farm Road, Suite 200 Cary, NC 27511 SOUTHWEST AREA (310) 648-6681 Telephone TriQuint Semiconductor (310) 648-6687 Fax 2250 E. Imperial Hwy., Ste. 200 El Segundo, CA 90245 MAJOR ACCOUNT SALES (610) 668-6781 Telephone TriQuint Semiconductor (610) 668-6782 Fax 1637 Oakwood Drive, Ste. S-419 Penn Valley, PA 19072 EUROPE TriQuint Semiconductor (33) 4-9359-2424 Telephone 1345 Route De La Colle (33) 4-9359-2425 Fax 06140 Tourrettes Sur Loup France TriQuint Semiconductor (49) 8071-93504 Telephone Birkenweg 6 (49) 8071-93505 Fax Bachmehring, Eiselfing West Germany D-83549 ASIA TriQuint Semiconductor (503) 615-9115 Telephone 2300 NE Brookwood Parkway (503) 615-8901 Fax Hillsboro, OR 97124 GENERAL INFORMATION BOARD OF DIRECTORS EXECUTIVE OFFICERS STEVEN J. SHARP STEVEN J. SHARP Chairman of the Board, President Chairman of the Board, President and Chief Executive Officer, and Chief Executive Officer TriQuint Semiconductor, Inc. EDWARD C. V. WINN PAUL A. GARY Executive Vice President Finance and Retired Executive of AT&T Administration, Chief Financial Officer and Secretary CHARLES SCOTT GIBSON Consultant THOMAS V. CORDNER Vice President & General Manager E. FLOYD KVAMME Millimeter Wave General Partner Kleiner Perkins Caufield & Byers BRUCE FOURNIER Venture Capital Firm Vice President and General Manager Foundry WALDEN C. RHINES President and Chief Executive Officer PAUL KOLLAR Mentor Graphics Corporation Vice President, Sales EDWARD TUCK DONALD H. MOHN General Partner Vice President and General Manager Kinship Venture Management, LLP Telecommunications & Computing J. DAVID PYE Vice President, Manufacturing E. K. RANJIT Vice President Finance, Treasurer and Assistant Secretary RONALD R. RUEBUSCH Vice President and General Manager Wireless Communications ANNUAL MEETING The Company's Annual Meeting of Shareholders will be held on Wednesday, May 26, 1999 at 2:00 p.m. (PDT) at the Company's principal executive offices, located at 2300 NE Brookwood Parkway, Hillsboro, Oregon, 97124. FORM 10K A copy of the Company's Form 10-K as filed with the Securities and Exchange Commission, is available free of charge by calling the Investor Relations number below. CORPORATE HEADQUARTERS 2300 NE Brookwood Parkway Hillsboro, Oregon 97124 Phone: (503) 615-9000 Fax: (503) 615-8900 INVESTOR RELATIONS E. K. Ranjit (503) 615-9414 Heidi Flannery (503) 844-8888 TRANSFER AGENT ChaseMellon Shareholder Services Seattle, WA INDEPENDENT PUBLIC ACCOUNTANTS KPMG Peat Marwick LLP Portland, Oregon LEGAL COUNSEL Wilson Sonsini Goodrich & Rosati Palo Alto, California EX-23.1 3 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors TriQuint Semiconductor, Inc.: We consent to the incorporation by reference in the Registration Statements (Nos. 33-75464, 333-08893, 333-08891, 333-31585, 333-48883, 333-02166, 333-66707 and 333-74617) on Form S-8 of TriQuint Semiconductor, Inc. of our reports dated February 11, 1999, except as to note 13 which is as of February 26, 1999, relating to the consolidated balance sheets of TriQuint Semiconductor, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows and related consolidated financial statement schedule for each of the years in the three-year period ended December 31, 1998, which reports appear in the December 31, 1998 annual report on Form 10-K of TriQuint Semiconductor, Inc. KPMG Peat Marwick LLP Portland, Oregon March 31, 1999 EX-27.1 4 EX-27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE BALANCE SHEET AS OF DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 14,602 11,460 21,282 (262) 19,706 68,816 71,458 (40,929) 141,306 24,322 9,369 0 0 133,592 (25,977) 141,306 111,605 111,605 72,784 117,950 (563) 0 1,454 (3,861) 94 (3,955) 0 0 0 (3,955) (0.42) (0.42)
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