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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2002
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 000-31029-40
MICROTUNE, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2883117
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
2201 10th Street
Plano, Texas 75074
(Address of principal executive office and zip code)
(972) 673-1600
(Registrant's telephone number, including area code)
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
filing requirements for the past 90 days.
YES [X] NO [_]
As of October 31, 2002, 49,637,238 shares of the Registrant's common
stock were outstanding.
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Microtune, Inc.
FORM 10-Q
September 30, 2002
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements .................................................................................... 3
Consolidated Balance Sheets at September 30, 2002 and December 31, 2001 (unaudited) ..................... 3
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2002 and 2001
(unaudited) ............................................................................................. 4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001 (unaudited).. 5
Notes to Consolidated Financial Statements (unaudited) .................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................... 13
Item 3. Qualitative and Quantitative Disclosure About Market Risk ............................................... 17
Item 4. Controls and Procedures ................................................................................. 17
Part II. Other Information
Item 1. Legal Proceedings ....................................................................................... 18
Item 2. Changes In Securities and Use of Proceeds ............................................................... 18
Item 3. Defaults Upon Senior Securities ......................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders ..................................................... 18
Item 5. Other Information ....................................................................................... 19
Item 6. Exhibits and Reports on Form 8-K ........................................................................ 19
Signatures ....................................................................................................... 20
Exhibits ......................................................................................................... 23
Forward Looking Statements
This document includes certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are based on management's current expectations and are subject to
uncertainty and changes in circumstances. Actual results may differ materially
from these expectations due to changes in global political, economic, business,
competitive and market factors.
2
PART I. Financial Information
Item 1. Financial Statements
Microtune, Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
(unaudited)
September 30, December 31,
2002 2001
------------- ------------
Assets
Current assets:
Cash and cash equivalents ........................................................ $ 134,775 $ 173,149
Accounts receivable, net of allowance for doubtful accounts of $1,027 at
September 30, 2002 and $592 at December 31, 2001 ................................. 24,701 14,580
Inventories ...................................................................... 14,572 9,401
Deferred income taxes ............................................................ 219 389
Other current assets ............................................................. 3,091 3,206
--------- ---------
Total current assets ......................................................... 177,358 200,725
Property and equipment, net ........................................................... 18,462 19,269
Intangible assets, net of accumulated amortization of $11,049 at September 30, 2002 and
$3,841 at December 31, 2001 ........................................................ 53,140 64,136
Goodwill, net of accumulated amortization of $11,210 at September 30,2002 and
December 31, 2001 .................................................................. 51,040 51,040
Deferred income taxes ................................................................. 1,767 1,419
Other assets and deferred charges ..................................................... 1,024 1,113
--------- ---------
Total assets $ 302,791 $ 337,702
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ................................................................. $ 9,462 $ 7,856
Accrued expenses ................................................................. 12,814 15,099
Accrued compensation ............................................................. 2,419 2,355
--------- ---------
Total current liabilities .................................................... 24,695 25,310
Deferred income taxes ............................................................ 320 320
Other noncurrent liabilities ..................................................... 2,357 2,286
Commitments ...................................................................... -- --
Stockholders' equity:
Preferred stock, $0.001 par value per share; authorized shares - 25,000 .......... -- --
Common stock, $0.001 par value per share; authorized shares - 150,000;
issued shares - 54,137 at September 30, 2002 and 52,737 at December 31, 2001 54 53
Additional paid-in capital ....................................................... 449,470 450,081
Unearned stock compensation ...................................................... (16,529) (28,317)
Loans receivable from stockholders ............................................... (295) (35)
Accumulated other comprehensive loss ............................................. (988) (988)
Accumulated deficit .............................................................. (155,260) (111,008)
Treasury stock, at cost - 324 shares at September 30, 2002 ....................... (1,033) --
--------- ---------
Total stockholders' equity ................................................... 275,419 309,786
--------- ---------
Total liabilities and stockholders' equity ................................... $ 302,791 $ 337,702
========= =========
See accompanying notes.
3
Microtune, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Net revenues ...................................................... $ 24,003 $ 15,015 $ 65,424 $ 47,129
Cost of revenues .................................................. 15,098 9,981 41,350 34,170
-------- -------- -------- --------
Gross margin ...................................................... 8,905 5,034 24,074 12,959
Operating expenses:
Research and development:
Stock option compensation .................................... 2,575 335 7,730 1,014
Other ........................................................ 9,729 4,383 29,366 11,916
-------- -------- -------- --------
12,304 4,718 37,096 12,930
Selling, general and administration:
Stock option compensation .................................... 706 363 2,165 1,397
Other ........................................................ 5,906 3,180 16,225 11,298
-------- -------- -------- --------
6,612 3,543 18,390 12,695
Restructuring costs ............................................... 4,457 -- 4,511 --
Amortization of intangible assets and goodwill .................... 2,691 1,804 8,078 5,410
-------- -------- -------- --------
Total operating expenses ..................................... 26,064 10,065 68,075 31,035
-------- -------- -------- --------
Loss from operations .............................................. (17,159) (5,031) (44,001) (18,076)
Other income (expense):
Interest income (expense), net ............................... 712 693 2,325 2,565
Foreign currency translation and transaction gains
(losses), net .............................................. (1,051) (79) (1,747) (1,245)
Other ........................................................ 20 (972) (49) (910)
-------- -------- -------- --------
Loss before income taxes .......................................... (17,478) (5,389) (43,472) (17,666)
Income tax expense (benefit) ...................................... 386 14 784 (478)
-------- -------- -------- --------
Net loss .......................................................... $(17,864) $ (5,403) $(44,256) $(17,188)
======== ======== ======== ========
Basic and diluted loss per common share ........................... $ (0.33) $(0.14) $ (0.84) $ (0.44)
======== ======== ======== ========
Weighted-average shares used in computing basic and diluted loss
per common share ............................................... 53,415 39,711 52,919 39,293
======== ======== ======== ========
See accompanying notes.
4
Microtune, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended September 30,
-------------------------------
2002 2001
---- ----
Operating activities:
Net loss .......................................................................... $(44,256) $(17,188)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation .................................................................. 4,648 4,630
Amortization of intangible assets ............................................. 8,078 1,180
Write-off of intangible assets ................................................ 3,262 --
Amortization of goodwill ...................................................... -- 4,230
Foreign currency translation and transaction gains (losses), net .............. 1,747 1,245
Amortization of deferred stock option compensation ............................ 9,895 2,411
Write-off of uncollectable loan receivable .................................... -- 1,026
Deferred income taxes ......................................................... (133) (1,584)
Changes in operating assets and liabilities:
Accounts receivable ...................................................... (10,121) 2,004
Inventories .............................................................. (5,171) 6,534
Other assets ............................................................. 337 (1,386)
Accounts payable ......................................................... 1,606 (3,635)
Other operating accrued expenses ......................................... (2,063) 325
Accrued compensation ..................................................... 64 103
-------- --------
Net cash used in operating activities ................................ (32,107) (105)
Investing activities:
Purchases of property and equipment ............................................... (3,966) (7,468)
Sale of property and equipment .................................................... 125 196
Loans receivable .................................................................. (130) (1,148)
Purchase of intangible assets ..................................................... (344) (45)
-------- --------
Net cash used in investing activities ................................ (4,315) (8,465)
Financing activities:
Proceeds from issuance of common stock upon exercise of stock options and from
shares purchased under Employee Stock Purchase Plan ............................. 1,758 2,666
Loans receivable from stockholders ................................................ (260) 753
Purchase of common stock .......................................................... (1,033) --
Other, net ........................................................................ (670) --
-------- --------
Net cash provided by (used in) financing activities .................. (205) 3,419
Effect of foreign currency exchange rate changes on cash ............................... (1,747) (1,235)
-------- --------
Net change in cash and cash equivalents ................................................ (38,374) (6,386)
Cash and cash equivalents at beginning of period ....................................... 173,149 77,650
-------- --------
Cash and cash equivalents at end of period ............................................. $134,775 $ 71,264
======== ========
See accompanying notes.
5
Microtune, Inc.
Notes to Consolidated Financial Statements
September 30, 2002
(unaudited)
1. Basis of Presentation
General
The accompanying unaudited financial statements as of and for the three
and nine months ended September 30, 2002 and 2001 have been prepared by
Microtune, Inc. (the Company), pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. These unaudited consolidated
financial statements should be read in conjunction with the audited financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2001.
In the opinion of management, all adjustments which are of a normal and
recurring nature and are necessary for a fair presentation of the financial
position, results of operations, and cash flows as of and for the three and nine
months ended September 30, 2002 have been made. Results of operations for the
three and nine months ended September 30, 2002, are not necessarily indicative
of results of operations to be expected for the entire year or any other period.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Adoption of New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations, effective as of June 20, 2001 and SFAS No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, the pooling-of-interests method of
accounting for business combinations has been eliminated. Also, the criteria for
recognizing acquired intangible assets apart from goodwill has been changed, and
acquired goodwill and intangible assets deemed to have indefinite lives are no
longer amortized, but are subject to annual impairment tests in accordance with
SFAS No. 141 and SFAS No. 142. Other intangible assets will continue to be
amortized over their useful lives.
The Company has applied the new rules on accounting for goodwill and
acquired intangible assets beginning January 1, 2002. Intangible assets that do
not meet the criteria for recognition apart from goodwill were required to be
reclassified. As a result, intangible assets relating to an acquired workforce
of $701,600, net of the related accumulated amortization at December 31, 2001 of
$175,400 were reclassified to goodwill as of December 31, 2001. See Note 5 for
further detail of intangible assets.
With the application of the nonamortization provisions of SFAS No. 142,
the Company ceased amortization of goodwill as of January 1, 2002. The following
table presents the quarterly results of the Company on a comparable basis
assuming the nonamortizaton provisions of SFAS No. 142 were effective January 1,
2001 (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Net loss:
Reported net loss .............................................. $(17,864) $ (5,403) $(44,256) $(17,188)
Goodwill and workforce amortization ............................ -- 1,432 -- 4,296
-------- -------- -------- --------
Adjusted net loss .............................................. $(17,864) $ (3,971) $(44,256) $(12,892)
======== ======== ======== ========
Basic and diluted loss per common share:
Reported net loss .............................................. $ (0.33) $ (0.14) $ (0.84) $ (0.44)
Goodwill and workforce amortization ............................ -- .04 -- 0.11
-------- -------- -------- --------
Adjusted net loss .............................................. $ (0.33) $ (0.10) $ (0.84) $ (0.33)
======== ======== ======== ========
As of January 1, 2002, the Company completed the initial goodwill
impairment test required by SFAS No. 142 and determined that no impairment
existed at that date. The assessment of goodwill impairment in the future may be
impacted if projected future operating cash flows of the Company are not
achieved, or if a substantial decline in the market value of our stock occurs
for an extended period of time, resulting in decreases in the related estimated
fair market values. During the third quarter of 2002, the Company's market
capitalization declined to a level which is less than the Company's net book
value. To date, the
6
Company does not believe that such decline is indicative that it is more likely
than not that the fair value of the Company's assets, including goodwill, are
less than their carrying values. The Company will perform its annual assessment
of goodwill impairment during the fourth quarter. If the Company's market
capitalization remains at its current level during the fourth quarter, the
Company believes it is likely that an impairment charge will be required.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, effective for fiscal years
beginning after December 15, 2001. This statement establishes new rules for
determining impairment of certain other long-lived assets, including intangible
assets subject to amortization, property and equipment and long-term prepaid
assets. The adoption of this standard did not have an effect on the operating
results or the financial position of the Company.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This new rule requires companies to
recognize costs associated with exit or disposal activities when the liability
is incurred rather than at the date of commitment to exit from or dispose of an
activity as required by current generally accepted accounting principles. This
statement is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. Accordingly, adoption of this new rule will
not have a material affect on the Company's financial statements. However, the
Company's accounting for exit and disposal activities, including restructurings,
initiated after that date will be impacted.
2. Business Acquisitions
On November 28, 2001, the Company acquired all of the outstanding capital
stock of Transilica Inc. (Transilica), a privately-held company based in
California. Transilica was engaged in research and development of silicon and
system-on-chip products for short-range wireless applications. The consideration
in the acquisition consisted of 7,206,187 shares of the Company's common stock.
In addition, the Company assumed Transilica stock options which represent
831,967 options for the Company's common stock. The merger agreement also
provided that approximately 15% of the total shares of the Company's common
stock issued to Transilica shareholders at the time of acquisition be placed in
escrow for the purpose of securing the indemnification obligations of Transilica
under the merger agreement. The escrow shares are to be released periodically,
subject to any escrow claims, at the end of each of the three years following
the closing. The results of operations of Transilica are included in the results
of operations of the Company from the date of acquisition. The components of the
aggregate cost of the acquisition were as follows (in thousands, except share
data):
Fair market value of 7,206,187 shares of common stock (including 1,206,307 shares
placed in escrow) ................................................................... $130,072
Fair market value of 831,967 Transilica stock options assumed ....................... 13,937
Transaction costs ................................................................... 2,130
--------
Total acquisition cost .............................................................. $146,139
========
The fair market value of the Company's common stock was based on the
closing stock price on the date of acquisition. The fair value of the Transilica
stock options assumed was based on the Black-Scholes option valuation model.
The cost of the acquisition has been allocated to the assets and
liabilities acquired, acquired in-process research and development and deferred
stock compensation, with the remainder recorded as excess cost over net assets
acquired, based on estimates of fair values as follows (in thousands):
Working capital ..................................................................... $ 386
Noncurrent assets and liabilities, net .............................................. 2,368
Developed technology ................................................................ 36,200
Patents ............................................................................. 19,300
Employment and non-compete agreements ............................................... 5,010
Goodwill ........................................................................... 28,546
Acquired in-process research and development costs charged to expense ............... 32,400
Unearned stock compensation ......................................................... 21,929
--------
Total acquisition cost .............................................................. $146,139
========
Unearned stock compensation recorded in connection with the acquisition
represents the intrinsic value of Transilica's unvested stock options and
restricted common stock shares for which future service is required subsequent
to the date of the acquisition in order for employees to vest in the stock
options and restricted common stock shares. The amount allocated to unearned
stock compensation has been deducted from the estimated fair value of the
unvested stock options and restricted common stock shares for purposes of the
allocation of purchase price to assets acquired. The unearned stock compensation
will be amortized to expense over the remaining vesting period of the unvested
stock options and restricted common stock shares of one to four years. The
Company is in the process of evaluating the other assets and liabilities
acquired in the Transilica acquisition.
7
The final allocation of the purchase price, which is expected to be complete in
the fourth quarter of 2002, will be based on the complete evaluation of the
acquired assets and liabilities.
In the third quarter 2002, we closed our Singapore design center and
eliminated certain positions at our San Diego location which were part of the
acquisition. This resulted in the write-off of certain employment agreements
related to the employees at these locations. See Notes 5 and 10 for further
discussions of the write-off of these employment agreements.
On October 16, 2001, the Company acquired a research and design center,
located in the Netherlands, which was subsequently renamed the Microtune Holland
Design Center (MHDC). MHDC specializes in the design of digital signal
processing VLSI chips and associated software, currently targeted at the digital
television equipment market. MHDC's products provide decoding and decompression
of video and audio that are embedded within the radio-frequency transmitted
signals. The consideration in the acquisition consisted of $3,000,000 of cash
and 210,000 shares of the Company's common stock. The results of operations of
MHDC are included in the results of operations of the Company from the date of
acquisition. The components of the aggregate cost of the acquisition were as
follows (in thousands, except share data):
Cash paid to shareholders ........................................................... $3,000
Fair market value of 210,000 shares of common stock ................................. 2,144
Transaction costs ................................................................... 319
------
Total acquisition cost .............................................................. $5,463
======
The fair market value of the Company's common stock was based on the
closing price as of October 1, 2001, when the terms of the acquisition were
agreed to by the parties to the transaction.
The cost of the acquisition has been allocated to the assets and
liabilities acquired and to acquired in-process research and development, with
the remainder recorded as excess cost over net assets acquired, based on
estimates of fair values as follows (in thousands):
Working capital (deficit) ........................................................... $ (335)
Noncurrent assets and liabilities, net .............................................. (1,003)
Developed technology ................................................................ 567
Goodwill ............................................................................ 4,726
Acquired in-process research and development costs charged to expense ............... 1,706
Deferred income taxes ............................................................... (198)
-------
Total acquisition cost .............................................................. $ 5,463
=======
The acquisitions of Transilica and MHDC have allowed the Company to
expand its core RF silicon and systems technologies. These acquisitions provide
the Company with complementary wireless silicon solutions that, when integrated
into consumer or commercial end products, enable users to remotely access data
or voice through wireless personal or local areas networks.
The Company's management is primarily responsible for estimating the fair
values of intangible assets and acquired in-process research and development.
The estimates of the fair values of intangible assets and acquired in-process
research and development were determined based on information furnished by
management of the companies acquired.
The value of the acquired developed technology, patents, and other
intangibles was determined by discounting the estimated projected net cash flows
to be generated from the related assets. Projected net cash flows were based on
estimates of future revenues and costs related to such assets. The rate used to
discount the net cash flows to present value ranged from 17% to 25%.
Amounts allocated to acquired in-process research and development were
expensed at the date of acquisition because the purchased research and
development had no alternative future uses, and had not reached technological
feasibility based on the status of design and development activities that
required further refinement and testing. The estimates used in valuing the
research and development were based upon assumptions regarding future events and
circumstances management believes to be reasonable, but that are inherently
uncertain and unpredictable. The relative stage of completion and projected
operating cash flows of the underlying in-process projects acquired were the
most significant and uncertain assumptions utilized in the valuation analysis of
the acquired in-process research and development. Such uncertainties could give
rise to unforeseen budget overruns and revenue shortfalls in the event that the
Company is unable to successfully complete and commercialize the projects.
The value of the acquired in-process research and development was
determined by discounting the estimated projected net cash flows related to the
applicable products of each acquisition for the amount of years as shown in the
table below, including
8
costs to complete the development of the technology and the future revenues to
be earned upon release of the products. The rates utilized to discount the net
cash flows to present value as shown in the table below were based on the
weighted average cost of capital adjusted for the risks associated with the
estimated growth, profitability, developmental and market risks of the acquired
development projects for each acquisition. Projected net cash flows from such
products of each acquisition are based on estimates of revenues and operating
profit (loss) related to such products. Management expects that the purchased
research and development projects generally will be successfully developed into
commercially viable products and expects to essentially meet its original cash
flows and return expectations for these projects. However, there can be no
assurance that commercial viability or timely release of these products will be
achieved.
Estimated Cost / Time to
Complete Projects
-------------------------------
Entity Acquired Acquisition At Acquisition At September 30, Year Cash Inflows
--------------- ------------ In Process -------------- ------------- Began or are
Date Projects Discount Rate 2002 Projected to Begin
---- -------- ------------- ------- ------------------
Transilica Inc. Nov. 2001 Short-range 35% $3.2 million / $3.0 million / 2003
Wireless Oct. 2002 Dec. 2002
applications
SPaSE, B.V. Oct. 2001 Demodulator 28% $2.7 million / $2.5 million / 2003
design June 2003 June 2003
3. Earnings Per Share
Basic earnings (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during each
period. Diluted earnings (loss) per common share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding during
each period and common equivalent shares consisting of preferred stock, stock
options, warrants, restricted stock subject to repurchase rights and employee
stock purchase plan options.
The following table sets forth anti-dilutive securities that have been
excluded from diluted earnings per share (in thousands):
September 30,
------------------
2002 2001
---- ----
Stock options ..................................................................... 8,083 6,857
Restricted common stock ........................................................... 323 126
Employee stock purchase plan ...................................................... 374 28
----- -----
Total anti-dilutive securities exclude ............................................ 8,780 7,011
===== =====
4. Inventories
Inventories consists of the following (in thousands):
September 30, December 31,
------------- ------------
2002 2001
---- ----
Finished goods .................................................................... $ 4,055 $ 1,654
Work-in-process ................................................................... 5,631 1,550
Raw materials ..................................................................... 4,886 6,197
------- -------
$14,572 $ 9,401
======= =======
Inventories are stated at the lower of standard cost, which approximates
actual cost determined on a first-in, first-out basis, or estimated realizable
value.
5. Intangible Assets
Excluding goodwill and intangible assets reclassified into goodwill as of
December 31, 2001, amortization expense on intangible assets was $8.1 million
and $1.1 million for the nine months ended September 30, 2002 and 2001,
respectively, and $2.7 million and $0.4 million for the three months ended
September 30, 2002 and 2001, respectively. Employment agreements of $4.1 million
less the associated accumulated amortization of $0.9 million were written off in
conjunction with our restructuring efforts in the three months ended September
30, 2002. See Note 10 for further detail of restructuring costs.
Effective January 1, 2002 acquired goodwill and intangible assets with
indefinite lives are no longer amortized, but are subject to annual impairment
tests in accordance with SFAS No. 142, Goodwill and Other Intangible Assets.
Application of the
9
non-amortization provisions of SFAS No. 142 decreased amortization of intangible
assets and goodwill by $4.3 million in the nine months ended September 30, 2002.
However, amortization of recorded intangible assets increased by $7.0 million in
the nine months ended September 30, 2002 as the result of the acquisitions of
Transilica and MHDC.
The following table sets forth the estimated amortization expense of
intangible assets for the fiscal years ending December 31 (in thousands):
2002 ..................................... $10,635
2003 ..................................... 9,739
2004 ..................................... 9,656
2005 ..................................... 8,061
2006 ..................................... 7,928
Intangible assets consist of the following (in thousands):
September 30, 2002 December 31, 2001
------------------ -----------------
Gross Gross Weighted
Carrying Accum. Carrying Accum. Average
Amount Amort. Amount Amort. Useful Life
------ ------ ------ ------ -----------
Developed technology .................. $ 36,767 $ 4,485 $36,767 $463 6.9 years
Patents ............................... 22,223 3,917 21,891 1,424 6.7 years
Employment agreements ................. 890 184 5,010 104 4.0 years
Other ................................. 4,309 2,463 4,309 1,850 5.0 years
-------- ------- ------- ----- ---------
$ 64,189 $11,049 $67,977 $3,841 6.7 years
======== ======= ======= ====== =========
6. Accrued Expenses
Accrued expenses consists of the following (in thousands):
September 30, December 31,
------------- ------------
2002 2001
---- ----
Deferred revenue .................... $ -- $ 1,494
Accrued warranty obligation ......... 407 743
Accrued income taxes ................ 5,269 5,289
Deferred income taxes ............... 538 492
Other ............................... 6,600 7,081
-------- --------
$ 12,814 $ 15,099
======== ========
7. Income Taxes
Prior to our combination with Microtune KG, the Company had not
recognized any provision for income taxes. For U.S. federal income tax purposes,
at December 31, 2001, the Company had a net operating loss carryforward of
approximately $72.6 million and an unused research and development credit
carryforward of approximately $1.4 million, which begins to expire in 2011. Due
to the uncertainty of our ability to utilize these deferred tax assets, they
have been fully reserved.
The provision for the three and nine months ended September 30, 2002 and
the provision and benefit for the three and nine months ended September 30, 2001
consists of foreign income taxes and U.S. state taxes. Effective January 1,
2001, the German government reduced tax rates of retained earnings, previously
40%, and earnings distributed as a dividend, previously 30%, to a flat rate of
25%.
8. Commitments and Contingencies
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We are not currently a party to
any material litigation, except as described below.
On January 24, 2001, the Company filed a lawsuit alleging patent
infringement in the United States Court for the Eastern District of Texas,
Sherman Division, against Broadcom Corporation. The lawsuit alleges that
Broadcom Corporation's BCM3415 microchip infringes on the Company's U.S. patent
no. 5,737,035. The Company's complaint is seeking monetary damages resulting
from the alleged infringement as well as injunctive relief precluding Broadcom
Corporation from taking any further action which infringes the Company's
5,737,035 patent. On May 7, 2002 Broadcom Corporation filed a Motion for Leave
to Supplement its counterclaim asking the court's permission to add a
counterclaim asserting infringement by Microtune of
10
Broadcom's U.S. patent no. 6,377,315. On June 19, 2002, Broadcom's motion was
denied. The trial in this lawsuit is scheduled to commence January 8, 2003. We
are unable at this time to determine whether the outcome of the litigation will
have a material impact on our results of operations or financial condition in
any future period.
On July 15, 2002, Broadcom Corporation filed a lawsuit alleging patent
infringement in the United States Court for the Eastern District of Texas,
Sherman Division, against the Company. The lawsuit alleges that various
Microtune products infringe Broadcom's U.S. patent no. 6,377,315. The complaint
is seeking monetary damages resulting from the alleged infringement as well as
injunctive relief precluding Microtune from taking any further action which
infringes the U.S. patent no. 6,377,315. While we intend to vigorously defend
this suit, we are unable at this time to determine whether the outcome of the
litigation will have a material impact on our results of operations or financial
condition in any future period.
Starting on July 11, 2001, multiple purported securities fraud class
action complaints were filed in the United States District Court for the
Southern District of New York. The Company is aware of at least three such
complaints: Berger v. Goldman, Sachs & Co., Inc. et al.; Atlas v. Microtune et
al.; and Ellis Investments Ltd. v. Goldman Sachs & Co., Inc. et al. The
complaints are brought purportedly on behalf of all persons who purchased the
Company's common stock from August 4, 2000 through December 6, 2000. The Atlas
complaint names as defendants Microtune, Douglas J. Bartek, the Company's
Chairman and Chief Executive Officer, Everett Rogers, the Company's former Chief
Financial Officer and Vice President of Finance and Administration and current
Vice President of Investor Relations, and several investment banking firms that
served as underwriters of our initial public offering. Microtune, Mr. Bartek and
Mr. Rogers were served with notice on the Atlas complaint on August 22, 2001,
however, they have not been served regarding the other referenced complaints.
The Berger and Ellis Investment Ltd. complaints assert claims against the
underwriters only. The complaints were consolidated and amended on May 29, 2002.
Among other things, the complaints allege liability under Sections 11 and 15 of
the Securities Act of 1933 and Section 10(b) and 20(a) of the Securities
Exchange Act of 1934, on the grounds that the registration statement for our
initial public offering did not disclose that (1) the underwriters had agreed to
allow certain of their customers to purchase shares in the offering in exchange
for excess commissions paid to the underwriters and (2) the underwriters had
arranged for certain of their customers to purchase additional shares in the
aftermarket at pre-determined prices. We are aware that similar allegations have
been made in lawsuits challenging over 180 other initial public offerings
conducted in 1998, 1999, and 2000. No specific amount of damages is claimed in
the three complaints involving our initial public offering. These cases are
subject to the Private Securities Litigation Reform Act of 1995. These cases and
all of the other lawsuits filed in the Southern District of New York making
similar allegations have been coordinated before the Honorable Shira A.
Scheindlin. We believe that the allegations against Microtune, Inc., Mr. Bartek
and Mr. Rogers are without merit. We intend to contest them vigorously,
including by filing a motion to dismiss these cases. We are unable at this time
to determine whether the outcome of the litigation will have a material impact
on our results of operations or financial condition in any future period.
Furthermore, there can be no assurances regarding the outcome of the litigation
or any related claim for indemnification or contribution between or among any of
the underwriters and us.
9. Stock Plans and Stockholders' Equity
In 2001 and 2000, the Company recorded approximately $17.8 million and
$16.5 million, respectively, of deferred stock option compensation as a result
of granting stock options with deemed exercise prices below the estimated fair
value per share of the Company's common stock at the date of grant prior to the
initial public offering of its common stock or as a result of the Transilica
acquisition. Deferred stock option compensation is being amortized and charged
to operations over the vesting period of the applicable options. As of September
30, 2002 and December 31, 2001, unamortized deferred stock compensation was
$16.5 million and $28.3 million, respectively. The weighted-average remaining
vesting period of outstanding compensatory stock options was 1.7 years at
December 31, 2001 based upon the annual stock option compensation amortization
over the total deferred stock option compensation. Actual vesting periods range
from 2002 to 2006.
On July 19, 2002 the Board of Directors authorized a stock repurchase
program to acquire outstanding common stock on either the open market or through
negotiated transactions. Under the program, up to 10% of the outstanding shares
of Microtune common stock can be reacquired. Since the beginning of the program
through November 8, 2002, the Company has purchased a total of 4,445,325 shares
of its common stock for an aggregate cost of $7.7 million.
During October 2002, the Company established a program whereby each
employee with outstanding stock options was given the opportunity to cancel
some, or all of their option grants in exchange for a promise by the Company to
grant a new stock option in six months and two days from the date of the
employee's election to cancel options. The new grants will be for the same or
lesser number of options cancelled and will have an exercise price equal to the
market closing price the day before the grant. New grants will vest 1/54 each
month with 6/54 vesting on the date of the new grant. The program ended October
31, 2002 and 1,875,781 shares were cancelled pursuant to the program.
11
10. Restructuring Costs
In the fourth quarter of 2001 the Company recorded a $3.0 million charge
related to restructuring actions, primarily related to the consolidation of the
Company's manufacturing operations in the Philippines from two factories into a
single factory. Of the $3.0 million charge, $0.8 million related to severance
for 477 employees that had been paid out by year end, $1.3 million related to
write-offs of equipment to be disposed of, $0.4 million related to write-offs of
VAT receivables which will not be collectable and the remaining $0.5 million
related to the write-down of other assets and accrual of costs related to the
restructuring. The equipment which was written-off will no longer be used at the
Philippines factory and is expected to be completely disposed of by the end of
the first quarter 2003. At September 30, 2002 and December 31, 2001, accrued
restructuring costs related to these actions taken in the fourth quarter 2001
totaled $0.6 million and $0.8 million, respectively. Such costs are expected to
be settled during 2003.
In the third quarter of 2002 the Company recorded a $4.5 million charge
related to restructuring actions taken to reduce operating costs and strengthen
our ability to focus on core strategic competencies. Of the $4.5 million charge,
$3.2 million related to the write-off of intangible assets consisting of
employment agreements acquired in the Transilica acquisition, $0.3 million
related to the write-off of other assets and accrual of costs related to the
restructuring and $1.0 million related to closing our design center located in
Singapore. The $1.0 million charge included $0.6 million related to write-offs
of equipment, software and software leases and $0.4 million related to other
charges associated with the office closing including severance for 21 employees.
At September 30, 2002 accrued restructuring costs related to these actions taken
in the third quarter 2002 totaled $0.4 million. Such costs are expected to be
settled by the end of 2003.
On October 25, 2002 Microtune began a worldwide reduction-in-force which
will result in additional restructuring costs in the fourth quarter 2002.
11. Geographic Information and Significant Customers
The Company's headquarters and main design center are located in Plano,
Texas. The Company has other sales offices and design centers in the United
States. The Company also has significant design centers in Germany and the
Netherlands and a manufacturing facility in the Philippines. Revenues by
geographical area are summarized below (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
North America .................. $ 6,432 $ 5,142 $16,244 $21,290
Europe ......................... 4,526 3,751 14,093 11,207
Asia Pacific ................... 13,045 5,982 35,087 14,303
Other .......................... -- 140 -- 329
------- ------- ------- -------
$24,003 $15,015 $65,424 $47,129
======= ======= ======= =======
Sales to DaimlerChrysler accounted for approximately 15% and 22%of
consolidated net revenues for the nine months ended September 30, 2002 and 2001,
respectively.
Sales to Unical Enterprises, Inc. accounted for approximately 13% of
consolidated net revenues for the three months ended September 30, 2002. Sales
to DaimlerChrysler and Motorola/General Instruments accounted for approximately
19% and 11%, respectively, of consolidated net revenues for the three months
ended September 30, 2001.
Property and equipment are summarized below by location (in thousands):
September 30, December 31,
2002 2001
---- ----
North America .................... $ 8,836 $ 7,131
Europe ........................... 2,075 3,069
Philippines ...................... 7,378 8,210
Asia Pacific 173 859
------- -------
$18,462 $19,269
======= =======
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements in the discussion and analysis below
contain forward looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
that involve risks and uncertainties, such as statements for the plans,
objectives, expectations and intentions of Microtune. Such forward looking
statements often contain the words "plan", "could", "would", "may", "believe",
"anticipates", "estimates", "expects", and words of similar import, and may
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Readers are referred to the
disclosures under the caption "Factors Affecting Future Operating Results and
Stock Price" in our 2001 Form 10K Report and in our Form 10Q for the period
ended March 31, 2002 which is incorporated by this reference to such reports,
which describes factors that could cause actual events to differ materially from
those contained in the forward looking statements.
Financial Information
Since inception we have incurred significant losses, and as of September
30, 2002, we had an accumulated deficit of approximately $155.3 million. With
the acquisition of Transilica, our activities have expanded into the wireless
connectivity market with Bluetooth technology and 802.11 technology. We have not
previously designed, manufactured, or marketed in this area. Our limited
combined operating history combined with business risks, including those risks
set forth under the caption "Factors Affecting Future Operating Results and
Stock Price" on pages 32 - 48 of our 2001 Annual Report and in our Form 10-Q for
the period ended March 31, 2002, make the prediction of future results of
operations difficult, and as a result there can be no assurance that we will
achieve or sustain revenue growth or profitability.
The time lag between product availability and volume shipment can be
significant due to a sales process that includes customer qualification of our
products, and can take as long as two years during which we continue to evolve
our technology.
We have invested heavily in research and development of our RF integrated
circuits and systems technology. We expect to increase our investment in these
areas in absolute dollars to further develop our RF products. This investment
will include the continued recruitment of RF and analog integrated circuit
designers and systems engineers, acquisition of test, development and production
equipment and expansion of facilities for research and manufacturing. As a
result, we may continue to incur substantial losses from operations for the
foreseeable future.
We use IBM, TSMC and X-FAB to manufacture our wafers and Amkor and Carsem
to assemble our integrated circuits. We perform final testing, packaging and
shipping of our integrated circuits at our facility in Plano, Texas, and
overseas at Amkor, Carsem and United Test & Assembly Center. With respect to our
tuner modules, we perform most of our assembly and calibration functions in our
factory in Manila, Philippines. Test functions of our tuner modules are
performed in our factory in Manila, Philippines, at our facility in Huntsville,
Alabama and at AMB Electronic in Vohburg, Germany.
13
Results of Operations
The following table sets forth, for the periods presented, certain data
from our consolidated statements of operations expressed as a percentage of net
revenues:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Net revenues ............................................ 100% 100% 100% 100%
Cost of revenues ........................................ 63 66 63 73
--- --- --- ---
Gross margin ............................................ 37 34 37 27
Operating expenses:
Research and development:
Stock option compensation .......................... 11 2 12 2
Other .............................................. 40 30 45 25
--- --- --- ---
51 32 57 27
Selling, general and administration:
Stock option compensation .......................... 3 3 3 3
Other .............................................. 24 21 25 24
--- --- --- ---
27 24 28 27
Restructuring costs ..................................... 19 - 7
--- --- ---
Amortization of intangible assets and goodwill .......... 11 12 12 11
--- --- --- ---
Total operating expenses ........................... 108 68 104 65
--- --- --- ---
Loss from operations .................................... (71) (34) (67) (38)
Other income (expense) .................................. (1) (2) - 1
--- --- --- ---
Loss before income taxes ................................ (72) (36) (67) (37)
Income tax expense (benefit) ............................ 2 - 1 (1)
--- --- --- ---
Net loss ................................................ (74)% (36)% (68)% (36)%
=== === === ===
Comparison of the Three and Nine Months Ended September 30, 2002 and 2001
Net Revenues
Our net revenues increased $18.3 million, or 39%, to $65.4 million in the
nine months ended September 30, 2002, from $47.1 million in the nine months
ended September 30, 2001. Our net revenues increased $9.0 million, or 60%, to
$24.0 million in the three months ended September 30, 2002, from $15.0 million
in the three months ended September 30, 2001. This increase is primarily due to
growth experienced in the broadband communications sector during the first half
of 2002, as well as increased sales from our Bluetooth(TM) wireless connectivity
products during the third quarter of 2002. Sales to DaimlerChrysler accounted
for approximately 15% and 22% of consolidated net revenues for the nine months
ended September 30, 2002 and 2001, respectively. Sales to Unical Enterprises,
Inc. accounted for approximately 13% of consolidated net revenues for the three
months ended September 30, 2002. Sales to DaimlerChrysler and Motorola/General
Instruments accounted for approximately 19% and 11%, respectively, of
consolidated net revenues for the three months ended September 30, 2001.
Sales to our twenty largest customers, including sales to their respective
manufacturing subcontractors, accounted for approximately 95% and 90% of our
revenues for the nine months ended September 30, 2002 and 2001, respectively. We
could experience pricing pressures at any point in the future for our products.
Cost of Revenues
Cost of revenues includes the cost of purchases for subcontracted
materials, integrated circuit assembly, factory labor and overhead and warranty
costs. In addition, we perform final testing of our products and incur cost for
the depreciation of our test and handling equipment, labor, quality assurance
and logistics. Our subcontracted materials experience cyclical trends in pricing
due to fluctuations in demand. Our costs of revenues in the nine months ended
September 30, 2002 were $41.4 million, or 63% of net revenues, compared to $34.2
million, or 73% of net revenues, in the nine months ended September 30, 2001.
Our costs of revenues in the three months ended September 30, 2002 were $15.1
million, or 63% of net revenues, compared to $10.0 million, or 66% of net
revenues, in the three months ended September 30, 2001. Our gross margins in the
three and nine months ended September 30, 2002 increased compared to the same
periods for 2001 as a result of the consolidation of our factory in Manila in
the fourth quarter 2001 and strength in silicon product sales which normally
have higher margins. In the near future, we believe gross margins may continue
to improve due to increased efficiencies in our factories and increasing levels
of our silicon products in our product mix partially offset by increased selling
price pressures. However, we do not expect gross margins to consistently
increase each quarter. As we add new products to our manufacturing lines, we
will incur higher cost of revenues, which may be
14
offset over time as we negotiate volume discounts with our suppliers and become
more efficient in manufacturing each new product.
Research and Development
Research and development expenses consist of personnel-related expenses,
lab supplies, training, prototype subcontract materials, and prototype assembly.
We expense all of our research and development costs in the period incurred.
Research and development efforts are currently focused primarily on development
of the next generation of RF products. Research and development expenses
including noncash stock compensation for the nine months ended September 30,
2002 were $37.1 million, or 57% of net revenues, compared to $12.9 million, or
27% of net revenues, in the nine months ended September 30, 2001. Research and
development expenses including noncash stock compensation for the three months
ended September 30, 2002 were $12.3 million, or 51% of net revenues, compared to
$4.7 million, or 32% of net revenues, in the three months ended September 30,
2001. The increase in research and development expenses primarily reflects the
acquisitions of MHDC in October 2001 and Transilica in November 2001, as well as
continued recruiting of engineers and increased prototype activity in the
silicon design process. We expect that research and development expenses will
increase in absolute dollars in future periods, and may fluctuate significantly
as a percentage of total revenues from period to period. Stock option
compensation related to research and development was $7.7 million in the nine
months ended September 30, 2002 and $1.0 million in the nine months ended
September 30, 2001 and $2.6 million in the three months ended September 30, 2002
and $0.3 million in the three months ended September 30, 2001, but does not
affect our total stockholders' equity or cash flows. The increase in stock
option compensation is due to the Transilica acquisition.
See Note 2 to the financial statements for a discussion on the status of
the Company's acquired in-process research and development projects.
Selling, General and Administration
Selling, general and administration expenses include our
personnel-related expenses for administration, finance, human resources,
marketing and sales, and information technology departments, and include
expenditures related to legal, public relations and financial advisors. In
addition, these expenses include promotional and marketing costs, sales
commissions, shipping costs to customers and reserves for bad debts. Selling,
general and administration expenses including noncash stock compensation for the
nine months ended September 30, 2002 were $18.4 million, or 28% of net revenues,
compared to $12.7 million, or 27% of net revenues, in the nine months ended
September 30, 2001. Selling, general and administration expenses including
noncash stock compensation for the three months ended September 30, 2002 were
$6.6 million, or 27% of net revenues, compared to $3.5 million, or 24% of net
revenues, in the three months ended September 30, 2001. The increase relates to
significant increases in legal expenses in 2002 due to the lawsuit we filed
alleging patent infringement in the United Sates Court for the Eastern District
of Texas, Sherman Division, against Broadcom Corporation (see Note 8 to the
financial statements for further discussion of the lawsuit against Broadcom),
the additional ongoing expenses resulting from the acquisitions of MHDC in
October 2001 and Transilica in November 2001 and recording additional bad debt
expenses related to increased accounts receivable. Stock option compensation
related to selling, general and administration was $2.2 million and $1.4 million
in the nine months ended September 30, 2002 and 2001, respectively, and $0.7
million and $0.4 million in the three months ended September 30, 2002 and 2001,
respectively, but does not affect our total stockholders' equity or cash flows.
Amortization of Intangible Assets and Goodwill
Amortization of intangible assets for the nine months ended September 30,
2002 was $8.1 million compared to amortization of intangible assets and goodwill
of $5.4 million for the nine months ended September 30, 2001. Amortization of
intangible assets for the three months ended September 30, 2002 was $2.7 million
compared to amortization of intangible assets and goodwill of $1.8 million for
the three months ended September 30, 2001. Employment agreements of $4.1 million
less the associated accumulated amortization of $0.9 million were written off in
conjunction with our restructuring efforts in the three months ended September
30, 2002. See Note 10 for further detail on restructuring costs. Amortization of
intangible assets and goodwill results principally from our combinations with
Microtune KG, MHDC and Transilica. All combinations were accounted for using the
purchase method of accounting. Effective January 1, 2002 acquired goodwill and
intangible assets with indefinite lives are no longer amortized, but are subject
to annual impairment tests in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets. Application of the non-amortization provisions of SFAS No.
142 decreased amortization of intangible assets and goodwill by $4.3 million in
the nine months ended September 30, 2002. However, amortization of recorded
intangible assets increased by $7.0 million in the nine months ended September
30, 2002 as the result of the acquisitions of Transilica and MHDC.
During the third quarter of 2002, the Company's market capitalization
declined to a level which is less than the Company's net book value. To date,
the Company does not believe that such decline is indicative that it is more
likely than not that the fair value of the Company's assets, including goodwill,
are less than their carrying values. The Company will perform its annual
15
assessment of goodwill impairment during the fourth quarter. If the Company's
market capitalization remains at its current level during the fourth quarter,
the Company believes it is likely that an impairment charge will be required.
Restructuring Costs
Restructuring costs for the three and nine months ended September 30,
2002 were $4.5 million and there were no restructuring costs for the same
periods for 2001. These charges were taken to reduce operating costs and
strengthen our ability to focus on core strategic competencies. Of the $4.5
million charge, $3.2 million related to the write-off of intangible assets
consisting of employment agreements acquired in the Transilica acquisition, $0.3
million related to the write-off of other assets and accrual of costs related to
the restructuring and $1.0 million related to closing our design center located
in Singapore. The $1.0 million charge included $0.6 million related to
write-offs of equipment, software and software leases and $0.4 million related
to other charges associated with the office closing including severance for 21
employees. At September 30, 2002 accrued restructuring costs related to these
actions taken in the third quarter 2002 totaled $0.4 million. Such costs are
expected to be settled by the end of 2003.
On October 25, 2002 Microtune began a worldwide reduction-in-force which
will result in additional restructuring costs in the fourth quarter 2002.
Other Income and Expense
Other income consists of interest income from investment of cash and cash
equivalents, foreign currency gains and losses and other non-operating income
and expenses.
Interest income for the nine months ended September 30, 2002 was $2.4
million compared to $2.6 million for the nine months ended September 30, 2001.
Interest income for the three months ended September 30, 2002 and 2001 was $0.7
million. The decrease in interest income is mainly due to the decrease in
interest rates for the nine months ended September 30, 2002 as compared to the
nine months ended September 30, 2001.
Our functional currency is the U.S. Dollar. The impact from the
remeasurement of financial statements of the Subsidiaries not denominated in
U.S. Dollars is recognized currently in our results of operations as a component
of foreign currency gains and losses. The increase in the foreign currency loss
is mainly due to the strengthening of the U.S. Dollar against the Philippine
Peso during third quarter 2002.
Other expenses for the three and nine months ended September 30, 2001
included a $1.0 million one-time write-off due to the uncollectability of a loan
which we made in May 2001 to a private radio frequency focused company.
Income Taxes
Prior to our combination with Microtune KG, we had not recognized any
provision for income taxes. For U.S. federal income tax purposes, at December
31, 2001, the Company had a net operating loss carryforward of approximately
$72.6 million and an unused research and development credit carryforward of
approximately $1.4 million, which begins to expire in 2011. Due to the
uncertainty of our ability to utilize these deferred tax assets, they have been
fully reserved.
The provision for the three and nine months ended September 30, 2002 and
the provision and benefit for the three and nine months ended September 30, 2001
consists of foreign income taxes and U.S. state taxes. Effective January 1,
2001, the German government reduced corporate tax rates of retained earnings,
previously 40%, and earnings distributed as a dividend, previously 30%, to a
flat rate of 25%.
Liquidity and Capital Resources
As of September 30, 2002, we had net working capital of $152.7 million,
including $134.8 million of cash and cash equivalents, compared to net working
capital of $175.4 million, including $173.1 million of cash and cash equivalents
at December 31, 2001. Highly liquid investments with original maturities of
three months or less are considered to be cash equivalents. Cash and cash
equivalents consist of bank deposits, money market funds and asset-backed
commercial paper. Our investments in asset-backed commercial paper are comprised
of high-quality securities in accordance with the Company's investment policy.
Operating activities used $32.1 million in cash during the nine months
ended September 30, 2002 compared to $0.1 million used in operating activities
for the nine months ended September 30, 2001. The increase in cash used from
operations is due to
16
increased expenses primarily from acquisitions. In addition, accounts receivable
increased due to the growth in our sales volume and inventories have increased
due to softening in demand at the end of third quarter 2002.
Investing activities used $4.3 million in cash during the nine months
ended September 30, 2002 compared to $8.5 million used in investing activities
for the nine months ended September 30, 2001. Investments in property and
equipment were $4.0 million and $7.5 million in the nine months ended September
30, 2002 and 2001, respectively.
Financing activities used $0.2 million in cash during the nine months
ended September 30, 2002 compared to generating $3.4 million provided by
financing activities for the nine months ended September 30, 2001. We received
cash of approximately $1.8 million and $2.7 million from the sale of common
stock upon the exercise of employee stock options and from shares purchased
under our Employee Stock Purchase Plan during the nine months ended September
30, 2002 and 2001, respectively. During the first quarter of 2002, we also
incurred $0.5 million for the remainder of costs from our December 18, 2001
follow-on public offering when we issued 5 million shares of common stock
resulting in net proceeds of approximately $109 million. We used cash of
approximately $1.0 million to repurchase shares of our common stock during the
nine months ended September 30, 2002.
On July 19, 2002 the Board of Directors authorized a stock repurchase
program to acquire outstanding common stock on either the open market or through
negotiated transactions. Under the program, up to 10% of the outstanding shares
of Microtune common stock can be reacquired. Since the beginning of the program
through November 8, 2002, the Company has purchased a total of 4,445,325 shares
of its common stock for an aggregate cost of $7.7 million.
On October 25, 2002 Microtune began a worldwide reduction-in-force which
will result in restructuring costs in the fourth quarter 2002.
Microtune KG has a credit agreement with a bank that provides for
borrowings of up to $1.0 million. The agreement is cancelable upon notification
by the bank. Borrowings under this agreement bear interest at a rate determined
from time to time by the bank. The rate was 7.25% at September 30, 2002. At
September 30, 2002, no borrowings were outstanding under this credit agreement.
We believe that our current cash balance will provide adequate liquidity
to fund our operations and meet our other cash requirements through at least
2004. However, we may find it necessary or we may choose to seek additional
financing if our investment plans change, or if industry or market conditions
are favorable for a particular type of financing. If we raise additional funds
through the issuance of equity or convertible debt securities, the percentage
ownership of our stockholders will be reduced.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
Information concerning market risk is contained in our 2001 Form 10-K
Report and in our Form 10-Q for the period ended March 31, 2002 and is
incorporated by reference to these reports.
Item 4. Controls and Procedures
Pursuant to the Sarbanes-Oxley Act of 2002, we performed an evaluation
under the supervision and with the participation of our management, including
our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, our management, including our CEO and CFO,
concluded that our disclosure controls and procedures were effective as of
September 30, 2002. There have been no significant changes in our internal
controls or other factors that could significantly affect internal controls
subsequent to September 30, 2002.
17
Part II Other Information
Item 1. Legal Proceedings
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We are not currently a party to
any material litigation, except as described below.
On January 24, 2001, we filed a lawsuit alleging patent infringement in
the United States Court for the Eastern District of Texas, Sherman Division,
against Broadcom Corporation. The lawsuit alleges that Broadcom Corporation's
BCM3415 microchip infringes on our U.S. patent no. 5,737,035. In our complaint,
we are seeking monetary damages resulting from the alleged infringement as well
as injunctive relief precluding Broadcom Corporation from taking any further
action which infringes our 5,737,035 patent. On May 7, 2002 Broadcom Corporation
filed a Motion for Leave to Supplement its counterclaim asking the court's
permission to add a counterclaim asserting infringement by Microtune of
Broadcom's U.S. patent no. 6,377,315. On June 19, 2002 Broadcom's motion was
denied. The trial in this lawsuit is scheduled to commence January 8, 2003. We
are unable at this time to determine whether the outcome of the litigation will
have a material impact on our results of operations or financial condition in
any future period.
On July 15, 2002, Broadcom Corporation filed a lawsuit alleging patent
infringement in the United States Court for the Eastern District of Texas,
Sherman Division, against the Company. The lawsuit alleges that various
Microtune products infringe Broadcom's U.S. patent no. 6,377,315. The complaint
is seeking monetary damages resulting from the alleged infringement as well as
injunctive relief precluding Microtune from taking any further action which
infringes the U.S. patent no. 6,377,315. While we intend to vigorously defend
this suit, we are unable at this time to determine whether the outcome of the
litigation will have a material impact on our results of operations or financial
condition in any future period.
Starting on July 11, 2001, multiple purported securities fraud class
action complaints were filed in the United States District Court for the
Southern District of New York. We are aware of at least three such complaints:
Berger v. Goldman, Sachs & Co., Inc. et al.; Atlas v. Microtune et al.; and
Ellis Investments Ltd. v. Goldman Sachs & Co., Inc. et al. The complaints are
brought purportedly on behalf of all persons who purchased our common stock from
August 4, 2000 through December 6, 2000. The Atlas complaint names as defendants
Microtune, Douglas J. Bartek, our Chairman and Chief Executive Officer, Everett
Rogers, our former Chief Financial Officer and Vice President of Finance and
Administration and current Vice President of Investor Relations, and several
investment banking firms that served as underwriters of our initial public
offering. Microtune, Mr. Bartek and Mr. Rogers were served with notice on the
Atlas complaint on August 22, 2001, however, they have not been served regarding
the other referenced complaints. The Berger and Ellis Investment Ltd. Complaints
assert claims against the underwriters only. The complaints were consolidated
and amended on May 29, 2002. Among other things, the complaints allege liability
under Sections 11 and 15 of the Securities Act of 1933 and Section 10(b) and
20(a) of the Securities Exchange Act of 1934, on the grounds that the
registration statement for our initial public offering did not disclose that (1)
the underwriters had agreed to allow certain of their customers to purchase
shares in the offering in exchange for excess commissions paid to the
underwriters and (2) the underwriters had arranged for certain of their
customers to purchase additional shares in the aftermarket at pre-determined
prices. We are aware that similar allegations have been made in lawsuits
challenging over 180 other initial public offerings conducted in 1998, 1999, and
2000. No specific amount of damages is claimed in the three complaints involving
our initial public offering. These cases are subject to the Private Securities
Litigation Reform Act of 1995. These cases and all of the other lawsuits filed
in the Southern District of New York making similar allegations have been
coordinated before the Honorable Shira A. Scheindlin. We believe that the
allegations against Microtune, Inc., Mr. Bartek and Mr. Rogers are without
merit. We intend to contest them vigorously, including by filing a motion to
dismiss these cases. We are unable at this time to determine whether the outcome
of the litigation will have a material impact on our results of operations or
financial condition in any future period. Furthermore, there can be no
assurances regarding the outcome of the litigation or any related claim for
indemnification or contribution between or among any of the underwriters and us.
Item 2. Changes In Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
18
Item 5. Other Information
During October 2002, the Company established a program whereby each
employee with outstanding stock options was given the opportunity to cancel
some, or all of their option grants in exchange for a promise by the Company to
grant a new stock option in six months and two days from the date of the
employee's election to cancel options. The new grants will be for the same or
lesser number of options cancelled and will have an exercise price equal to the
market closing price the day before the grant. New grants will vest 1/54 each
month with 6/54 vesting on the date of the new grant. The program ended October
31, 2002 and 1,875,781 shares were cancelled pursuant to the program.
On October 25, 2002 Microtune began a worldwide reduction-in-force which
will result in restructuring costs in the fourth quarter 2002.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12. Computation of Ratio of Earnings to Fixed Charges
99.1 Certificate of the Chief Executive Officer pursuant to 18
U.S.C. (S)1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
99.2 Certificate of the Chief Financial Officer pursuant to 18
U.S.C. (S)1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
(b) Reports on Form 8-K
On July 22, 2002, we filed a Form 8-K with the Security and Exchange
Commission to announce the appointment of Nancy A. Richardson as Chief Financial
Officer.
On August 14, 2002, we filed a Form 8-K with the Security and
Exchange Commission regarding Item 9. - Regulation FD Disclosure stating that
the purpose of the transmittal letter and certifications accompanying our Form
10-Q for the quarter ended June 30,2002 were furnished solely pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and were not filed as part of our
Quarterly Report on Form 10-Q.
19
Signatures
In accordance with the requirements of the Securities Exchange Act of 1934 as
amended, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 12, 2002
/s/ Nancy A. Richardson
--------------------------------------------
Nancy A. Richardson
Chief Financial Officer
(Principal Financial and Accounting Officer)
20
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 352 of the
Sarbanes-Oxley Act of 2002
I, Douglas J. Bartek, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Microtune, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons fulfilling the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls;
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Douglas J. Bartek
- -------------------------------
Douglas J. Bartek
Chairman and
Chief Executive Officer
(Principal Executive Officer)
21
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 352 of the
Sarbanes-Oxley Act of 2002
I, Nancy A. Richardson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Microtune, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons fulfilling the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls;
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Nancy A. Richardson
- ------------------------------------
Nancy A. Richardson
Chief Financial Officer
(Principal Financial and Accounting Officer)
22