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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 29, 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: 000-30615
SIRENZA MICRODEVICES, INC.
(Exact name of registrant as specified in its charter)
| Delaware |
|
77-0073042 |
| (State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification
No.) |
| 522 Almanor Avenue, Sunnyvale, CA |
|
94085 |
| (Address of principal executive offices) |
|
(Zip Code) |
(408) 616-5400
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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) had been subject to such filing requirements for the past 90 days. Yes x No ¨
As of October 27, 2002, there were 29,814,426 shares of registrant’s Common Stock outstanding.
SIRENZA MICRODEVICES, INC.
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Page
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| Part I. Financial Information |
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| Item 1. |
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1 |
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| Item 2. |
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17 |
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| Item 3. |
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50 |
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| Item 4. |
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51 |
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| Part II. Other Information |
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| Item 1. |
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|
51 |
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| Item 2. |
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52 |
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| Item 3. |
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52 |
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| Item 4. |
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52 |
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| Item 5. |
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52 |
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| Item 6. |
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53 |
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53 |
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54 |
Part I. Financial Information
Item 1. Financial Statements
Sirenza Microdevices, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
| |
|
September 30, 2002
|
|
|
December 31, 2001
|
|
| |
|
(unaudited) |
|
|
|
|
| Assets |
|
|
|
|
|
|
|
|
| Current assets: |
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
2,278 |
|
|
$ |
15,208 |
|
| Short-term investments |
|
|
18,032 |
|
|
|
27,118 |
|
| Accounts receivable, net |
|
|
1,831 |
|
|
|
1,158 |
|
| Inventories |
|
|
2,248 |
|
|
|
1,894 |
|
| Other current assets |
|
|
1,056 |
|
|
|
1,062 |
|
| |
|
|
|
|
|
|
|
|
| Total current assets |
|
|
25,445 |
|
|
|
46,440 |
|
| Property and equipment, net |
|
|
7,073 |
|
|
|
7,285 |
|
| Long-term investments |
|
|
16,593 |
|
|
|
9,058 |
|
| Investment in GCS |
|
|
7,500 |
|
|
|
— |
|
| Intangible and other assets |
|
|
1,058 |
|
|
|
1,260 |
|
| Goodwill |
|
|
834 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
58,503 |
|
|
$ |
64,043 |
|
| |
|
|
|
|
|
|
|
|
| Liabilities and stockholders’ equity |
|
|
|
|
|
|
|
|
| Current liabilities: |
|
|
|
|
|
|
|
|
| Accounts payable |
|
$ |
2,009 |
|
|
$ |
1,464 |
|
| Accrued expenses |
|
|
2,184 |
|
|
|
1,745 |
|
| Deferred margin on distributor inventory |
|
|
2,035 |
|
|
|
3,631 |
|
| Accrued restructuring |
|
|
1,916 |
|
|
|
2,155 |
|
| Capital lease obligations, current portion |
|
|
593 |
|
|
|
634 |
|
| |
|
|
|
|
|
|
|
|
| Total current liabilities |
|
|
8,737 |
|
|
|
9,629 |
|
| Capital lease obligations and other long-term liabilities |
|
|
154 |
|
|
|
401 |
|
| Stockholders’ equity |
|
|
|
|
|
|
|
|
| Common Stock |
|
|
30 |
|
|
|
30 |
|
| Additional paid-in capital |
|
|
128,862 |
|
|
|
128,426 |
|
| Deferred stock compensation |
|
|
(996 |
) |
|
|
(1,787 |
) |
| Accumulated deficit |
|
|
(78,119 |
) |
|
|
(72,656 |
) |
| Treasury stock, at cost |
|
|
(165 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
| Total stockholders’ equity |
|
|
49,612 |
|
|
|
54,013 |
|
| |
|
|
|
|
|
|
|
|
| Total liabilities and stockholders’ equity |
|
$ |
58,503 |
|
|
$ |
64,043 |
|
| |
|
|
|
|
|
|
|
|
See accompanying notes.
Sirenza Microdevices, Inc.
Condensed Consolidated Statements Of Operations
(In thousands, except per share data)
(unaudited)
| |
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
| |
|
September 30, 2002
|
|
|
September 30, 2001
|
|
|
September 30, 2002
|
|
|
September 30, 2001
|
|
| Net revenues |
|
$ |
5,206 |
|
|
$ |
3,188 |
|
|
$ |
14,939 |
|
|
$ |
16,343 |
|
| Cost of revenues (exclusive of amortization of deferred stock compensation of $48, $110, $32 and $106 for the three and
nine months ended September 30, 2002 and three and nine months ended September 30, 2001, respectively) |
|
|
2,401 |
|
|
|
7,468 |
|
|
|
6,022 |
|
|
|
15,084 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit (loss) |
|
|
2,805 |
|
|
|
(4,280 |
) |
|
|
8,917 |
|
|
|
1,259 |
|
| Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Research and development (exclusive of amortization of deferred stock compensation of $65, $161, $61 and $204 for the
three and nine months ended September 30, 2002 and three and nine months ended September 30, 2001, respectively) |
|
|
1,889 |
|
|
|
3,116 |
|
|
|
4,945 |
|
|
|
7,619 |
|
| Sales and marketing (exclusive of amortization of deferred stock compensation of $75, $195, $65 and $216 for the three
and nine months ended September 30, 2002 and three and nine months ended September 30, 2001, respectively) |
|
|
1,244 |
|
|
|
1,365 |
|
|
|
3,675 |
|
|
|
4,419 |
|
| General and administrative (exclusive of amortization of deferred stock compensation of $125, $325, $314 and $621 for
the three and nine months ended September 30, 2002 and three and nine months ended September 30, 2001, respectively) |
|
|
1,241 |
|
|
|
1,111 |
|
|
|
3,622 |
|
|
|
3,340 |
|
| Amortization of deferred stock compensation |
|
|
313 |
|
|
|
472 |
|
|
|
791 |
|
|
|
1,147 |
|
| In-process research and development |
|
|
2,200 |
|
|
|
— |
|
|
|
2,200 |
|
|
|
— |
|
| Restructuring |
|
|
(112 |
) |
|
|
— |
|
|
|
(112 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
|
6,775 |
|
|
|
6,064 |
|
|
|
15,121 |
|
|
|
16,525 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss from operations |
|
|
(3,970 |
) |
|
|
(10,344 |
) |
|
|
(6,204 |
) |
|
|
(15,266 |
) |
| Interest expense |
|
|
13 |
|
|
|
26 |
|
|
|
48 |
|
|
|
99 |
|
| Interest income and other, net |
|
|
245 |
|
|
|
1,086 |
|
|
|
789 |
|
|
|
3,153 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss before taxes |
|
|
(3,738 |
) |
|
|
(9,284 |
) |
|
|
(5,463 |
) |
|
|
(12,212 |
) |
| Provision for income taxes |
|
|
— |
|
|
|
3,154 |
|
|
|
— |
|
|
|
2,276 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
$ |
(3,738 |
) |
|
$ |
(12,438 |
) |
|
$ |
(5,463 |
) |
|
$ |
(14,488 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
$ |
(0.13 |
) |
|
$ |
(0.42 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.50 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Diluted |
|
$ |
(0.13 |
) |
|
$ |
(0.42 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.50 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Shares used to compute net loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
|
29,869 |
|
|
|
29,447 |
|
|
|
29,837 |
|
|
|
28,996 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Diluted |
|
|
29,869 |
|
|
|
29,447 |
|
|
|
29,837 |
|
|
|
28,996 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
Sirenza Microdevices, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
| |
|
Nine Months Ended
|
|
| |
|
September 30, 2002
|
|
|
September 30, 2001
|
|
| Operating Activities |
|
|
|
|
|
|
|
|
| Net loss |
|
$ |
(5,463 |
) |
|
$ |
(14,488 |
) |
| Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
| Depreciation and amortization |
|
|
2,136 |
|
|
|
2,091 |
|
| Deferred tax assets |
|
|
— |
|
|
|
2,277 |
|
| Retirement of property and equipment |
|
|
56 |
|
|
|
— |
|
| Abandoned and impaired equipment |
|
|
— |
|
|
|
1,468 |
|
| Amortization of deferred stock compensation |
|
|
791 |
|
|
|
1,147 |
|
| In-process research and development |
|
|
2,200 |
|
|
|
— |
|
| Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
| Accounts receivable |
|
|
(519 |
) |
|
|
2,500 |
|
| Inventories |
|
|
(208 |
) |
|
|
5,039 |
|
| Other assets |
|
|
(138 |
) |
|
|
572 |
|
| Accounts payable |
|
|
348 |
|
|
|
(495 |
) |
| Accrued expenses |
|
|
56 |
|
|
|
(940 |
) |
| Accrued restructuring |
|
|
(632 |
) |
|
|
— |
|
| Deferred margin on distributor inventory |
|
|
(1,596 |
) |
|
|
(2,200 |
) |
| |
|
|
|
|
|
|
|
|
| Net cash used in operating activities |
|
|
(2,969 |
) |
|
|
(3,029 |
) |
| Investing Activities |
|
|
|
|
|
|
|
|
| Sales/maturities of available-for-sale securities, net |
|
|
1,551 |
|
|
|
(16,556 |
) |
| Purchases of property and equipment |
|
|
(363 |
) |
|
|
(2,764 |
) |
| Purchase of Xemod, net of cash received |
|
|
(4,720 |
) |
|
|
|
|
| Investment in GCS |
|
|
(6,126 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
| Net cash used in investing activities |
|
|
(9,658 |
) |
|
|
(19,320 |
) |
| Financing Activities |
|
|
|
|
|
|
|
|
| Principal payments on capital lease obligations |
|
|
(574 |
) |
|
|
(547 |
) |
| Purchase of treasury shares |
|
|
(165 |
) |
|
|
— |
|
| Proceeds from employee stock plans |
|
|
436 |
|
|
|
2,988 |
|
| |
|
|
|
|
|
|
|
|
| Net cash provided by (used in) financing activities |
|
|
(303 |
) |
|
|
2,441 |
|
| Decrease in cash |
|
|
(12,930 |
) |
|
|
(19,908 |
) |
| Cash and cash equivalents at beginning of period |
|
|
15,208 |
|
|
|
37,683 |
|
| Cash and cash equivalents at end of period |
|
$ |
2,278 |
|
|
$ |
17,775 |
|
| |
|
|
|
|
|
|
|
|
| Supplemental disclosures of noncash investing and financing activities |
|
|
|
|
|
|
|
|
| Conversion of GCS loan receivable |
|
$ |
1,374 |
|
|
$ |
— |
|
See accompanying notes.
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the
United States for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three-month
and nine month periods ended September 30, 2002 are not necessarily indicative of the results that may be expected for any subsequent period or for the year as a whole.
The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes
required by accounting principles generally accepted in the United States for complete financial statements.
The
accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Sirenza Microdevices, Inc. (the Company) for the fiscal year ended December 31, 2001, which are
included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 27, 2002.
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated.
The Company operates on thirteen-week fiscal quarters ending on the Sunday closest to the end of the calendar quarter, with the exception
of the fourth quarter, which ends on December 31. The Company’s third quarter of fiscal year 2002 ended on September 29, 2002. The Company’s third quarter of fiscal year 2001 ended on September 30, 2001. For presentation purposes, the
accompanying unaudited condensed consolidated financial statements refer to the quarter’s calendar month end for convenience.
Note 2: Business Combinations
On August 14, 2002, the board of directors of the Company approved the
acquisition of Xemod Incorporated (“Xemod”), a California corporation and a designer and fabless manufacturer of radio frequency (“RF”) power amplifier modules and components based on patented lateral double-diffused transistor
(LDMOS) technology. The Company’s results of operations include the effect of Xemod from September 11, 2002, the date the acquisition closed. The merger consideration was approximately $4.9 million in cash and accrued transaction costs, with
additional cash consideration for the achievement of technology licensing objectives within 210 days of the closing of the acquisition. If the technology licensing objectives are achieved the liability related to the additional consideration will be
recorded as additional goodwill or another element of the transaction. The future cash payout of additional consideration, if any, will be payable within 15 days following the date upon which technology licensing objectives are achieved. The Company
funded the acquisition using cash on hand. The acquisition is intended to strengthen the Company’s product portfolio of RF components by adding higher power amplifier products.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 141, the Company allocated the purchase price of its acquisition of Xemod to the tangible assets,
liabilities and intangible assets acquired, as well as in-process research and development, based on their estimated fair values. The excess purchase price over those fair values has been recorded as goodwill. The fair value assigned to intangible
assets acquired was determined through established valuation techniques using estimates made by management. The goodwill resulting from this acquisition has been assigned to the Integrated Power Products business area. In accordance with SFAS No.
142, goodwill and purchased intangibles with indefinite lives acquired after June 30, 2001 are not amortized but will be reviewed periodically for impairment. Purchased intangibles with finite lives will be amortized on a straight-line basis over
their respective useful lives.
The total purchase price of approximately $4.9 million has been allocated as
follows (in thousands):
| |
|
|
|
|
| Net tangible assets and liabilities acquired (excluding accrued restructuring) |
|
$ |
1,521 |
|
| Amortizable intangible assets: |
|
|
|
|
| Patented core technology |
|
|
700 |
|
| Internal use software |
|
|
70 |
|
| Goodwill |
|
|
834 |
|
| Accrued Restructuring |
|
|
(393 |
) |
| In-process research and development |
|
|
2,200 |
|
| |
|
|
|
|
| Total purchase price |
|
$ |
4,932 |
|
| |
|
|
|
|
Amortizable intangible assets
Of the total purchase price, approximately $770,000 has been allocated to amortizable intangible assets including patented core technology
($700,000) and internal-use software ($70,000). Patented core technology consists of semiconductor and module
intellectual property and proprietary knowledge that is technologically feasible. Xemod’s technology is designed for high power RF
amplifiers in the wireless communications infrastructure market. The Company intends to leverage this proprietary knowledge to develop new technology and improved products. The Company will amortize the patented core technology on a straight-line
basis over a period of three to five years, which represents the estimated useful life of the patented core technology.
Internal-use
software consists of proprietary test software that was developed internally and integral to Xemod’s daily operations. The Company intends to utilize this internal-use software in the manufacturing of modules and components. The Company will
amortize internal-use software on a straight-line basis over a period of three years, which represents the estimated useful life of the internal-use software.
In-process research & development
Of the total
purchase price, $2.2 million has been allocated to in-process research & development (“IPR&D”) and was expensed in the third quarter of 2002. Projects that qualify as IPR&D are those that have not yet reached technological
feasibility and for which no alternative future use exists. Technological feasibility is defined as being equivalent to a beta-phase working prototype in which there is no remaining risk relating to the development.
The fair value assigned to IPR&D was determined using the income approach. The income approach estimates costs to develop the
purchased IPR&D into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. The revenue estimates used to value the purchased IPR&D
were based on estimates of the relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by Xemod.
The rates utilized to discount the net cash flows to their present values are based on Xemod’s weighted average cost of capital, calculated employing estimates of
required equity rates of return and after-tax costs of debt based on a group of peer companies. The weighted average cost of capital was adjusted to reflect the difficulties and uncertainties in completing each project and thereby achieving
technological feasibility, the percentage of completion of each project, anticipated market acceptance and penetration, market growth rates and risks related to the impact of potential changes in future target markets. Based on these factors,
discount rates that range from 32% - 36% were deemed appropriate for valuing the IPR&D.
The Company believes
the amounts determined for IPR&D and patented core technology are reasonable estimates of fair value and do not exceed the amounts a third party would pay for these projects. The estimates used in valuing IPR&D were based upon assumptions
believed to be reasonable but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Accordingly, actual results may differ from the projected
results.
Pro forma results
The following unaudited pro forma financial information presents the
combined results of operations of the Company and Xemod as if the acquisition had occurred as of the beginning of the periods presented. The results for the three and nine month periods ended September 30, 2002 include the results of Xemod from
September 11, 2002 (the acquisition date). Adjustments have been made to the combined results of operations for the three and nine-month periods ended September 30, 2002 and 2001, respectively, reflecting amortization of purchased intangibles and
the effect on interest income of $4.9 million in cash and accrued transaction costs incurred by the Company to acquire Xemod, as if the acquisition had occurred at the beginning of the periods presented. The unaudited pro forma financial information
is not intended to represent or be indicative of the consolidated results of operations or financial condition of the Company that would have been reported had the acquisition been completed as of the dates presented, and should not be taken as
representative of the future consolidated results of operations or financial condition of the Company.
| |
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
| |
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
| |
|
(in thousands, except per share data) |
|
| Net revenues |
|
$ |
5,621 |
|
|
$ |
3,420 |
|
|
$ |
16,511 |
|
|
$ |
17,052 |
|
| Loss before extraordinary item and cumulative effect of change in accounting principle |
|
|
(5,195 |
) |
|
|
(14,094 |
) |
|
|
(9,341 |
) |
|
|
(21,903 |
) |
| Net loss |
|
|
(5,195 |
) |
|
|
(14,094 |
) |
|
|
(9,341 |
) |
|
|
(21,903 |
) |
| Basic net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss before extraordinary item and cumulative effect of change in accounting principle |
|
$ |
(0.17 |
) |
|
$ |
(0.48 |
) |
|
$ |
(0.31 |
) |
|
$ |
(0.76 |
) |
| Net loss |
|
$ |
(0.17 |
) |
|
$ |
(0.48 |
) |
|
$ |
(0.31 |
) |
|
$ |
(0.76 |
) |
The unaudited pro forma financial information above includes the
following material, non-recurring charges: development fees (research and development) of $1.8 million in the nine-month period ended September 30, 2001 and purchased IPR&D charges of $2.2 million in the three and nine-month periods ended
September 30, 2002, respectively.
Note 3: Inventories
The Company plans production based on orders received and forecasted demand and must order wafers and other raw materials and build inventories well in advance of product
shipments. The valuation of inventories at the lower of cost or market requires the use of estimates regarding the amounts of current inventories that will be sold. These estimates are dependent on the Company’s assessment of current and
expected orders from its customers, including consideration that orders are subject to cancellation with limited advance notice prior to shipment. Because the Company’s markets are volatile, and are subject to technological risks and price
changes as well as inventory reduction programs by the Company’s customers and distributors, there is a risk that the Company will forecast incorrectly and produce excess inventories of particular products. This inventory risk is compounded
because many of the Company’s customers place orders with short lead times. As a result, actual demand will differ from forecasts, and such a difference has in the past and may in the future have a material adverse effect on actual results of
operations. For example, in the third quarter of 2001, the Company recorded a provision for excess inventories totaling $4.5 million. This additional excess inventory charge was due to a significant decrease in forecasted demand for the
Company’s products and was calculated in accordance with the Company’s policy, which is based on inventory levels in excess of demand for each specific product.
In the first, second and third quarters of 2002, the Company sold inventory products that were previously reserved and accordingly, reduced its provision for excess
inventories by approximately $563,000, $566,000 and $726,000, respectively. The Company may sell previously reserved inventory products in future periods, which would have a similarly positive impact on the Company’s results of operations.
Inventories consist of (in thousands):
| |
|
September 30, 2002
|
|
December 31, 2001
|
| |
|
(unaudited) |
|
|
| Raw materials |
|
$ |
127 |
|
$ |
242 |
| Work-in-process |
|
|
1,502 |
|
|
1,572 |
| Finished goods |
|
|
619 |
|
|
80 |
| |
|
|
|
|
|
|
| Total |
|
$ |
2,248 |
|
$ |
1,894 |
| |
|
|
|
|
|
|
Note 4: Investment in GCS
In the first quarter of 2002, the Company converted an outstanding loan receivable of approximately $1.4 million and invested cash of
approximately $6.1 million in Global Communication Semiconductors, Inc. (GCS), a privately held semiconductor foundry, in exchange for 12.5 million shares of GCS Series D-1 preferred stock valued at $0.60 per share. The Company’s total
investment of $7.5 million represented approximately 14% of the outstanding voting shares of GCS at the time of the investment. The investment in
GCS was within the Company’s strategic focus and intended to strengthen the Company’s supply chain for Indium Gallium Phosphide
(InGaP) and Indium Phosphide (InP) process technologies. In connection with the investment, the Company’s President and CEO joined GCS’ seven-member board of directors.
The Company accounted for its investment in GCS under the cost method of accounting in accordance with accounting principles generally accepted in the United States, as the
Company’s investment was less than 20% of the voting stock of GCS and the Company cannot exercise significant influence over GCS. The investment in GCS is classified as a non-current asset on the Company’s consolidated balance sheet.
On a quarterly basis, the Company evaluates its investment in GCS to determine if an other than temporary decline
in value has occurred. Factors that may cause an other than temporary decline in the value of the Company’s investment in GCS would include, but not be limited to, a degradation of the general business environment in which GCS operates, the
failure of GCS to achieve certain milestones or a series of operating losses in excess of GCS’ then current business plan, the inability of GCS to continue as a going concern and a reduced valuation as determined by a new financing event. There
is no public market for securities of GCS, and the factors mentioned above may require management to make significant judgments about the fair value of such securities. If the Company determines that an other than temporary decline in value has
occurred, the Company will write-down its investment in GCS to fair value. Such a write-down could have a material adverse impact on the Company’s consolidated results of operations in the period in which it occurs. As of September 30, 2002 the
Company’s investment in GCS had not experienced an other than temporary decline in value.
The realizability
of the Company’s $7.5 million investment in GCS is ultimately dependent on the Company’s ability to sell its GCS shares, for which there is currently no public market and may be dependent on market conditions surrounding the wireless
communications industry and the related semiconductor foundry industry, as well as, public markets receptivity to liquidity events such as initial public offerings or merger and acquisition activities. Even if the Company is able to sell its GCS
shares, the sale price may be less than the price paid by the Company, which could have a material adverse effect on the Company’s consolidated results of operations.
Note 5: Restructuring Activities
During the
third quarter of 2002, in connection with the acquisition of Xemod, the Company’s management approved and initiated plans to restructure the operations of the Xemod organization. The Company recorded $393,000 to eliminate certain duplicative
facilities and for employee termination costs. These costs are accounted for under Emerging Issues Task Force (“EITF”) Issue No. 95-3, “Recognition of Liabilities in Connection with Purchase Business Combinations.” These costs
were recognized as a liability assumed in the purchase business combination and included in the allocation of the cost to acquire Xemod and, accordingly, have been included as an increase to
goodwill.
The restructuring charges recorded in the third quarter are based on the Company’s restructuring plans that have been committed to by management. Changes to the estimates of executing the currently approved plans of
restructuring the Xemod organization will be recorded as an increase or decrease to goodwill.
Acquisition-Related Restructuring Costs
Capitalized in Fiscal 2002 as a Cost of Acquisition
The restructuring plans included $393,000 incurred in
connection with restructuring the operations of Xemod that was recognized as a liability assumed in the purchase business combination and included in the allocation of the cost to acquire Xemod. This restructuring liability consisted of $28,000 of
severance and $365,000 of costs of vacating duplicate facilities.
The $28,000 of severance resulted from the
termination of one employee located in the United States and engaged in general and administrative activities. The employee was terminated in the third quarter of 2002.
The $365,000 of costs of exiting duplicative facilities related to noncancelable lease costs. The Company estimated the cost of duplicative facilities based on the
contractual terms of its noncancelable lease agreement. Given the current and expected real estate market conditions, the Company assumed that the exited facility would not be subleased. However, to the extent the Company does sublease the
duplicative facility, the proceeds received from subleasing will result in a decrease to goodwill.
As of
September 30, 2002, the balance of the accrued restructuring charges capitalized as a cost of acquisition in the third quarter of 2002 consisted of the following (in thousands):
| |
|
Amount Charged to Goodwill
|
|
Cash Payments
|
|
Non-cash Charges
|
|
Accrued Restructuring Balance at September, 30 2002
|
| Severance |
|
$ |
28 |
|
$ |
— |
|
$ |
— |
|
$ |
28 |
| Duplicative facilities |
|
|
365 |
|
|
— |
|
|
— |
|
$ |
365 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
393 |
|
$ |
— |
|
$ |
— |
|
$ |
393 |
The cash expenditures relating to the terminated employee are
expected to be paid in the fourth quarter of 2002. The cash expenditures relating to the duplicative facility lease commitments are expected to be paid over the term of the lease through 2005.
The Company will evaluate its restructuring accrual at each balance sheet date for appropriateness. If the Company determines its restructuring accrual is no longer
appropriate, the Company will adjust its restructuring liability accordingly. Any adjustment to the Company’s restructuring liability will
result in an increase or decrease to goodwill.
2001 Restructuring Activities
In 2001, companies throughout the worldwide telecommunication industry announced slowdowns or delays in the build out of new wireless and
wireline infrastructure. This resulted in lower equipment production volumes by the Company’s customers and efforts to lower their component inventory levels. These actions by the Company’s customers resulted in a slowdown in shipments and
a reduction in visibility regarding future sales and caused the Company to revise its cost structure given the then revised revenue levels. As a result, in the fourth quarter of 2001, the Company incurred a restructuring charge of $2.7 million
related to a worldwide workforce reduction and consolidation of excess facilities. The Company realigned its organizational structure to focus on strategic account sales and marketing efforts, centralized engineering and customer and solution
business area management. Prior to the date of the financial statements, management with the appropriate level of authority approved and committed the Company to a plan of termination and consolidation of excess facilities which included the
benefits terminated employees would receive. In addition, prior to the date of the financial statements, the termination benefits were communicated to employees in detail sufficient to enable them to determine the nature and amounts of their
individual severance benefits.
Worldwide Workforce Reduction
In the fourth quarter of 2001, the Company recorded a charge of $481,000 primarily related to severance and fringe benefits associated with the termination of 27 employees.
Of the 27 terminations, 12 were engaged in manufacturing activities, seven were engaged in research and development activities, five were engaged in sales and marketing activities and three were engaged in general and administrative activities. In
addition, of the 27 terminations, 23 were from sites located in the United States, three were from our Canadian design center and one was from our European sales office.
The workforce reductions began and were concluded in the fourth quarter of 2001 with substantially all of the severance related benefits paid in the fourth quarter of 2001.
Consolidation of Excess Facilities
In the fourth quarter of 2001, the Company recorded a charge of approximately $2.2 million for excess facilities primarily relating to noncancelable lease costs. The
Company estimated the cost for excess facilities based on the contractual terms of its noncancelable lease agreements. Given the then current and expected real estate market conditions, the Company assumed none of the excess facilities would be
subleased. To date, none of the facilities have been subleased. However, to the extent the Company does sublease any of its excess facilities, the proceeds received from subleasing will be credited to
restructuring charges, the same statement of operations line item originally charged for such excess facilities.
The following table summarizes the activity related to the Company’s accrued restructuring balance during the third quarter of 2002
(in thousands):
| |
|
Accrued Restructuring Balance at June
30, 2002
|
|
Cash Payments
|
|
|
Non-cash Charges
|
|
|
Accrued Restructuring Balance at September, 30 2002
|
| Worldwide workforce reduction |
|
$ |
17 |
|
$ |
— |
|
|
$ |
(17 |
) |
|
$ |
— |
| Lease commitments |
|
|
1,796 |
|
|
(178 |
) |
|
|
(95 |
) |
|
|
1,523 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
1,813 |
|
$ |
(178 |
) |
|
$ |
(112 |
) |
|
$ |
1,523 |
The following table summarizes the restructuring costs and
activities through September 30, 2002 (in thousands):
| |
|
Amount Charged
to Restructuring
|
|
Cash Payments
|
|
|
Non-cash Charges
|
|
|
Accrued Restructuring Balance at September, 30 2002
|
| Worldwide workforce reduction |
|
$ |
481 |
|
$ |
(464 |
) |
|
$ |
(17 |
) |
|
$ |
— |
| Lease commitments |
|
|
2,189 |
|
|
(571 |
) |
|
|
(95 |
) |
|
|
1,523 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
2,670 |
|
$ |
(1,035 |
) |
|
$ |
(112 |
) |
|
$ |
1,523 |
The remaining cash expenditures related to the noncancelable lease
commitments are expected to be paid over the respective lease terms through 2006.
At each balance sheet date, the
Company evaluates its restructuring accrual for appropriateness. In the third quarter of 2002, the Company determined that $112,000 of its restructuring accrual was no longer appropriate as of September 30, 2002 and adjusted its restructuring
liability accordingly. The $112,000 restructuring liability adjustment was recorded through the same income statement line item that was used when the liability was initially recorded, or restructuring.
Of the $112,000 restructuring liability adjustment, $95,000 related to a non-cancelable operating lease that the Company determined would
not be abandoned. The remaining $17,000 related to termination benefits that were never redeemed by terminated employees.
Note 6: Stockholders’ Equity
In the third quarter of 2002, the Company’s board of directors authorized the repurchase of up to $4.0 million of the Company’s
common stock from time to time based on the price per share of its common stock and general market conditions.Purchases may be made at management’s discretion in the open market or in private transactions at negotiated prices. In the third
quarter of 2002, the Company repurchased 100,000 shares for an aggregate price of $165,000.
In the third quarter
of 2002, the Company’s board of directors approved a voluntary stock option exchange program for employees and directors. Under the program eligible employees and directors were given the opportunity to exchange certain unexercised stock
options for new options to be granted at least six months and one day following the cancellation of the exchanged options. The new options will be exercisable for an equal number of shares as the exchanged option and the exercise price of the new
options will be equal to the fair market value of the Company’s common stock at the time the new options are granted. On September 19, 2002, the Company cancelled options to purchase 2,416,416 shares of the Company’s common stock. In
exchange for those options canceled, the Company will grant new options to purchase an aggregate of up to 2,416,416 shares of the Company’s common stock sometime on or after March 20, 2003. In connection with the option exchange program, the
Company incurred accelerated amortization of deferred stock compensation of approximately $74,000 in the third quarter.
Note
7: Net Income (Loss) Per Share
The Company computes net income (loss) per share in accordance with
SFAS No. 128, “Earnings per Share” and SEC Staff Accounting Bulletin No. 98 (SAB 98). Under the provisions of FAS 128 and SAB 98, basic net income (loss) per share is computed by dividing the net income (loss) applicable to common
stockholders for the period by the weighted average number of shares of Common Stock outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) applicable to common stockholders for the period by
the weighted average number of shares of Common Stock and potential Common Stock equivalents outstanding during the period, if dilutive. Potential Common Stock equivalents include incremental shares of Common Stock issuable upon the exercise of
stock options.
The following table sets forth the computation of basic and diluted net loss per share for the
periods indicated (in thousands, except per share data):
| |
|
Three Months Ended September
30,
|
|
|
Nine Months Ended September
30,
|
|
| |
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
| Net loss |
|
$ |
(3,738 |
) |
|
$ |
(12,438 |
) |
|
$ |
(5,463 |
) |
|
$ |
(14,488 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average common shares outstanding |
|
|
29,869 |
|
|
|
29,447 |
|
|
|
29,837 |
|
|
|
28,996 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss per share |
|
$ |
(0.13 |
) |
|
$ |
(0.42 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.50 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of options to purchase 2,289,282 and 4,316,361 shares of Common Stock
at average exercise prices of $2.20 and $9.81 for the three and nine months ended September 30, 2002 and September 30, 2001, respectively, has not been included in the computation of diluted net loss per share as their effect is antidilutive.
Note 8: Comprehensive Income (Loss)
The Company’s comprehensive net loss was the same as its net loss for the three and nine months ended September 30, 2002 and 2001.
Note 9: Segments of an Enterprise and Related Information
The Company has adopted SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information”. SFAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS 131 also establishes
standards for related disclosures about products and services, geographic areas, and major customers. The Company’s chief operating decision maker (CODM), the Chief Executive Officer of the Company, evaluates performance and allocates resources
based on segment reporting operating income (loss).
From 2000 to 2001, the Company operated under two business
segments: (1) the Standard Products segment and (2) the Wireless Infrastructure Products segment. At the beginning of 2002, in response to the changes in the market place, the Company reorganized to focus on end markets. As a result of this
reorganization, the Company operated in three business segments through the date of the acquisition of Xemod. As a result of the acquisition, the Company now operates in four business segments. First is the Wireless Applications business area. This
business area is responsible for all wireless infrastructure activity, excluding high power amplifier products, both standard and specialized. Second is the Wireline Applications business area. This business area is responsible for the development
and marketing of wireline components to both CATV and fiber optics markets. Third is the Terminals business area. This business area focuses on customers who use the Company’s products for applications outside of the Company’s core markets
of wireless and wireline infrastructure, such as cable television set-top boxes and wireless video transmitters. Last is the Integrated Power Products business area. This business area focuses on high power amplifier products for wireless
communication and networking infrastructure markets. The Company’s reportable segments are organized as separate functional units with separate management teams and separate performance assessment and resource allocation processes.
The accounting policies of each segment are the same as those described in Note 1: Organization and Summary of
Significant Accounting Policies of the Notes to Consolidated Financial Statements as reflected in the Company’s Annual Report on Form 10-K, filed with the SEC on March 27, 2002. There are no intersegment sales. Non-segment items include certain
corporate manufacturing expenses, advanced research and development expenses, certain sales expenses, general and administrative expenses, amortization of deferred stock compensation, in-process research and development, restructuring charges,
interest income and other, net, interest expense, and the provision for income taxes, as the aforementioned items are not allocated for purposes of the CODM’s review. Assets and liabilities are not discretely reviewed by the CODM.
| |
|
Wireless Applications
|
|
|
Wireline Applications
|
|
|
Terminals Applications
|
|
Integrated Power Products
|
|
|
Total Segments
|
|
|
Non- Segment
Items
|
|
|
Total Company
|
|
| |
|
(in thousands) |
|
| For the three months ended September 30, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net revenues from external customers |
|
$ |
4,618 |
|
|
$ |
57 |
|
|
$ |
397 |
|
$ |
134 |
|
|
$ |
5,206 |
|
|
$ |
— |
|
|
$ |
5,206 |
|
| Operating income (loss) |
|
$ |
1,080 |
|
|
$ |
(148 |
) |
|
$ |
104 |
|
$ |
(254 |
) |
|
$ |
782 |
|
|
$ |
(4,752 |
) |
|
$ |
(3,970 |
) |
| For the nine months ended September 30, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net revenues from external customers |
|
$ |
13,070 |
|
|
$ |
319 |
|
|
$ |
1,519 |
|
$ |
134 |
|
|
$ |
15,042 |
|
|
$ |
(103 |
) |
|
$ |
14,939 |
|
| Operating income (loss) |
|
$ |
3,535 |
|
|
$ |
(631 |
) |
|
$ |
246 |
|
$ |
(254 |
) |
|
$ |
2,896 |
|
|
$ |
(9,100 |
) |
|
$ |
(6,204 |
) |
| For the three months ended September 30, 2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net revenues from external customers |
|
$ |
2,240 |
|
|
$ |
68 |
|
|
$ |
1,092 |
|
$ |
— |
|
|
$ |
3,400 |
|
|
$ |
(212 |
) |
|
$ |
3,188 |
|
| Operating income (loss) |
|
$ |
(837 |
) |
|
$ |
(508 |
) |
|
$ |
2 |
|
$ |
— |
|
|
$ |
(1,343 |
) |
|
$ |
(9,001 |
) |
|
$ |
(10,344 |
) |
| For the nine months ended September 30, 2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net revenues from external customers |
|
$ |
9,845 |
|
|
$ |
128 |
|
|
$ |
6,683 |
|
$ |
— |
|
|
$ |
16,656 |
|
|
$ |
(313 |
) |
|
$ |
16,343 |
|
| Operating income (loss) |
|
$ |
1,289 |
|
|
$ |
(1,334 |
) |
|
$ |
2,747 |
|
$ |
— |
|
|
$ |
2,702 |
|
|
$ |
(17,968 |
) |
|
$ |
(15,266 |
) |
The Integrated Power Products business area was established as a
result of the acquisition of Xemod. Net revenues from external customers and operating income (loss) for the Company’s Integrated Power Products business area only reflect such segment information from the date of acquisition. The corresponding
items of segment information for earlier periods has not been restated, as it is impractical to do so.
Note 10: Contingency
In November 2001, the Company, various of its officers and certain underwriters of its initial public offering of securities were named in a purported class action lawsuit
filed in the United States District Court for the Southern District of New York. The suit, Van Ryen v. Sirenza Microdevices, Inc., et al., Case No. 01-CV-10596, alleges that various underwriters engaged in improper and undisclosed activities related
to the allocation of shares in the Company’s initial public offering, including obtaining commitments from investors to purchase shares in the aftermarket at pre-arranged prices. Similar lawsuits concerning more than 300 other companies’
initial public offerings were filed during 2001, and this lawsuit is being coordinated with those actions (the “coordinated litigation”). The Plaintiffs, who filed an amended complaint on or about April 19, 2002, bring claims for violation
of several provisions of the federal securities laws and seek an unspecified amount of damages. On or about July 1, 2002, an omnibus motion to dismiss was filed in the coordinated litigation on behalf of the issuer defendants, of which the Company
and its named officers and directors are a part, on common pleadings issues. On October 8, 2002, pursuant to stipulation by the parties, the court dismissed the officer defendants from the action without prejudice. The Company believes that the
allegations against it are without merit and intends to defend the litigation vigorously. However, there can be no assurance as to the ultimate outcome of this lawsuit and an adverse outcome to this litigation could have a material adverse effect on
the Company’s consolidated balance sheet, statement of operations or cash flows. Even if the Company is entirely successful in defending this lawsuit, it may incur significant legal expenses and its management may expend significant time in the
defense.
Note 11: Impact of Recently Issued Accounting Standards
In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”
SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)” and must be applied for activities initiated after December 31, 2002. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the
liability is incurred rather than when the exit or disposal plan is approved. The adoption of the standard will affect the timing of recognition of certain charges in restructuring activities if the Company has any in the future.
Note 12: Subsequent Event
In the fourth quarter of 2002, the Company announced it is in discussions to acquire Vari-L Company, Inc., (“Vari-L”) a designer and manufacturer of complementary RF components using
technologies common to existing and planned products of the Company. In connection with the acquisition discussions, the Company agreed to provide Vari-L with a secured bridge loan facility of up to $5.3 million. The loan facility is secured by the
majority of Vari-L’s assets and includes all intangible assets such as: patents, trademarks and mask works. The loan facility also provides for a portion of the principal amounts to be convertible into approximately 19.9% of Vari-L’s
fully diluted common stock under certain conditions. As of November 12, 2002, Vari-L had drawn down approximately $2.6 million of the secured
bridge loan facility.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report are forward-looking statements
that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,”
“should,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “potential,” or “continue,” the negative of these terms or other comparable
terminology. These statements involve a number of risks and uncertainties. Actual events or results may differ materially from any forward-looking statement as a result of various factors, including those described below under “Risk
Factors.”
Critical Accounting Policies and Estimates
The discussion and analysis below of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair
presentation have been included. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosure of contingent assets and
liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. We evaluate these estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies require the most significant judgments and estimates to be made in the
preparation of our consolidated financial statements.
Investments: In the first
quarter of 2002, we converted an outstanding loan receivable of approximately $1.4 million and invested cash of approximately $6.1 million in Global Communication Semiconductors, Inc. (GCS), a privately held semiconductor foundry, in exchange for
12.5 million shares of GCS Series D-1 preferred stock valued at $0.60 per share. Our total investment of $7.5 million represented approximately 14% of the outstanding voting shares of GCS at the time of the investment. The investment in
GCS was within our strategic focus and intended to strengthen our supply chain for InGaP and InP process technologies. In connection with the
investment, our President and CEO joined GCS’ seven-member board of directors.
We accounted for our
investment in GCS under the cost method of accounting in accordance with accounting principles generally accepted in the United States, as our investment was less than 20% of the voting stock of GCS and we cannot exercise significant influence over
GCS. The investment in GCS is classified as a non-current asset on our consolidated balance sheet.
On a quarterly
basis, we evaluate our investment in GCS to determine if an other than temporary decline in value has occurred. Factors that may cause an other than temporary decline in the value of our investment in GCS would include, but not be limited to, a
degradation of the general business environment in which GCS operates, the failure of GCS to achieve certain milestones or a series of operating losses in excess of GCS’ then current business plan, the inability of GCS to continue as a going
concern and a reduced valuation as determined by a new financing event. There is no public market for GCS, and the factors mentioned above may require management to make significant judgments about the fair value of such securities. If we determine
that an other than temporary decline in value has occurred, we will write-down our investment in GCS to fair value. Such a write-down could have a material adverse impact on our consolidated results of operations in the period in which it occurs. As
of September 30, 2002 our investment in GCS had not experienced an other than temporary decline in value.
Our
ultimate ability to realize our investment in GCS in the future may be dependent on the market conditions surrounding the wireless communications industry and the related semiconductor foundry industry, as well as the public markets receptivity to
liquidity events such as initial public offerings or mergers and acquisition activities.
Business
Combinations: We are required to allocate the purchase price of an acquired company to the tangible and intangible assets acquired, liabilities assumed, as well as IPR&D based on their estimated fair values. Such a
valuation requires management to make significant estimates and assumptions, especially with respect to intangible assets.
Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows from acquired patented core technology; expected costs to develop the IPR&D into commercially viable
products and estimating cash flows from the projects when completed; and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.
Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.
Excess and Obsolete Inventories: We record
provisions for excess inventories based on levels of inventory exceeding the forecasted demand of such products within specific time horizons, generally six months or less. We forecast demand for specific products based on the number of products we
expect to sell, with such assumptions dependent on our assessment of market conditions and current and expected orders from our customers, considering that orders are subject to cancellation with limited advance notice prior to shipment. If
forecasted demand decreases based on our estimates or if inventory levels increase disproportionately to forecasted demand, additional inventory write-downs may be required, as was the case in 2001 when we recorded additional provisions for excess
inventories of $7.8 million. Likewise, if we ultimately sell inventories that were previously reserved, we would reduce the previously recorded excess inventory provisions which would have a positive impact on our cost of revenues, gross margin and
operating results, as was the case in the first, second and third quarters of 2002 when we sold a total of $1.9 million of previously reserved inventory products.
Valuation of Deferred Tax Assets: We record a valuation allowance to reduce our deferred tax assets to the amount that management believes is
more likely than not to be realized. Each quarter management evaluates the required criteria necessary to support deferred tax assets, including recoverable income taxes and sources of future taxable income, and adjusts the valuation allowance
accordingly. Increases or decreases in the valuation allowance serve to increase or decrease the Company’s income tax expense in the period such adjustments are recorded. Due to current and continuing uncertain economic conditions in our
industry, management believes that as of September 28, 2002, it is more likely than not that our deferred tax assets will not be realized and no net deferred tax assets are recorded on our balance sheet as of that date. Management will continue to
evaluate the need for a valuation allowance in subsequent quarters. If it is subsequently determined that some or all or our deferred tax assets will more likely than not be realized, we will reduce our valuation allowance in the quarter such
determination is made.
Valuation of Long-lived Assets and Intangible Assets: We
record impairment charges for long-lived assets and intangible assets with finite useful lives when impairment indicators exist and the related undiscounted future cash flows and fair values are less than the carrying value of such assets, as was
the case in 2001 when we recorded $315,000 of impairment charges on long-lived assets. Future adverse changes in market conditions or changes in the estimated useful life of our long-lived assets or intangible assets with finite useful lives could
result in new impairment indicators, thereby possibly resulting in impairment charges in the future.
Allowance
for Doubtful Accounts: We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments, additional allowance may be required. To date, we have not experienced material losses as a result of our customers’ inability to pay us.
Sales Returns: We record estimated reductions to
revenues for sales returns, primarily related to quality issues, at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our foundry and
packaging partners, our sales return obligations are affected by failure rates. Should actual product failure rates and the resulting return of failed products differ from our estimates, revisions to our sales return reserves may be required.
In addition to the above critical accounting policies we consider the following accounting policies to be very
important in the preparation of our consolidated financial statements:
Restructuring
Charges: We recorded restructuring charges of $2.7 million in the fourth quarter of 2001 and $393,000, as an increase to goodwill, in the third quarter of 2002 with the assumption that we would not sublease any of our
excess facilities through the end of the respective lease term. In the event that we sublease any of these excess facilities, an adjustment to our restructuring accrual would be charged to income or goodwill in the period such a sublease occurred.
As of September 30, 2002, we have not subleased any of our excess facilities.
Distributor Revenue
Accounting: We recognize revenues on sales to our distributors at the time our products at sold by our distributors to their third party customers. The recognition of sales to our distributors and the related gross profit
on the products held by our distributors is deferred until the sale to the third party customer. The deferred gross profit is included as “deferred margin on distributor inventory” on our balance sheet. On a monthly basis, we reconcile the
value of inventory being held by our distributors, as reported by our distributors, to our estimate of the value of ending inventory, considering in-transit inventory to and from our distributors and pricing adjustments.
Overview
We are a
leading designer and supplier of high performance RF components for communications equipment manufacturers. Our products are used primarily in wireless communications equipment to enable and enhance the transmission and reception of voice and data
signals. Historically, our products meeting standard specifications widely adopted by communications equipment manufactures have constituted a majority of our revenues and we expect this trend to continue in the near term. Our products are also
utilized in broadband wireline and terminal applications.
On August 14, 2002, our board of directors approved the
acquisition of Xemod, a California corporation and a designer and fabless manufacturer of RF power amplifier modules and components based on patented lateral double-diffused transistor (LDMOS) technology. Our results of operations include the effect
of Xemod from September 11,
2002, the date the acquisition closed. The merger consideration was approximately $4.9 million in cash and accrued transaction costs, with
additional cash consideration for the achievement of technology licensing objectives within 210 days of the closing of the acquisition. If the technology licensing objectives are achieved the liability related to the additional consideration will be
recorded as additional goodwill or another element of the transaction. The future cash payout of additional consideration, if any, will be payable within 15 days following the date upon which technology licensing objectives are achieved. The Company
funded the acquisition using cash on hand. The acquisition is intended to strengthen the Company’s product portfolio of RF components, in particular, high power amplifier products.
From 2000 to 2001, we operated under two business segments: (1) the Standard Products segment and (2) the Wireless Infrastructure Products segment. At the beginning of
2002, in response to the changes in the market place, we reorganized to focus on end markets. As a result of this reorganization, we operated in three business segments through the date of the acquisition of Xemod. As a result of the acquisition, we
now operate in four business segments. First is the Wireless Applications business area. This business area is responsible for all wireless infrastructure activity, excluding high power amplifier products, both standard and specialized. Second is
the Wireline Applications business area. This business area is responsible for the development and marketing of wireline components to both CATV and fiber optics markets. Third is the Terminals business area. This business area focuses on customers
who use the Company’s products for applications outside of the Company’s core markets of wireless and wireline infrastructure, such as cable television set-top boxes and wireless video transmitters. Last is the Integrated Power Products
business area. This business area focuses on high power amplifier products for wireless communication and networking infrastructure markets. Our results of operations include the results of the Integrated Power Products business area from September
11, 2002, the date of our acquisition of Xemod.
Our Wireless Applications business area accounted for 89% of net
revenues in the three months ended September 30, 2002. Our Wireline Applications business area accounted for 1% of net revenues in the three months ended September 30, 2002. Our Terminals business area accounted for 8% of net revenues in the three
months ended September 30, 2002. Our Integrated Power Products business area accounted for 2% of net revenues in the three months ended September 30, 2002. We currently expect the relative percentage of net revenues attributable to the Wireless
Applications business area to decrease slightly and the Integrated Power Products business area to increase slightly in the near future.
We sell our products worldwide through U.S.-based distributors and through our direct sales force. In the past, we also sold our products through a private label reseller who sold our products under its brand name, although
there have not been any sales to this reseller in recent quarters. Our products are also sold through a worldwide network of independent sales representatives whose orders are fulfilled either by our distributors or us. Significant portions of our
distributors’ end sales are made to their customers overseas. Sales to customers located in the United States represented approximately 55% of net revenues in the three months ended September 30, 2002. Sales customers located
outside of the United States represented 45% of net revenues in the three months ended September 30, 2002. Sales to one customer located in
Sweden, Ericsson, represented 13% of net revenues in the three months ended September 30, 2002. For our direct sales, private label sales and sales to our sales representatives, we recognize revenues when the product has been shipped, title has
transferred, and no further obligations remain. Although we have never experienced a delay in customer acceptance of our products, should a customer delay acceptance in the future, our policy is to delay revenue recognition until the products are
accepted by a customer. Revenues from our distributors are deferred until the distributors resell the products to their customers.
Two distributors, Richardson Electronics Laboratories and Avnet Electronics Marketing, accounted for a substantial portion of our net revenues in the three months ended September 30, 2002. Sales to Richardson Electronics
Laboratories represented 37% of net revenues in the three months ended September 30, 2002. Sales to Avnet Electronics Marketing represented 15% of net revenues in the three months ended September 30, 2002. One distributor, Richardson Electronics
Laboratories and one direct customer, Pace Micro Technology PLC, accounted for a substantial portion of our net revenues in the three months ended September 30, 2001. Sales to Pace Micro Technology PLC represented 19% of net revenues in the three
months ended September 30, 2001. Richardson Electronics Laboratories represented 45% of net revenues in the three months ended September 30, 2001. Richardson Electronics Laboratories and Avnet Electronics Marketing distribute our products to a large
number of end customers. We anticipate that sales through our distributors and to Ericsson will continue to account for a substantial portion of our net revenues in the near term.
Sales of our products using two of our process technologies accounted for a significant portion of our net revenues in the three months ended September 30, 2002 and 2001.
Sales of our gallium arsenide heterojunction bipolar transistor (GaAs HBT) products accounted for 44% of our net revenues in both the three months ended September 30, 2002 and in the three months ended September 30, 2001. Sales of our silicon
germanium (SiGe) heterojunction bipolar transistor products accounted for 31% of our net revenues in the three months ended September 30, 2002 and 41% of our net revenues in the three months ended September 30, 2001.
Cost of revenues consists primarily of the costs of wafers from our third-party wafer fabs, costs of packaging performed by third-party
vendors, costs of testing, costs associated with procurement, production control, quality assurance, manufacturing engineering, and provisions for excess inventories. We subcontract our wafer manufacturing and packaging and do only final testing and
tape and reel assembly at our facilities. In late 2001, we made the decision to outsource a major portion of our production testing operations. We are currently in the process of qualifying subcontractors to test our products and expect to begin the
outsourcing of our production testing operations in early 2003 if volumes increase.
There are a number of factors
influencing our gross margin. Historically, gross margins on our sales through our distributors, to private label resellers and our direct
customers have differed materially from each other. As a result, the relative mix of these sales affects our gross margin. Also, the gross
margin on sales of our newer products are typically higher than the gross margin on sales of some of our older products. As a result, the relative mix of new product sales compared to older product sales affects our gross margin. In addition, we
offer a broad range of products in multiple technologies that have historically had different gross margins. As a result, the relative mix of product sales by process technology and within each technology affects our gross margins.
In addition, our gross margins may be negatively influenced by provisions for excess inventories, as was the case in the in the
third quarter of 2001 when we recorded provisions for excess inventories of $4.5 million, and positively influenced by the sale of previously reserved inventory products, as was the case in the first, second and third quarters of 2002 when we sold
$563,000, $566,000 and $726,000, respectively, of previously reserved inventory products.
Also, our gross margin
is traditionally lower in periods with less volume and higher in periods with high volume. We value inventories at the lower of standard cost, which approximates actual on a first-in, first-out basis, or market. In periods in which volumes are low,
our manufacturing overhead costs are allocated to fewer units, thereby decreasing our gross margin. Likewise, in periods in which volumes are high, our manufacturing overhead costs are allocated to more units, thereby increasing our gross margin.
We do not recognize revenue from our sales to distributors until shipment to the distributor’s customer. We
record the deferred margin on distributor inventory on our balance sheet. As a result, the level of inventory at our distributors can affect our reported gross margin for any particular period.
In the three months ended September 30, 2002, Circuit Electronic Industries Public Co., Ltd. (“CEI”) and MPI Corporation packaged a significant majority of
our products. Relatives of our founding stockholders own one of these packaging firms, MPI Corporation in Manila, Philippines. Although we utilized three additional packaging subcontractors in the three months ended September 30, 2002, we anticipate
that CEI and MPI will continue to account for a significant amount of our packaging in the near future.
Research
and development expenses consist primarily of salaries and related expenses for personnel engaged in research and development, material costs for prototype and test units and other expenses related to the design, development and testing of our
products and, to a lesser extent, fees paid to consultants and outside service providers. We expense all of our research and development costs as they are incurred.
Sales and marketing expenses consist primarily of salaries, commissions and related expenses for personnel engaged in marketing, sales and customer support functions, as
well as costs associated with trade shows, promotional activities, advertising and public relations. We pay and expense commissions to our independent sales representatives when revenues from the associated sale are recognized.
General and administrative expenses consist primarily of salaries and related expenses for executive, finance, accounting,
information technology, and human resources personnel, insurance and professional fees.
IPR&D consists of projects that have not yet reached technological feasibility and for which no alternative future
use exists, related to our acquisition of Xemod. Technological feasibility is defined as being equivalent to a beta-phase working prototype in which there is no remaining risk relating to the development.
The fair value assigned to IPR&D was determined using the income approach. The income approach estimates costs to develop the
purchased IPR&D into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. The revenue estimates used to value the purchased IPR&D
were based on estimates of the relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by Xemod.
The $2.2 million of IPR&D resulting from our acquisition of Xemod consisted of three projects as follows: 1) semiconductor intellectual property related to the XeMOS II
LDMOS process (“XeMOS II”); 2) semiconductor intellectual property related to the XeMOS III 3GHZ LDMOS process (“XeMOS III”); and 3) module intellectual property of the XeMOS II process that includes modules with XeMOS II chips
(“XeMOS II Module IP”). The development of these projects remains a significant risk due to the remaining efforts to achieve technical viability, rapidly changing customer markets, uncertain standards for new products, and significant
competitive threats from numerous companies. The nature of the efforts to develop these technologies into commercially viable products consists principally of planning, designing, experimenting, and testing activities necessary to determine that the
technologies can meet market expectations, including functionality and technical requirements. Failure to bring these products to market in a timely manner could result in a loss of market share or a lost opportunity to capitalize on the high power
amplifier RF market, and could have a material adverse impact on our business and operating results.
The
following table summarizes key assumptions and the underlying valuations for the three IPR&D projects described above related to our acquisition of Xemod:
| |
|
XeMOS II
|
|
|
XeMOS III
|
|
|
XeMOS II Module IP
|
|
| Estimated fair value |
|
$ |
1,100,000 |
|
|
$ |
800,000 |
|
|
$ |
300,000 |
|
| Estimated % of completion |
|
|
74 |
% |
|
|
19 |
% |
|
|
35 |
% |
| Estimated cost to complete |
|
$ |
221,000 |
|
|
$ |
752,000 |
|
|
$ |
1,038,000 |
|
| Estimated completion date |
|
|
12/31/2002 |
|
|
|
12/31/2003 |
|
|
|
12/31/2003 |
|
| Risk adjusted discount rate |
|
|
32 |
% |
|
|
36 |
% |
|
|
36 |
% |
| Estimated revenue commencement (year) |
|
|
2003 |
|
|
|
2004 |
|
|
|
2004 |
|
The assumptions primarily consist of an expected completion date
for the in-process projects, estimated costs to complete the projects, revenue and expense projections
assuming the products have entered the market at a certain time, and discount rates based on the risks associated with the development life
cycle of the in-process technology acquired. Failure to achieve the expected levels of revenue and net income from these products will negatively impact the return on investment expected at the time that the acquisition was completed and may result
in impairment charges.
Comparison of the Three Months Ended September 30, 2002 and September 30, 2001
Net Revenues
Net revenues increased to $5.2 million for the three months ended September 30, 2002 from $3.2 million for the three months ended September 30, 2001. This increase was primarily the result of increased demand for our products by
leading wireless equipment original equipment manufacturers (“OEMs”) and a general increase in end market demand for our products through our distribution channels. Sales through our distributors were 52% of net revenues for the three
months ended September 30, 2002 and 50% of net revenues for the three months ended September 30, 2001. Sales to our direct customers comprised 48% of net revenues for the three months ended September 30, 2002, none of which was to our private label
reseller. Sales to our direct customers comprised 50% of net revenues for the three months ended September 30, 2001, of which 7% of net revenues was to our private label reseller and 43% of net revenues was to our factory direct customers. Sales of
our SiGe and InGaP products were approximately 43% of our total net revenues for the three months ended September 30, 2002 compared to 54% for the three months ended September 30, 2001. Sales of our GaAs products were approximately 44% of net
revenues for both the three months ended September 30, 2002 and September 30, 2001.
Cost of Revenues
Cost of revenues decreased to $2.4 million for the three months ended September 30, 2002 from $7.5 million for the three months
ended September 30, 2001, primarily as a result of lower provisions for excess inventories, which reduced costs by $4.3 million and lower manufacturing spending as a result of cost reduction actions implemented in the second half of 2001. In
addition, in the three months ended September 30, 2002, we sold inventory products that were previously reserved of approximately $726,000. As the cost basis for previously reserved inventory is zero when such products are sold, there is no cost of
revenue element associated with the sale, which results in a 100% gross margin on that sale. A significant majority of the previously reserved inventory parts that were sold in the three months ended September 30, 2002 related to a small number of
parts within two product lines. We originally recorded provisions for excess inventories for these parts as a result of a rapidly declining demand for these products due to customer program cancellations. Subsequently, we began receiving new orders
for these parts, which we did not anticipate at the time we made the decision to record provisions for excess
inventories. We expect to sell previously reserved inventory products in future periods. Operations personnel totaled 42 at September 30, 2002
and September 30, 2001.
Gross Profit
Gross profit increased to $2.8 million in the three months ended September 30, 2002 from a negative gross profit of $4.3 million in the three months ended September 30,
2001. Gross margin increased to approximately 54% in the three months ended September 30, 2002 from negative 134% in the three months ended September 30, 2001. The increase in gross margin is primarily attributable to lower provisions for excess
inventories, the sale of previously reserved inventory products and lower manufacturing spending as a result of cost reduction actions implemented in the second half of 2001.
Operating Expenses
Research and
Development. Research and development expenses decreased to $1.9 million for the three months ended September 30, 2002 from $3.1 million for the three months ended September 30, 2001. This decrease is primarily the result of $1.2
million of abandoned and impaired research and development equipment and software charges incurred in the third quarter of 2001. Research and development personnel increased to 43 at September 30, 2002 from 41 at September 30, 2001.
Sales and Marketing. Sales and marketing expenses decreased to $1.2 million for the three months ended
September 30, 2002 from $1.4 million for the three months ended September 30, 2001. This decrease is primarily the result of lower advertising expenses, which reduced costs by $62,000. Sales and marketing personnel increased to 25 at September 30,
2002 from 22 at September 30, 2001.
General and Administrative. General and administrative
expenses totaled $1.2 million for the three months ended September 30, 2002 and $1.1 million for the three months ended September 30, 2001. This increase is primarily the result of higher professional fees, which added costs of $69,000. General and
administrative personnel increased to 19 at September 30, 2002 from 18 at September 30, 2001.
Amortization of
Deferred Stock Compensation. In connection with the grant of stock options to employees prior to our initial public offering, we recorded deferred stock compensation within stockholders’ equity of approximately $681,000 in 2000
and $4.5 million in 1999, representing the difference between the deemed fair value of the common stock for accounting purposes and the exercise price of these options at the date of grant. During the three months ended September 30, 2002 and 2001,
we amortized $313,000 and $472,000, respectively, of this deferred stock compensation. We will amortize the remaining deferred stock compensation over the vesting period of the related options, generally four years. The amount of deferred stock
compensation expense to be recorded in future periods could decrease if options for which accrued but unvested compensation has been recorded are forfeited, as was the case in 2001 when we reduced the amount of deferred stock compensation expense to
be recorded in future periods by $434,000.
In-process Research and Development. In the third quarter of 2002, we recorded IPR&D charges of
$2.2 million in connection with the acquisition of Xemod. Projects that qualify as IPR&D are those that have not yet reached technological feasibility and for which no alternative future use exists. Technological feasibility is defined as being
equivalent to a beta-phase working prototype in which there is no remaining risk relating to the development.
Restructuring. In third quarter of 2002, in connection with the acquisition of Xemod, management of Sirenza approved and initiated plans to restructure the operations of the Xemod organization. We recorded $393,000
to eliminate certain duplicative facilities and for employee termination costs. These costs are accounted for under EITF 95-3, “Recognition of Liabilities in Connection with Purchase Business Combinations.” These costs were recognized as a
liability assumed in the purchase business combination and included in the allocation of the cost to acquire Xemod and, accordingly, have been included as an increase to goodwill.
The restructuring charges recorded in the third quarter are based on our restructuring plans that have been committed to by management. Changes to the estimates of
executing the currently approved plans of restructuring the Xemod organization will be recorded as an increase or decrease to goodwill.
In 2001, we approved a restructuring plan as companies throughout the worldwide telecommunication industry announced slowdowns or delays in the build out of new wireless and wireline infrastructure. This resulted in lower
equipment production volumes by our customers and efforts to lower their component inventory levels. These actions by our customers resulted in a slowdown in shipments and a reduction in visibility regarding future sales and caused us to revise our
cost structure given the then revised revenue levels. As a result, in the fourth quarter of 2001, we incurred a restructuring charge of $2.7 million related to a worldwide workforce reduction and consolidation of excess facilities.
At each balance sheet date, we evaluate our restructuring accrual for appropriateness. In the third quarter of 2002, we
determined that $112,000 of our restructuring accrual was no longer appropriate as of September 30, 2002 and adjusted our restructuring liability accordingly. The $112,000 restructuring liability adjustment was recorded through the same income
statement line item that was used when the liability was initially recorded, or restructuring.
Interest and Other Income (Expense),
Net
Interest and other income (expense), net includes income from our cash and cash
equivalents and available-for-sale securities, interest expense from capital lease financing obligations and other miscellaneous items. We had net interest and other income of $232,000 for the three months ended September 30, 2002 and $1.1 million
for the three months ended September 30, 2001. The decrease in net interest and other income for the
three months ended September 30, 2002 compared to September 30, 2001 is primarily attributable to proceeds received from the settlement of a
trademark dispute in the three months ended September 30, 2001, and a reduction in our cash and cash equivalents and available for sale securities and lower interest rates in 2002.
Provision for (Benefit from) Income Taxes
No income tax
benefit was recorded for the three months ended September 30, 2002 compared to a provision for income taxes of $3.2 million for the three months ended September 30, 2001. The expected benefit that would be derived by applying the federal statutory
rate to our loss before income taxes was reduced by nondeductible charges for in-process research and development and an increase in our valuation allowance for deferred tax assets. During the three months ended September 30, 2001, we recorded a
valuation allowance of $2.3 million against the carrying value of our net deferred tax assets and reversed $878,000 of income tax benefits recorded in previous quarters of 2001 as a result of a reduction in our projected future taxable income.
Deferred tax assets require a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets may not be realized. Realization of our deferred tax assets is dependent upon our ability
to generate future taxable income, the timing and magnitude of which are uncertain. Accordingly, management has recorded a full valuation allowance for our deferred tax assets. The amount of deferred tax assets considered realizable, however, could
change if estimates of future taxable income during the carry-forward period are changed
Comparison of the Nine Months Ended
September 30, 2002 and September 30, 2001
Net Revenues
Net revenues decreased to $14.9 million for the nine months ended September 30, 2002 from $16.3 million for the nine months ended September 30, 2001. This decrease was
the result of the general economic slowdown, the resulting softness in the wireless infrastructure markets, changes in buying patterns by equipment manufacturers worldwide and delays in the next generation wireless infrastructure build-out, although
we have experienced an increase in sales to equipment manufacturers and in particular, to Asia. Sales through our distributors were 51% of net revenues for the nine months ended September 30, 2002 and 52% of net revenues for the nine months ended
September 30, 2001. Sales to our direct customers comprised 49% of net revenues for the nine months ended September 30, 2002, none of which was to our private label reseller. Sales to our direct customers comprised 48% of net revenues for the nine
months ended September 30, 2001, of which 23% was to our private label reseller and 25% was to our factory direct customers. Sales of our SiGe and InGaP products were approximately 43% of our total net revenues for the nine months ended September
30, 2002 compared to 33% for the nine months ended September 30, 2001. Sales of our GaAs products were approximately 44% of our total net revenues for the nine months ended September 30, 2002 compared to 56% for the nine months ended September 30,
2001.
Cost of Revenues
Cost of revenues decreased to $6.0 million for the nine months ended September 30, 2002 from $15.1 million for the nine months ended September 30, 2001 primarily as a result of lower provisions for
excess inventories, which lowered costs by approximately $7.3 million, and lower manufacturing spending as a result of cost reduction actions
implemented in the second half of 2001. In addition, in the nine months ended September 30, 2002, we sold inventory products that were
previously reserved of approximately $1.9 million. As the cost basis for previously reserved inventory is zero when such products are sold, there is no cost of revenue element associated with the sale, which results in a 100% gross margin on that
sale. A significant majority of the previously reserved inventory parts that were sold in the nine months ended September 30, 2002 related to a small number of parts within two product lines. We originally recorded provisions for excess inventories
for these parts as a result of a rapidly declining demand for these products due to customer program cancellations. Subsequently, we began receiving new orders for these parts which we did not anticipate at the time we made the decision to record
provisions for excess inventories. We may sell previously reserved inventory products in future periods.
Gross Profit
Gross profit increased to $8.9 million for the nine months ended September 30, 2002 from $1.3 million for the
nine months ended September 30, 2001. Gross margin increased to 60% for the nine months ended September 30, 2002 from 8% for the nine months ended September 30, 2001. The increase in gross margin is primarily attributable to the sale of previously
reserved inventory products, lower provisions for excess inventories and lower manufacturing spending as a result of cost reduction actions implemented in the second half of 2001.
Operating Expenses
Research and
Development. Research and development expenses decreased to $4.9 million for the nine months ended September 30, 2002 from $7.6 million for the nine months ended September 30, 2001. This decrease is primarily the result of abandoned
and impaired research and development equipment and software charges of $1.2 million incurred in the third quarter of 2001, lower salaries and salary related expenses, and lower expenses for engineering materials.
Sales and Marketing. Sales and marketing expenses decreased to $3.7 million for the nine months ended September 30, 2002
from $4.4 million for the nine months ended September 30, 2001. This decrease is primarily the result of lower commissions to outside sales representatives, which reduced costs by approximately $242,000, lower advertising expenses, which reduced
costs by approximately $293,000 and lower salaries and salary related expenses.
General and
Administrative. General and administrative expenses increased to $3.6 million for the nine months ended September 30, 2002 from $3.3 million for the nine months ended September 30, 2001. This increase is primarily attributable to
higher professional fees, which added costs of approximately $310,000.
Amortization of Deferred Stock
Compensation. In connection with the grant of stock options to employees prior to our initial public offering, we recorded deferred stock compensation within stockholders’ equity of approximately $681,000 in 2000 and $4.5
million in 1999, representing the difference between the deemed fair value of the common stock for accounting purposes and the exercise price of
these options at the date of grant. During the nine months ended September 30, 2002 and 2001, we amortized $791,000 and $1.1 million, respectively, of this deferred stock compensation. We will amortize the remaining deferred stock compensation over
the vesting period of the related options, generally four years. The amount of deferred stock compensation expense to be recorded in future periods could decrease if options for which accrued but unvested compensation has been recorded are
forfeited, as was the case in 2001 when we reduced the amount of deferred stock compensation expense to be recorded in future periods by $434,000.
In-process Research and Development. In the third quarter of 2002, we recorded IPR&D charges of $2.2 million in connection with the acquisition of Xemod. Projects that qualify as
IPR&D are those that have not yet reached technological feasibility and for which no alternative future use exists. Technological feasibility is defined as being equivalent to a beta-phase working prototype in which there is no remaining risk
relating to the development.
Restructuring. In third quarter of 2002, in connection with the
acquisition of Xemod, management of Sirenza approved and initiated plans to restructure the operations of the Xemod organization. We recorded $393,000 to eliminate certain duplicative facilities and for employee termination costs. These costs are
accounted for under EITF 95-3, “Recognition of Liabilities in Connection with Purchase Business Combinations.” These costs were recognized as a liability assumed in the purchase business combination and included in the allocation of the
cost to acquire Xemod and, accordingly, have been included as an increase to goodwill.
The restructuring charges
recorded in the third quarter are based on our restructuring plans that have been committed to by management. Changes to the estimates of executing the currently approved plans of restructuring the Xemod organization will be recorded as an increase
or decrease to goodwill.
In 2001, we approved a restructuring plan as companies throughout the worldwide
telecommunication industry announced slowdowns or delays in the build out of new wireless and wireline infrastructure. This resulted in lower equipment production volumes by our customers and efforts to lower their component inventory levels. These
actions by our customers resulted in a slowdown in shipments and a reduction in visibility regarding future sales and caused us to revise our cost structure given the then revised revenue levels. As a result, in the fourth quarter of 2001, we
incurred a restructuring charge of $2.7 million related to a worldwide workforce reduction and consolidation of excess facilities.
At each balance sheet date, we evaluate our restructuring accrual for appropriateness. In the third quarter of 2002, we determined that $112,000 of our restructuring accrual was no longer appropriate as of September 30, 2002
and adjusted our restructuring liability accordingly. The $112,000 restructuring liability adjustment
was recorded through the same income statement line item that was used when the liability was initially recorded, or restructuring.
Interest and Other Income (Expense), Net
Interest and other income (expense), net includes income from our cash and cash equivalents and available-for-sale securities, interest expense from capital lease financing obligations and other
miscellaneous items. We had net interest and other income of $741,000 for the nine months ended September 30, 2002 and $3.1 million for the nine months ended September 30, 2001. The decrease in net interest and other income for the nine months ended
September 30, 2002 compared to September 30, 2001 is primarily attributable to proceeds received from the settlement of a trademark dispute in the nine months ended September 30, 2001, a reduction in our cash and cash equivalents and available for
sale securities and lower interest rates in 2002.
Provision for (Benefit from) Income Taxes
No income tax benefit was recoded for the nine months ended September 30, 2002 compared to an income tax provision of $2.3
million for the nine months ended September 30, 2001. The expected benefit that would be derived by applying the federal statutory rate to our loss before income taxes, was reduced by nondeductible charges for in-process research and development and
an increase in our valuation allowance for deferred tax assets. During the nine months ended September 30, 2001, we recorded a valuation allowance of $2.3 million against the carrying value of our net deferred tax assets as a result of a reduction
in our projected future taxable income. Deferred tax assets require a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets may not be realized. Realization of our deferred
tax assets is dependent upon our ability to generate future taxable income, the timing and magnitude of which are uncertain. The amount of deferred tax assets considered realizable, however, could change if estimates of future taxable income during
the carry-forward period are changed.
Liquidity and Capital Resources
We have financed our operations primarily through the private sale of mandatorily redeemable convertible preferred stock and from the net
proceeds received upon completion of our initial public offering in May 2000. As of September 30, 2002, we had cash and cash equivalents of $2.3 million, short-term investments of $18.0 million, long-term investments of $16.6 million and working
capital of $16.7 million.
Our operating activities used cash of $3.1 million in the nine months ended September 30, 2002 and used cash
of $3.0 million in the nine months ended September 30, 2001. In the nine months ended September 30, 2002, cash used in operating activities was primarily attributable to our net loss of $5.5 million, decreases in deferred margin on distributor
inventory of $1.6 million, accrued restructuring of $632,000 and an increase in accounts receivable of $519,000. These were partially offset by depreciation and amortization of $2.1 million, in-process research and development charges of $2.2
million, and amortization of deferred stock compensation of $791,000. In the nine
months ended September 30, 2001, cash used in operating activities was primarily attributable to our net loss of $14.5 million and a decrease in
deferred margin on distributor inventory of $2.2 million. These were partially offset by depreciation and amortization of $2.1 million, amortization of deferred stock compensation of $1.1 million, abandoned and impaired equipment of $1.5 million and
decreases in accounts receivable of $2.5 million, inventories of $5.0 million and deferred tax assets of $2.3 million.
Our investing activities used cash of $9.5 million in the nine months ended September 30, 2002 and $19.3 million in the nine months ended September 30, 2001. Our investing activities reflect purchases and sales of available-for-sale
securities and fixed assets, and in the nine months ended September 30, 2002, our investment in GCS and acquisition of Xemod.
Our financing activities used cash of $303,000 in the nine months ended September 30, 2002 and provided cash of $2.4 million in the nine months ended September 30, 2001. Cash provided by or used in financing activities reflect
proceeds from employee stock plans partially offset by principal payments on capital lease obligations and purchases of treasury shares.
On August 14, 2002, our board of directors approved the acquisition of Xemod, a California corporation and a designer and fabless manufacturer of RF power amplifier modules and components based on patented lateral
double-diffused transistor (LDMOS) technology. Our results of operations include the effect of Xemod from September 11, 2002, the date the acquisition closed. The merger consideration was approximately $4.9 million in cash and accrued transaction
costs with additional cash consideration for the achievement of technology licensing objectives within 210 days of the closing of the acquisition. If the technology licensing objectives are achieved the liability related to the additional
consideration will be recorded as additional goodwill or another element of the transaction. The future cash payout of additional consideration, if any, will be payable within 15 days following the date upon which technology licensing objectives are
achieved. We funded the acquisition using cash on hand.
In the fourth quarter of 2002, we announced we are in
discussions to acquire Vari-L, a designer and manufacturer of complementary RF components using technologies common to existing and planned products of ours. In connection with the acquisition discussions, we agreed to provide Vari-L with a secured
bridge loan facility of up to $5.3 million. The loan facility is secured by the majority of Vari-L’s assets and includes all intangible assets such as: patents, trademarks and mask works. The loan facility also provides for a portion of the
principal amounts to be convertible into approximately 19.9% of Vari-L’s fully diluted common stock under certain conditions. As of November 12, 2002 Vari-L had drawn down approximately $2.6 million of the secured bridge loan facility. We
funded the secured bridge loan facility using cash on hand. In the event that the loan remains outstanding on September 25, 2003, the date of maturity, all principal and accrued interest are due and payable in full. Interest accrues at a rate per
annum equal to 25%.
In the first quarter of 2002, we converted an outstanding loan receivable of approximately
$1.4 million and invested cash of approximately $6.1 million in GCS, a
privately held semiconductor foundry partner, in exchange for 12.5 million shares of Series D-1 preferred stock valued at $0.60 per share. The
impact of our investment in GCS on our cash, liquidity and capital resources amounted to $6.1 million, plus forgone interest income that we would have received of approximately $175,000 annually.
In the third quarter of 2002, the Company’s board of directors authorized the repurchase of up to $4.0 million of the Company’s common stock from time to
time based on the price per share of its common stock and general market conditions. Purchases may be made at management’s discretion in the open market or in private transactions at negotiated prices. In the third quarter of 2002, the Company
repurchased 100,000 shares for an aggregate price of $165,000. We plan to fund our repurchases from available working capital.
Our currently anticipated operating lease and capital lease commitments and unconditional purchase obligations over the next five years and thereafter are as follows (in thousands):
| |
|
Future Minimum Payments Due
|
| |
|
Total
|
|
< one year
|
|
1 - 3 years
|
|
4-5 years
|
|
> 5 years
|
| Operating lease commitments |
|
$ |
3,948 |
|
$ |
1,484 |
|
$ |
2,196 |
|
$ |
268 |
|
$ |
— |
| Capital lease commitments |
|
$ |
866 |
|
$ |
642 |
|
$ |
224 |
|
$ |
— |
|
$ |
— |
We currently anticipate that our current available cash and cash
equivalents and short-term investments will be sufficient to meet our anticipated cash needs for working capital, capital expenditures and secured bridge loan fundings to Vari-L for at least the next 12 months, although no assurance can be given in
this regard. If we require additional capital resources to grow our business, execute our operating plans, or acquire complimentary technologies or businesses at any time in the future, we may seek to sell additional equity or debt securities or
secure lines of credit, which may result in additional dilution to our stockholders.
Industry Trends and Market Conditions
In 2001, companies throughout the worldwide telecommunication industry experienced slowdowns and delays in
the build out of new wireless and wireline infrastructure. This resulted in lower equipment production volumes by our customers and efforts to lower their component inventory levels. These actions by our customers reduced our visibility regarding
future sales and resulted in a slowdown in our shipments in 2001. However, in the nine months ended September 30, 2002 we have experienced a sequential increase in sales to equipment manufacturers and in particular to Asia. While net revenues
increased in the third quarter of 2002 compared to both the third quarter of 2001 and second quarter of 2002, which we believe is an indication that the market for our products may have stabilized, we do not at this time see any significant recovery
in our end markets. We anticipate that any sales growth in the immediate future will depend on the achievement of market share gains and/or the introduction of new product lines.
If the macro-economic trends described above were to worsen again it would likely result in lower sales for our products.
Significantly lower sales would likely lead to further provisions for excess inventories and further actions by us to reduce our operating expenses. These actions could include, but would not be limited to, further reduction of our equipment value,
further consolidation of facilities, and a further workforce reduction. Any or all of these actions could have a material adverse effect on the results of our operations and the market price of common stock.
Risk Factors
Set
forth below and elsewhere in this quarterly report on Form 10-Q and in other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking
statements contained in this quarterly report on Form 10-Q.
Our stock price may be extremely volatile.
Our stock price has been highly volatile since our initial public offering. We expect that this volatility will continue in the future due
to factors such as:
| |
— |
|
general market and economic conditions; |
| |
— |
|
actual or anticipated variations in operating results; |
| |
— |
|
announcements of technological innovations, new products or new services by us or by our competitors or customers; |
| |
— |
|
changes in financial estimates or recommendations by stock market analysts regarding us or our competitors; |
| |
— |
|
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
|
| |
— |
|
additions or departures of key personnel; and |
| |
— |
|
future equity or debt offerings or our announcements of these offerings. |
In addition, in recent years, the stock market in general, and the Nasdaq National Market and the securities of technology companies in particular, have experienced extreme
price and volume fluctuations. These fluctuations have often been unrelated or disproportionate to the operating performance of individual companies. These broad
market fluctuations have in the past and may in the future materially adversely affect our stock price, regardless of our operating results.
Also, our stock price is currently trading below $5.00, which typically reduces the number of our institutional
investors and increases the number of our retail investors. This may have the effect of increased volatility in our stock price.
We
may not meet quarterly financial expectations, which could cause our stock price to decline.
Our quarterly
operating results have varied significantly in the past and are likely to vary significantly in the future based upon a number of factors related to our industry and the markets for our products, over many of which we have little or no control. We
operate in a highly dynamic industry and future results could be subject to significant fluctuations, particularly on a quarterly basis. These fluctuations could cause us to fail to meet quarterly financial expectations, which could cause our stock
price to decline rapidly and significantly. For example, on October 9, 2001 and March 12, 2001, we publicly announced our revised lowered expectations of financial results for the quarters ending September 30, 2001 and September 30, 2001,
respectively and the fiscal year ending December 31, 2001. Subsequently, the trading price of our common stock declined, which had a substantial negative effect on the value of any investment in such stock. Factors contributing to the volatility of
our stock price include:
| |
— |
|
general economic growth or decline; |
| |
— |
|
wireless and wireline industry growth generally and demand for products containing RF components specifically; |
| |
— |
|
changes in customer purchasing cycles and component inventory levels; |
| |
— |
|
the timing and success of new product and technology introductions by us or our competitors; |
| |
— |
|
market acceptance of our products; |
| |
— |
|
availability of raw materials, semiconductor wafers and manufacturing capacity or fluctuations in our manufacturing yields; |
| |
— |
|
changes in selling prices for our integrated circuits due to competitive or currency exchange rate pressures; |
| |
— |
|
changes in our product mix; |
| |
— |
|
changes in the relative percentage of products sold through distributors as compared to direct sales; and |
| |
— |
|
changes in the relative percentage of new products sold compared to older products. |
Due to the factors discussed above, investors should not rely on quarter-to-quarter comparisons of our results of operations as indicators of future performance.
Our growth primarily depends on the growth of the infrastructure for wireless and wireline communications. If this market does not
grow, or if it grows at a slow rate, demand for our products will diminish.
Our success will depend in large
part on the growth of the telecommunications industry in general and, in particular, the market for wireless and wireline infrastructure components. We cannot assure you that the market for these infrastructure products will grow at all, although we
have experienced an increase in sales to equipment manufacturers and in particular to Asia. We continue to observe softness in the wireless and wireline infrastructure markets related to a general economic slowdown, which has impacted our entire
segment. There have been announcements throughout the worldwide telecommunications industry of current and planned reductions in component inventory levels and equipment production volumes, and of delays in the build-out of new wireless and wireline
infrastructure. These trends have had an adverse effect on our operations and caused us in the past to lower our previously announced expectations for our financial results, which caused the market price of our common stock to decrease.
These trends contributed to our decision in the fourth quarter of 2001 to implement a worldwide workforce
reduction and consolidation of excess facilities. This resulted in our recording of $2.7 million in restructuring charges in the fourth quarter of 2001. These same trends contributed to our decision in the second half of 2001 to record provisions
for excess inventories of $4.7 million, charges reducing the value of certain equipment of $1.6 million and recording a valuation allowance of $2.3 million against our net deferred tax assets.
If the economic trends described above were to worsen it would likely result in lower sales for our products. Significantly lower sales would likely lead to further
provisions for excess inventories and further actions by us to reduce our operating expenses. These actions could include, but would not be limited to, further abandonment or obsolescence of equipment, further consolidation of facilities and a
further workforce reduction. Any or all of these actions could have a material adverse effect on the results of our operations and the market price of our common stock.
Fluctuations in supply and demand for semiconductor products could adversely impact our business.
The semiconductor industry has historically been characterized by wide fluctuations in supply and demand for
semiconductor products. From time to time, demand for semiconductor products has decreased, often in connection with, or in anticipation of, major additions of wafer fabrication capacity or maturing product cycles or due to general economic
conditions, as is the case currently.
These trends contributed to our decision in the fourth quarter of 2001 to
implement a worldwide workforce reduction and consolidation of excess facilities. This resulted in our recording of $2.7 million in restructuring charges in the fourth quarter of 2001. These same trends contributed to our decision in the second half
of 2001 to record provisions for excess inventories of $4.7 million, charges reducing the value of certain equipment of $1.6 million and recording a valuation allowance of $2.3 million against our net deferred tax assets.
If the economic trends described above were to worsen it would likely result in lower sales for our products. Significantly lower sales
would likely lead to further provisions for excess inventories and further actions by us to reduce our operating expenses. These actions could include, but would not be limited to, further abandonment or obsolescence of equipment, further
consolidation of facilities and a further workforce reduction. Any or all of these actions could have a material adverse effect on the results of our operations and the market price of our common stock.
The timing of the adoption of industry standards may negatively impact widespread market acceptance of our products.
The markets in which we and our customers compete are characterized by rapidly changing technology, evolving industry standards and
continuous improvements in products and services. If technologies or standards supported by us or our customers’ products, such as 2.5G and 3G, fail to gain widespread commercial acceptance, our business will be significantly impacted. For
example, in 2001 and 2002 the installation of 2.5G and 3G equipment occurred at a much slower rate than was initially expected. In addition, while historically the demand for wireless and wireline communications has exerted pressure on standards
bodies worldwide to adopt new standards for these products, such adoption generally only occurs following extensive investigation of, and deliberation over, competing technologies. The delays inherent in the standards approval process have in the
past and may in the future cause the cancellation, postponement or rescheduling of the installation of communications systems by our customers. For example, in 2001 and 2002 the delay in agreement over certain 3G standards contributed to the delay
of the installation of 3G equipment worldwide.
These trends contributed to our decision in the fourth quarter of
2001 to implement a worldwide workforce reduction and consolidation of excess facilities. This resulted in our recording of $2.7 million in restructuring charges in the fourth quarter of 2001. These same trends contributed to our decision in the
second half of 2001 to record provisions for excess inventories of $4.7 million, charges reducing the value of certain equipment of $1.6 million and recording a valuation allowance of $2.3 million against our net deferred
tax assets. If the economic trends described above were to continue or worsen it would likely result in lower sales for our products.
Significantly lower sales would likely lead to further provisions for excess inventories and further actions by us to reduce our operating expenses. These actions could include, but would not be limited to, further abandonment or obsolescence of
equipment, further consolidation of facilities and a further workforce reduction. Any or all of these actions could have a material adverse effect on the results of our operations and the market price of our common stock.
Any acquisitions of companies or technologies by us may result in distraction of our management and disruptions to our business.
We may acquire or make investments in complementary businesses, technologies, services or products if appropriate opportunities arise, as
was the case in the third quarter of 2002 when we acquired Xemod. From time to time, we may engage in discussions and negotiations with companies regarding the possibility of our acquiring or investing in their businesses, products, services or
technologies, as was the case in the fourth quarter of 2002 when we announced that we are in discussions to acquire Vari-L. We may not be able to identify suitable acquisition or investment candidates in the future, or if we do identify suitable
candidates, we may not be able to make such acquisitions or investments on commercially acceptable terms or at all. If we acquire or invest in another company, we could have difficulty assimilating that company’s personnel, operations,
technology or products and service offerings. In addition, the key personnel of the acquired company may decide not to work for us. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses
and adversely affect our results of operations. Furthermore, we may incur indebtedness or issue equity securities to pay for any future acquisitions. The issuance of equity securities could be dilutive to our existing stockholders. In addition, the
accounting treatment for any acquisition transaction may result in significant goodwill, which, if impaired, will negatively affect our consolidated results of operations.
In September 2002, we completed our acquisition of Xemod, a California corporation and a designer and fabless manufacturer of RF power amplifier modules and components
based on patented lateral double-diffused transistor (LDMOS) technology. In addition to the Xemod transaction, in the fourth quarter of 2002, we announced we are in discussions to acquire Vari-L, a designer and manufacturer of complementary RF
components using technologies common to existing and planned products of ours. We evaluate and may enter into other acquisitions or investment transactions on an ongoing basis. The recent acquisition of Xemod and the proposed acquisition with Vari-L
increase both the scope and consequence of ongoing integration risks. We may not successfully address the integration challenges in a timely manner, or at all, and we may not realize the anticipated benefits or synergies of either transaction, or of
any other transaction to the extent, or in the timeframe, anticipated. Moreover, the timeframe for achieving benefits may be dependent partially upon the actions of employees, suppliers or other third parties.
Even if an acquisition or alliance is successfully integrated, we may not receive the expected benefits of the transaction. Managing
acquisitions requires varying levels of
management resources, which may divert our attention from other business operations. These transactions also have resulted and may in the future
result in significant costs and expenses and charges to earnings. In the case of the Xemod acquisition, these costs and expenses include those related to severance pay, charges from the elimination of duplicative facilities, in-process research and
development charges, legal, accounting and financial advisory fees. Moreover, Sirenza has incurred and will incur additional depreciation and amortization expense over the useful lives of certain of the net tangible and intangible assets acquired in
connection with the transaction, and, to the extent the value of goodwill acquired in connection with the transaction becomes impaired, we may be required to incur material charges relating to the impairment of that asset. In addition, any
completed, pending or future transactions may contribute to financial results of the combined company that differ from the investment community’s expectations in a given quarter.
Our reliance on third-party wafer fabs to manufacture our semiconductor wafers may cause a significant delay in our ability to fill orders and limits our ability to assure product quality and to
control costs.
We do not own or operate a semiconductor fabrication facility. We currently rely on three
third-party wafer fabs to manufacture substantially all of our semiconductor wafers. These fabs are TRW for GaAs, Atmel for SiGe and TriQuint Semiconductors for our discrete devices. A majority of our products sold in the first nine months of 2002
and the year ended December 31, 2001 were manufactured in GaAs by TRW and SiGe by Atmel. Atmel is currently our sole source supplier for SiGe wafers and has provided us with a commitment for a supply of wafers through September of 2004. The supply
agreement with TRW provides us with a commitment for a supply of wafers through December 31, 2003. The loss of one of our third-party wafer fabs, in particular TRW or Atmel, or any delay or reduction in wafer supply, will impact our ability to
fulfill customer orders, perhaps materially, and could damage our relationships with our customers, either of which would significantly harm our business and operating results. Because there are limited numbers of third-party wafer fabs that use the
particular process technologies we select for our products and that have sufficient capacity to meet our needs, using alternative or additional third-party wafer fabs would require an extensive qualification process that could prevent or delay
product shipments, adversely effecting our results of operations.
Nortel Networks has notified us that they are
changing their fabrication process. As a result, Nortel Networks will no longer be able to support our products. We are transferring the fabrication of the products made at Nortel Networks to GCS who has a comparable fabrication process. These
products will require minor design changes as we transition to the GCS fabrication process and we have not purchased significant quantities of wafers from GCS to date. The unsuccessful or delayed transfer of our products to GCS could result in us
having an insufficient supply of InGaP HBT wafers that meet our specifications in a timely manner. This would impact our ability to fulfill customer orders, perhaps materially, and could damage our relationships with our customers, either of which
would significantly harm our business and operating results.
We have begun introducing products that are
fabricated at RF Micro Devices (RFMD). The unsuccessful fabrication of these products by RFMD, or our
inability to obtain a sufficient supply of these products in a timely manner would impact our ability to fulfill customer orders, perhaps
materially, and could damage our relationships with our customers, either of which would significantly harm our business and operating results.
Our reliance on these third-party wafer fabs involves several additional risks, including reduced control over the manufacturing costs, delivery times, reliability and quality of our components
produced from these wafers. The fabrication of semiconductor wafers 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. We expect that our customers will continue to establish demanding specifications for quality, performance and reliability that
must be met by our products. Our third-party wafer fabs may not be able to achieve and maintain acceptable production yields in the future. These risks are heightened with respect to our newer third-party wafer fabs, particularly GCS and RFMD, which
have not yet produced wafers in volume for us. To the extent our third-party wafer fabs suffer failures or defects, we could experience lost revenues, increased costs, and delays in, cancellations or rescheduling of orders or shipments, any of which
would harm our business.
In the past, we have experienced delays in product shipments from our third- party wafer
fabs, quality issues and poor manufacturing yields, which in turn delayed product shipments to our customers. We may in the future experience similar delays or other problems, such as inadequate wafer supply.
Product quality, performance and reliability problems could disrupt our business and harm our financial condition.
Our customers demand that our products meet stringent quality, performance and reliability standards. RF components such as those we
produce may contain undetected defects or flaws when first introduced or after commencement of commercial shipments. We have from time to time experienced product quality, performance or reliability problems. In addition, some of our products are
manufactured using process technologies that are relatively new and for which long-term field performance data are not available. As a result, defects or failures have in the past, and may in the future occur relating to our product quality,
performance and reliability. If these failures or defects occur or become significant, we could experience lost revenues, increased costs, including inventory write-offs, 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 harm our business.
Our $7.5
million strategic investment in GCS, a privately held semiconductor foundry partner, could ultimately be impaired or never redeemed, which could have a material adverse impact on our results of operations.
In the first quarter of 2002, we converted an outstanding loan receivable of approximately $1.4 million and invested cash of approximately
$6.1 million in GCS, a
privately held semiconductor foundry partner, in exchange for 12.5 million shares of Series D-1 preferred stock valued at $0.60 per share. Our
total investment of $7.5 million represented approximately 14% of the outstanding voting shares of GCS at that time.
We accounted for our investment in GCS under the cost method of accounting in accordance with accounting principles generally accepted in the United States, as our investment represents less than 20% of the voting stock of GCS and we
cannot exercise significant influence over GCS. The investment in GCS has been classified as a non-current asset on our consolidated balance sheet.
On a quarterly basis, we evaluate our investment in GCS to determine if an other than temporary decline in value has occurred. Factors that may cause an other than temporary decline in the value of our
investment in GCS would include, but not be limited to, a degradation of the general business environment in which GCS operates, the failure of GCS to achieve certain milestones or a series of operating losses in excess of GCS’ current business
plan, the inability of GCS to continue as a going concern and a reduced valuation as determined by a new financing event. If we determine that an other than temporary decline in value has occurred, we will write-down our investment in GCS to fair
value. Such a write-down could have a material adverse impact on our consolidated results of operations in the period in which it occurs. As of September 30, 2002 our investment in GCS had not experienced an other than temporary decline in value.
Our $7.5 million investment in GCS is also at risk to the extent that we cannot ultimately sell our shares of
Series D-1 preferred stock, for which there is currently no public market. Even if we are able to sell our Series D-1 preferred stock, the sale price may be less than the price paid by us, which could have a material adverse effect on our results of
operations.
We are in the process of outsourcing our RF production testing function. We may not be able to outsource our RF testing
function on favorable terms, or at all.
In late 2001, we made the decision to outsource a significant portion
of our RF testing function. We are currently in the process of qualifying subcontractors to test our products and expect to begin the outsourcing of our production testing operations in early 2003, if volumes increase. However, we may be unable to
successfully outsource this function by early 2003, or at all. The selection and ultimate qualification of a subcontractor to test our RF components could be costly and increase our cost of revenues. In the second half of 2001, we recorded an
impairment charge of $315,000 on some of our existing test equipment as a result of a reduction in demand for our products and the decision to outsource our testing operations. As a result of the impairment charge, our existing test equipment was
recorded at our estimate of fair market value as of September 30, 2002. To the extent that the proceeds, if any, from the ultimate disposition of our test equipment are less than the recorded value of such equipment, we would incur a charge to cost
of
revenues. Such a charge could have a material adverse effect on our gross margin and results of operations.
Our reliance on subcontractors to production test our products could cause a delay in our ability to fulfill orders and adversely affect our results of
operations.
We do not know if we will be able to negotiate a long-term contract with a subcontractor to
production test our RF components at acceptable prices or volumes. Therefore, in the future, we may be unable to obtain sufficient high quality or timely RF production testing of our products. In addition, the negotiated pricing may be more
expensive than production testing our RF components internally, which could have a material adverse effect on our gross margin and results of operations. The loss or reduction in production testing capacity at this RF testing subcontractor would
significantly damage our business.
Our components require sophisticated testing techniques. If our potential
subcontractor to test RF components is not successful in adopting such techniques, we could experience increased costs, including warranty expense and costs associated with customer support, delays in or cancellations or rescheduling of orders or
shipments, product returns or discounts and lost revenues, any of which would harm our business.
Our reliance on subcontractors to
package our products could cause a delay in our ability to fulfill orders or could increase our cost of revenues.
We do not package the RF components that we sell but rather rely on subcontractors to package our products. Packaging is the procedure of electrically bonding and encapsulating the integrated circuit into its final protective plastic
or ceramic casing. We provide the wafers containing the integrated circuits and, in some cases, packaging materials to third-party packagers. Although we currently work with five packagers, substantially all of our net revenues in 2001 and the first
nine months of 2002 were attributable to products packaged by three subcontractors. Relatives of our founding stockholders own one of these packaging firms, MPI Corporation in Manila, Philippines. We do not have long-term contracts with our
third-party packagers stipulating fixed prices or packaging volumes. Therefore, in the future we may be unable to obtain sufficient high quality or timely packaging of our products. The loss or reduction in packaging capacity of any of our current
packagers, particularly MPI, would significantly damage our business. In addition, increased packaging costs will adversely affect our profitability.
The fragile nature of the semiconductor wafers that we use in our components requires sophisticated packaging techniques and can result in low packaging yields. If our packaging subcontractors fail to
achieve and maintain acceptable production yields in the future, we could experience increased costs, including warranty expense and costs associated with customer support, delays in or cancellations or rescheduling of orders or shipments, product
returns or discounts and lost revenues, any of which would harm our business.
We depend on two distributors for a significant portion of our sales, the loss of any one of which
would limit our ability to sustain and grow our revenues.
Historically, two distributors, Avnet Electronics
Marketing and Richardson Electronics Laboratories, have accounted for a significant portion of our sales. In the three months ended September 30, 2002, sales through Richardson Electronics Laboratories represented 37% of our net revenues and sales
through Avnet Electronics Marketing represented 15% of our net revenues. Our contracts with these distributors do not require them to purchase our products and may be terminated by them at any time without penalty. If our distributors fail to
successfully market and sell our products, our revenues could be materially adversely affected. The loss of either of our current distributors and our failure to develop new and viable distribution relationships would limit our ability to sustain
and grow our revenues.
We depend on Ericsson for a significant portion of our revenues. The loss of Ericsson as a customer or a
decrease in purchases by Ericsson may adversely affect our revenues.
Sales to Ericsson, primarily a direct
customer, have recently accounted for a significant portion of our revenues. For example, 13% of our net revenues in the three months ended September 30, 2002 were attributable to direct sales to Ericsson and 12% of our net revenues in the three
months ended June 30, 2002 were attributable to direct sales to Ericsson. We expect that we will rely on sales to Ericsson for a significant portion of our future revenues. If we were to lose Ericsson as a customer, or if Ericsson substantially
reduced its purchases from us, our business and operating results could be materially and adversely affected.
Intense competition in
our industry could prevent us from increasing revenues and sustaining profitability.
The RF semiconductor
industry is intensely competitive and is characterized by the following:
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rapid technological change; |
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rapid product obsolescence; |
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shortages in wafer fabrication capacity; |
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unforeseen manufacturing yield problems. |
We compete primarily with other suppliers of high-performance RF components used
in the infrastructure of communications networks such as Agilent, Alpha Industries, Anadigics, Conexant, Infineon, M/A-COM, Minicircuits Laboratories, NEC, RF Micro Devices, TriQuint Semiconductor and WJ Communications. We also compete with
communications equipment manufacturers who manufacture RF components internally such as Ericsson, Lucent, Motorola and Nortel Networks. We expect increased competition both from existing competitors and from a number of companies that may enter the
RF component market, as well as future competition from companies that may offer new or emerging technologies. In addition, many of our current and potential competitors have significantly greater financial, technical, manufacturing and marketing
resources than we have. As a result, communications equipment manufacturers may decide not to buy from us due to their concerns about our size, financial stability or ability to interact with their logistics systems. Our failure to successfully
compete in our markets would have a material adverse effect on our business, financial condition and results of operations.
If we
fail to introduce new products in a timely and cost-effective manner, our ability to sustain and increase our revenues could suffer.
The markets for our products are characterized by frequent new product introductions, evolving industry standards and changes in product and process technologies. Because of this, our future success will in large part depend
on:
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our ability to continue to introduce new products in a timely fashion; |
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our ability to improve our products and to adapt to new process technologies in a timely manner; |
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our ability to adapt our products to support established and emerging industry standards; and |
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market acceptance of our products. |
We estimate that the development cycles of our products from concept to production could last more than 12 months. We have in the past experienced delays in the release of new products. We may not be
able to introduce new products in a timely and cost-effective manner, which would impair our ability to sustain and increase our revenues.
Sources for certain components and materials are limited, which could result in delays or reductions in product shipments.
The semiconductor industry from time to time is affected by limited supplies of certain key components and materials. For example, we rely on limited sources for certain packaging materials. If we, or
our packaging subcontractors, are unable to obtain these or other materials in the required quantity and quality, we could experience delays
or reductions in product shipments, which would materially and adversely affect our profitability. Although we have not experienced any
significant difficulty to date in obtaining these materials, these shortages may arise in the future. We cannot guarantee that we would not lose potential sales if key components or materials are unavailable, and as a result, we are unable to
maintain or increase our production levels.
If communications equipment manufacturers increase their internal production of RF
components, our revenues would decrease and our business would be harmed.
Currently, communications equipment
manufacturers obtain their RF components by either developing them internally or by buying RF components from third-party distributors or merchant suppliers. We have historically generated a majority of our revenues through sales of standard
components to these manufacturers through our distributors and direct sales force. If communications equipment manufacturers increase their internal production of RF components and reduce purchases of RF components from third parties, our revenues
would decrease and our business would be harmed.
Third-party wafer fabs who manufacture the semiconductor wafers for our products may
compete with us in the future.
Several third-party wafer fabs independently produce and sell RF components
directly to communications equipment manufacturers. We currently rely on certain of these third-party wafer fabs to produce the semiconductor wafers for our products. These third-party wafer fabs possess confidential information concerning our
products and product release schedules. We cannot guarantee that they would not use our confidential information to compete with us. Competition from these third-party wafer fabs may result in reduced demand for our products and could damage our
relationships with these third-party wafer fabs, thereby harming our business.
Perceived risks relating to process technologies we
may adopt in the future to manufacture our products could cause reluctance among potential customers to purchase our products.
We may adopt new process technologies in the future to manufacture our products. Prospective customers of these products may be reluctant to purchase these products based on perceived risks of these new technologies. These
risks could include concerns related to manufacturing costs and yields and uncertainties about the relative cost-effectiveness of products produced using these new technologies. If our products fail to achieve market acceptance, our business,
financial condition and results of operations would be materially adversely affected.
We have been named in a class action lawsuit
alleging that various underwriters engaged in improper and undisclosed activities related to the allocation of shares in our initial public offering.
In November 2001, we, various of our officers and certain underwriters of our initial public offering of securities were named in a purported class action lawsuit filed in
the United States District Court for the Southern District of New York. The suit, Van Ryen v. Sirenza Microdevices, Inc., et al., Case No.
01-CV-10596, alleges that various underwriters engaged in improper and undisclosed activities related to the allocation of shares in our initial public offering, including obtaining commitments from investors to purchase shares in the aftermarket at
pre-arranged prices. Similar lawsuits concerning more than 300 other companies’ initial public offerings were filed during 2001, and this lawsuit is being coordinated with those actions (the “coordinated litigation”). The Plaintiffs,
who filed an amended complaint on or about April 19, 2002, bring claims for violation of several provisions of the federal securities laws and seek an unspecified amount of damages. On or about July 1, 2002, an omnibus motion to dismiss was filed in
the coordinated litigation on behalf of the issuer defendants, of which we and our named officers and directors are a part, on common pleadings issues. On October 8, 2002, pursuant to stipulation by the parties, the courts dismissed the officer
defendants from the action without prejudice. We believe that the allegations against us are without merit and intend to defend the litigation vigorously. However, there can be no assurance as to the ultimate outcome of this lawsuit and an adverse
outcome to this litigation could have a material adverse effect on our consolidated balance sheet, statement of operations or cash flows. Even if we are entirely successful in defending this lawsuit, we may incur significant legal expenses and our
management may expend significant time in the defense.
We may encounter difficulties managing our business in an economic downturn.
We are currently experiencing a slowdown in the economy and in the telecommunications industry in particular.
Our net revenues decreased from $34.6 million in 2000 to $19.8 million in 2001 and from $16.3 million in the nine months ended September 30, 2001 to $14.9 million in the nine months ended September 30, 2002. As a result of this downturn, we incurred
restructuring charges of $2.7 million related to a worldwide workforce reduction and consolidation of excess facilities in the fourth quarter of 2001. These same trends contributed to our second half of 2001 decision to record provisions for excess
inventories of $4.7 million, charges reducing the value of certain equipment of $1.6 million and recording a valuation allowance of $2.3 million against our net deferred tax assets. If the current economic conditions continue or worsen, we may
experience difficulties maintaining employee morale, retaining employees, completing research and development initiatives, maintaining relationships with our customers and vendors and obtaining financing on favorable terms or at all. In addition, we
may have to take further actions to restructure our operations, including, but not limited to, further workforce reductions, further consolidation of facilities, eliminating product lines or disposing of certain equipment, any of which would have a
material adverse effect on our results of operations.
If we lose our key personnel or are unable to attract and retain key personnel,
we may be unable to pursue business opportunities or develop our products.
We believe that our future success
will depend in large part upon our continued ability to recruit, hire, retain and motivate highly skilled technical, marketing and managerial personnel, who are in great demand. Competition for these employees,
particularly RF integrated circuit design engineers, is intense. Our failure to hire additional qualified personnel in a timely manner and on
reasonable terms could adversely affect our business and profitability. In addition, from time to time we may recruit and hire employees from our customers, suppliers and distributors, which could damage our business relationship with these parties.
Our success also depends on the continuing contributions of our senior management and technical personnel, all of whom would be difficult to replace. The loss of key personnel could adversely affect our ability to execute our business strategy,
which could cause our results of operations and financial condition to suffer. We may not be successful in retaining these key personnel.
Our limited ability to protect our proprietary information and technology may adversely affect our ability to compete.
Our future success and ability to compete is dependent in part upon our proprietary information and technology. Although we have patented technology and current patent applications pending, we
primarily rely on a combination of contractual rights and copyright, trademark and trade secret laws and practices to establish and protect our proprietary technology. We generally enter into confidentiality agreements with our employees,
consultants, resellers, wafer suppliers, customers and potential customers, and strictly limit the disclosure and use of other proprietary information. The steps taken by us in this regard may not be adequate to prevent misappropriation of our
technology. Additionally, our competitors may independently develop technologies that are substantially equivalent or superior to our technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain or use our products or technology. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States.
Our products could infringe the intellectual property rights of others, and resulting claims against us could be costly and require us to enter into disadvantageous license or royalty
arrangements.
The semiconductor industry is characterized by the existence of a large number of patents and
frequent litigation based on allegations of patent infringement and the violation of intellectual property rights. Although we attempt to avoid infringing known proprietary rights of third parties in our product development efforts, we expect that
we may be subject to legal proceedings and claims for alleged infringement by us or our licensees of third-party proprietary rights, such as patents, trade secrets, trademarks or copyrights, from time to time in the ordinary course of business. Any
claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, divert management’s attention and resources, or require us to enter into royalty or license agreements which are
not advantageous to us. In addition, parties making these claims may be able to obtain an injunction, which could prevent us from selling our products in the United States or abroad. We may increasingly be subject to infringement claims as the
number of our products grows.
Our reliance on foreign suppliers and manufacturers exposes us to the economic and political risks of
the countries in which they are located.
Independent third parties in other countries package all of our products and
supply some of our wafers and substantially all of the packaging materials used in the production of our components. Due to our reliance on foreign suppliers and packagers, we are subject to the risks of conducting business outside the United
States. These risks include:
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unexpected changes in, or impositions of, legislative or regulatory requirements; |
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shipment delays, including delays resulting from difficulty in obtaining export licenses; |
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tariffs and other trade barriers and restrictions; |
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political, social and economic instability; and |
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potential hostilities and changes in diplomatic and trade relationships. |
In addition, we currently transact business with our foreign suppliers and packagers in U.S. dollars. Consequently, if the currencies of our suppliers’ countries were
to increase in value against the U.S. dollar, our suppliers may attempt to raise the cost of our wafers, packaging materials, and packaging services, which could have an adverse effect on our profitability.
A significant portion of our products are sold to international customers either through our distributors or directly by us, which exposes us to risks that
may adversely affect our results of operations.
A significant portion of our direct sales and sales through
our distributors were to foreign purchasers, particularly in countries located in Asia and Europe. International direct sales approximated 44% of our net revenues in the three months ended September 30, 2002. Based on information available from our
distributors, products representing approximately 56% of our total distribution revenues, representing approximately 30% of our net revenues, were sold by our distributors to international customers in the three months ended September 30, 2002.
Demand for our products in foreign markets could decrease, which could have a materially adverse effect on our results of operations. Therefore, our future operating results may depend on several economic conditions in foreign markets, including:
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changes in trade policy and regulatory requirements; |
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fluctuations in currency; |
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duties, tariffs and other trade barriers and restrictions; |
Information that we may provide to investors from time to time is accurate only as of the date we disseminate it and we undertake no obligation to update the information.
From time to time we may publicly disseminate forward-looking information or guidance in compliance with Regulation FD promulgated by the SEC. This information or
guidance represents our outlook only as of the date that we disseminated it, and we undertake no obligation to provide updates to this information or guidance in our filings with the SEC or otherwise.
Some of our existing stockholders can exert control over us, and they may not make decisions that reflect the interests of Sirenza Microdevices or other
stockholders.
Our officers, directors and principal stockholders (greater than 5% stockholders) together have
historically controlled a majority of our outstanding common stock and our two founding stockholders have historically controlled a significant amount of our outstanding common stock. As a result, these stockholders, if they act together, and our
founding stockholders acting alone, will be able to exert a significant degree of influence over our management and affairs and control matters requiring stockholder approval, including the election of all of our directors and approval of
significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of Sirenza Microdevices and might affect the market price of our common stock. In addition, the interests of these stockholders
may not always coincide with the interests of Sirenza Microdevices or the interests of other stockholders.
Our charter and bylaws and
Delaware law contain provisions that may delay or prevent a change of control.
Provisions of our charter and
bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. These provisions could limit the price that investors might be willing to pay in the
future for shares of our common stock. These provisions include:
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division of the board of directors into three separate classes; |
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elimination of cumulative voting in the election of directors; |
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prohibitions on our stockholders from acting by written consent and calling special meetings; |
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procedures for advance notification of stockholder nominations and proposals; and |
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the ability of the board of directors to alter our bylaws without stockholder approval. |
In addition, our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The issuance of preferred stock, while providing flexibility in connection with possible financings or acquisitions or other corporate
purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. We are also subject to Section 203 of the Delaware General Corporation Law that, subject to exceptions, prohibits a
Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that this stockholder became an interested stockholder. The preceding provisions of our charter and bylaws,
as well as Section 203 of the Delaware General Corporation Law, could discourage potential acquisition proposals, delay or prevent a change of control and prevent changes in our management.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Historically, our sales have been made to predominantly U.S.-based customers and distributors in U.S. dollars. As a result, we have not had any material exposure to factors such as changes in foreign currency exchange rates. However,
we continue to and expect in future periods to expand selling into foreign markets, including Europe and Asia. Because our sales are denominated in U.S. dollars, a strengthening of the U.S. dollar could make our products less competitive in foreign
markets.
At September 30, 2002, our cash and cash equivalents consisted primarily of bank deposits, federal
agency and related securities and money market funds issued or managed by large financial institutions in the United States and Canada. We did not hold any derivative financial instruments. Our interest income and expense are sensitive to changes in
the general level of interest rates. In this regard, changes in interest rates can affect the interest earned on our cash equivalents, short-term investments and long-term investments. For example, a 1% increase or decrease in interest rates would
increase or decrease our annual interest income by approximately $321,000.
Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of a date within 90 days of the filing date of this Quarterly Report on Form
10-Q, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”))
are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange
Commission’s rules and forms.
Change in Internal Controls
There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken.
Independent
Accountant Services
We currently engage Ernst & Young LLP as our independent auditors. In addition to the
audit services they provide with respect to our annual audited consolidated financial statements included in our Annual Reports on Form 10-K and certain other filings with the Securities and Exchange Commission, Ernst & Young LLP has provided us
in the past and may provide in the future other non-audit services, such as the preparation and review of our tax returns, tax consultation services, review of and provision of consents for registration statements and accounting consultations
unrelated to audits. Our audit committee has pre-approved the other audit related and non-audit related services currently being provided to us by Ernst & Young LLP, as listed above. We intend to have our audit committee pre-approve any future
provision of audit or non-audit services by our independent auditors.
Part II-Other Information
Item 1. Legal Proceedings
In November 2001, we, various of our officers and
certain underwriters of our initial public offering of securities were named in a purported class action lawsuit filed in the United States District Court for the Southern District of New York. The suit, Van Ryen v. Sirenza Microdevices, Inc., et
al., Case No. 01-CV-10596, alleges that various underwriters engaged in improper and undisclosed activities related to the allocation of shares in our initial public offering, including obtaining commitments from investors to purchase shares in the
aftermarket at pre-arranged prices. Similar lawsuits concerning more than 300 other companies’ initial public offerings were filed during 2001, and this
lawsuit is being coordinated with those actions (the “coordinated litigation”). The Plaintiffs, who filed an amended complaint on or
about April 19, 2002, bring claims for violation of several provisions of the federal securities laws and seek an unspecified amount of damages. On or about July 1, 2002, an omnibus motion to dismiss was filed in the coordinated litigation on behalf
of the issuer defendants, of which we and our named officers and directors are a part, on common pleadings issues. On October 8, 2002, pursuant to stipulation by the parties, the courts dismissed the officer defendants from the action without
prejudice.We believe that the allegations against us are without merit and intend to defend the litigation vigorously. However, there can be no assurance as to the ultimate outcome of this lawsuit and an adverse outcome to this litigation could have
a material adverse effect on our consolidated balance sheet, statement of operations or cash flows. Even if we are entirely successful in defending this lawsuit, we may incur significant legal expenses and our management may expend significant time
in the defense.
Item 2. Changes in Securities and Use of Proceeds
The effective date of our
Registration Statement filed on Form S-1 under the Securities Act of 1933 (File No. 333-31382), relating to our initial public offering of our common stock was May 24, 2000. Public trading commenced on May 25, 2000. The offering closed on May 31,
2000. The managing underwriters of the public offering were Deutsche Banc Alex. Brown, Banc of America Securities LLC, CIBC World Markets and Robertson Stephens. In the offering (including the exercise of the underwriters’ overallotment option
on June 16, 2000), we sold an aggregate of 4,600,000 shares of our common stock for an initial price of $12.00 per share.
The aggregate proceeds from the offering were $55.2 million. We paid expenses of approximately $5.4 million, of which approximately $3.9 million represented underwriting discounts and commissions and approximately $1.5 million
represented expenses related to the offering. Net proceeds from the offering were approximately $49.8 million. As of September 30, 2002, approximately $21.5 million of the net proceeds have been used to purchase property and equipment, make capital
lease payments, and fund our operating activities, acquisition of Xemod and investment in GCS. The remaining $28.3 million of net proceeds have been invested in interest bearing cash equivalents, short-term investments and long-term investments.
Item 3. Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
| Exhibit Number
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Description
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| 99.1 |
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section #906 of the Sarbanes-Oxley Act of
2002 |
(b) Reports on Form 8-K.
The Company filed a current report on Form 8-K dated September 25, 2002 to report, under Item 2 thereof, that the Company has acquired Xemod Incorporated, a California corporation.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SIRENZA MICRODEVICES, INC. |
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DATE: November, 13 2002 |
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/s/ Robert Van Buskirk
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ROBERT VAN BUSKIRK |
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President, Chief Executive Officer and Director |
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DATE: November, 13 2002 |
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/s/ Thomas Scannell
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THOMAS SCANNELL |
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Vice President, Finance and Administration, |
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Chief Financial Officer and Assistant Treasurer |
I, Robert Van Buskirk, certify that:
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I have reviewed this quarterly report on Form 10-Q of Sirenza Microdevices, Inc.; |
2. |
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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 with respect to the period covered by this quarterly report; |
3. |
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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. |
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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: |
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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; |
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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 |
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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; |
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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 performing the equivalent functions): |
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a) |
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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 |
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data |
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and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
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b) |
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any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
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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.
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Date: November 13, 2002
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/s/ Robert Van Buskirk
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Robert Van Buskirk Chief Executive Officer |
I, Thomas Scannell, certify that:
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I have reviewed this quarterly report on Form 10-Q of Sirenza Microdevices, Inc.; |
2. |
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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 with respect to the period covered by this quarterly report; |
3. |
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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. |
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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: |
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a) |
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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; |
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b) |
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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 |
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c) |
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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. |
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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 performing the equivalent functions): |
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a) |
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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 |
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b) |
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any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
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6. |
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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.
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Date: November 13, 2002
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/s/ Thomas Scannell
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Thomas Scannell Chief Financial Officer |