SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

ý  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 29, 2003

 

OR

 

o  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 000-31337

 

 

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, and (2) has been subject to such filing requirements for the past 90 days. Yes  ý.  No  o.

 

As of August 8, 2003 there were 56,112,597 shares outstanding of the registrant’s common stock, $0.01 par value.

 

 

SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q, the Annual Report on Form 10-K, the shareholders’ annual report, press releases and certain information provided periodically in writing or orally by the Company’s officers, directors or agents contain certain forward-looking statements within the meaning of the federal securities laws that also involve substantial uncertainties and risks. These forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections about our industry, our beliefs and our assumptions. Words such as “may,” “will,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks” and “estimates” and variations of these words and similar expressions, are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed, implied or forecasted in the forward-looking statements. In addition, the forward-looking events discussed in this quarterly report might not occur. These risks and uncertainties include, among others, those described in the section of this report entitled “Risk Factors that May Affect Future Results.” Readers should also carefully review the risk factors described in the other documents that we file from time to time with the Securities and Exchange Commission. We assume no obligation to update or revise the forward-looking statements or risks and uncertainties to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

 

 

WJ COMMUNICATIONS, INC.

QUARTERLY REPORT ON FORM 10-Q

THREE MONTHS AND SIX MONTHS ENDED JUNE 29, 2003

TABLE OF CONTENTS

 

PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 29, 2003 and June 30, 2002
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 29, 2003 and June 30, 2002
	Condensed Consolidated Balance Sheets at June 29, 2003 and December 31, 2002
	Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended June 29, 2003 and June 30, 2002
	Notes to Condensed Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosure About Market Risks
Item 4.	Controls and Procedures
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings
Item 2.	Changes In Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K

 

 

PART I — FINANCIAL INFORMATION

 

Item 1.  FINANCIAL STATEMENTS

 

WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended						Six Months Ended
		June 29, 2003			June 30, 2002			June 29, 2003			June 30, 2002
Sales:
Semiconductor		$	3,510		$	4,021		$	9,013		$	7,808
Wireless		1,974			1,960			4,161			8,573
Fiber optics		—			2,742			1			5,404
Total sales		5,484			8,723			13,175			21,785
Cost of goods sold		3,563			6,874			8,354			16,950
Gross profit		1,921			1,849			4,821			4,835
Operating expenses:
Research and development		4,281			4,657			8,749			9,097
Selling and administrative		2,687			2,596			5,398			6,039
Amortization of deferred stock compensation (*)		28			141			70			243
Recapitalization merger		35			—			772			—
Restructuring charges (credit) (Note 10)		—			—			(21		)	—
Total operating expenses		7,031			7,394			14,968			15,379
Loss from operations		(5,110		)	(5,545		)	(10,147		)	(10,544		)
Interest income		195			336			414			635
Interest expense		(38		)	(60		)	(50		)	(82		)
Other income—net		1,084			—			1,094			—
Loss before income taxes		(3,869		)	(5,269		)	(8,689		)	(9,991		)
Income tax benefit		(16		)	—			(647		)	—
Net loss		$	(3,853	)	$	(5,269	)	$	(8,042	)	$	(9,991	)
Basic and diluted net loss per share		$	(0.07	)	$	(0.09	)	$	(0.14	)	$	(0.18	)
Basic and diluted average shares		56,354			56,292			56,434			56,174
(*) Amortization of deferred stock compensation is excluded from the following expenses:
Cost of goods sold		$	8		$	3		$	16		$	14
Research and development		10			4			31			33
Selling and administrative		10			134			23			196
		$	28		$	141		$	70		$	243

 

See notes to condensed consolidated financial statements.

 

4

 

WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

		Three Months Ended						Six Months Ended
		June 29, 2003			June 30, 2002			June 29, 2003			June 30, 2002
Net loss		$	(3,853	)	$	(5,269	)	$	(8,042	)	$	(9,991	)
Other comprehensive loss:
Unrealized holding gains (losses) on securities arising during period net of reclassification adjustments.		—			6			18			(8		)
Comprehensive loss		$	(3,853	)	$	(5,263	)	$	(8,024	)	$	(9,999	)

 

See notes to condensed consolidated financial statements.

 

5

 

WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

		June 29, 2003			December 31, 2002
					(See Note 1)
ASSETS
CURRENT ASSETS:
Cash and equivalents		$	55,684		$	43,524
Short-term investments		8,488			21,221
Receivables, net		3,980			3,978
Inventories		2,945			3,957
Deferred income taxes		—			6,048
Other		2,326			2,105
Total current assets		73,423			80,833
PROPERTY, PLANT AND EQUIPMENT, net		12,083			14,409
OTHER ASSETS		214			306
		$	85,720		$	95,548
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	2,768		$	2,555
Accrued liabilities		3,529			4,198
Restructuring accrual		2,897			2,649
Total current liabilities		9,194			9,402
Restructuring accrual		24,085			25,370
Other long-term obligations		11,253			11,158
Total liabilities		44,532			45,930
STOCKHOLDERS’ EQUITY:
Common stock		564			564
Treasury stock		(5		)	—
Additional paid-in capital		178,646			179,172
Accumulated deficit		(137,851		)	(129,808		)
Deferred stock compensation		(166		)	(292		)
Other comprehensive loss		—			(18		)
Total stockholders’ equity		41,188			49,618
		$	85,720		$	95,548

 

See notes to condensed consolidated financial statements.

 

6

 

WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Six Months Ended
		June 29, 2003			June 30, 2002
OPERATING ACTIVITIES:
Net loss		$	(8,042	)	$	(9,991	)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Depreciation and amortization		2,405			3,018
Amortization of deferred financing costs		13			12
Net gain on disposal of property, plant and equipment		91			205
Gain on sale of product line		(1,084		)	—
Deferred income taxes		6,036			8,158
Restructuring charges (credit)		(21		)	—
Amortization of deferred stock compensation		70			243
Stock based compensation		50			82
Reduction in allowance for doubtful accounts		(302		)	(78		)
Write-off of uncollectible accounts to allowance		(2		)	(362		)
Amortization of discounts		43			586
Net changes in:
Receivables		302			7,140
Inventories		938			4,215
Other assets		1,173			744
Restructuring liabilities		(1,016		)	(584		)
Accruals, payables and income taxes		(297		)	644
Net cash provided by operating activities		357			14,032
INVESTING ACTIVITIES:
Purchase of short-term investments		(20,927		)	(24,913		)
Proceeds from sale of short-term investments		33,647			30,684
Purchases of property, plant and equipment		(547		)	(1,607		)
Proceeds on disposal of property, plant and equipment		7			50
Proceeds from sale of product line (Note 11)		181			—
Net cash provided by investing activities		12,361			4,214
FINANCING ACTIVITIES:
Payments on long-term borrowings and financing costs		(32		)	(12		)
Repurchase of common stock		(526		)	—
Net proceeds from issuances of common stock		—			628
Net cash provided (used) by financing activities		(558		)	616
Net increase in cash and equivalents		12,160			18,862
Cash and equivalents at beginning of period		43,524			25,216
Cash and equivalents at end of period		$	55,684		$	44,078
Other cash flow information:
Income taxes refunded, net		$	(6,678	)	$	(8,158	)
Interest paid		37			71

 

See notes to condensed consolidated financial statements.

 

7

 

WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 of America 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 generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three month and six month periods ended June 29, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. 

 

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of WJ Communications, Inc. (the “Company”) for the fiscal year ended December 31, 2002, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2003.

 

The balance sheet at December 31, 2002 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. 

 

STOCK-BASED COMPENSATION — The Company accounts for stock-based compensation granted to employees and directors under the intrinsic value method as defined in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”

 

As required under Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” and Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation Transition and Disclosure,” the pro forma effects of stock-based compensation on net income (loss) and net earnings (loss) per common share have been estimated at the date of grant as if the Company had accounted for such awards under the fair value method of FAS123 using the Black-Scholes option-pricing model. 

 

The following table illustrates the effect on net loss had compensation cost for all of the Company’s stock option plans been determined based upon the fair value at the grant date for awards under these plans, and amortized to expense over the vesting period of the awards consistent with the methodology prescribed under SFAS 123 (in thousands):

 

		Three Months Ended						Six Months Ended
		June 29, 2003			June 30, 2002			June 29, 2003			June 30, 2002
Reported net loss		$	(3,853	)	$	(5,269	)	$	(8,042	)	$	(9,991	)
Add:  Total stock-based employee compensation expense included in reported net loss		28			141			70			243
Deduct:  Total stock-based employee compensation expense under fair value based method for all awards		(575		)	(764		)	(1,166		)	(1,378		)
Pro forma net loss		$	(4,400	)	$	(5,892	)	$	(9,138	)	$	(11,126	)
Pro forma net loss per basic and diluted share		$	(0.08	)	$	(0.10	)	$	(0.16	)	$	(0.20	)

 

8

 

2.             ORGANIZATION AND OPERATIONS OF THE COMPANY

 

WJ Communications, Inc. (formerly Watkins-Johnson Company, the “Company”) was founded in 1957 in Palo Alto, California. The Company was originally incorporated in California and reincorporated in Delaware in August 2000. For more than 30 years, the Company developed and manufactured microwave devices for government electronics and space communications systems used for intelligence gathering and communication. In 1996, the Company began to develop commercial applications for its military technologies. The Company’s continuing operations design, develop and manufacture innovative, high quality commercial communications products that enable voice, data and image transport over broadband cable and wireless communications networks around the world. The Company’s products are comprised of advanced, highly functional components and integrated assemblies which address the radio frequency (“RF”) challenges faced by both current and next generation commercial communications networks. The Company’s products are used by telecommunication equipment manufacturers in the network infrastructure supporting and facilitating mobile communications and enhanced voice services. Consistent with its strategy to become a pure RF semiconductor company, the Company announced at the end of 2002 that it had entered into an agreement to sell its Thin-Film product line to M/A-COM, a unit of Tyco Electronics. The sale includes equipment, inventory, intellectual property, training and services. The sale of this product line was completed and title passed to M/A-COM in the second quarter of 2003. The Company also exited its fiber optics business at the end of 2002 due to the prolonged downturn in that market. 

 

Over the course of 2002, the Company began to design and manufacture semiconductors utilizing other manufacturing technologies. The Company believes that this approach is required in order to continue to offer competitive products and expects that a greater number of its future products would be developed in this fashion. The Company also believes that this business strategy offers considerable other advantages such as allowing it to focus its resources on product development and marketing, minimizing capital expenditures, reducing operating expenses, allowing it to continue to offer competitive pricing, reducing time to market, reducing technology and product risks and facilitating the migration of the Company’s products to new process technologies, which reduce costs and optimize performance. On December 17, 2002, the Company’s Board of Directors approved a plan which would completely outsource the Company’s internal wafer fabrication within one year.

 

3.             RECLASSIFICATIONS

 

Certain amounts for 2002 have been reclassified to conform with the 2003 presentation. Such reclassifications did not have any impact on net loss or stockholders’ equity.

 

4.             INVENTORIES

 

Inventories are stated at the lower of cost, using average-cost basis, or market. Cost of inventory items is based on purchase and production cost including labor and overhead. Provisions, when required, are made to write-down excess inventories to their estimated net realizable values. Such estimates are based on assumptions regarding future demand and market conditions. If actual conditions become less favorable than the assumptions used, an additional inventory write-down may be required. Inventories, net of provisions for excess and obsolete amounts, at June 29, 2003 and December 31, 2002 consisted of the following (in thousands):

 

 

9

 

5.             CONCENTRATION OF CREDIT RISK

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, short-term investments and receivables. The Company invests in a variety of financial instruments such as money market funds, commercial paper and high quality corporate bonds, and, by policy, limits the amount of credit exposure with any one financial institution or commercial issuer. During the three months ended June 29, 2003, the Company had three customers which, including sales to their respective manufacturing subcontractors, accounted for 71% of its total sales. These customers account for 82% of the Company’s accounts receivable at June 29, 2003. The Company performs ongoing credit evaluations and maintains an allowance for doubtful accounts based upon the expected collectibility of receivables.

 

6.             RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. The Company has adopted the provisions of SFAS 146 for restructuring activities initiated after December 31, 2002. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost was recognized at the date of the Company’s commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts to be recognized.

 

In November 2002, the EITF reached a consensus on Issue No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables”. The EITF concluded that revenue arrangements with multiple elements should be divided into separate units of accounting if the deliverables in the arrangement have value to the customer on a standalone basis, if there is objective and reliable evidence of the fair value of the undelivered elements, and as long as there are no rights of return or additional performance guarantees by the Company. The provisions of EITF Issue No. 00-21 are applicable to agreements entered into in fiscal periods beginning after June 15, 2003. The Company is determining what effect, if any, the provisions of EITF Issue No. 00-21 will have on its operating results or financial condition.

 

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45).  FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. The Company adopted the disclosure requirements of FIN 45 in the fourth quarter of fiscal 2002 (see Note 11 in the Company’s 2002 Form 10K concerning the allowance for warranty costs). The recognition and measurement provisions will be applied to guarantees issued or modified after December 31, 2002.  The adoption of FIN 45 did not have a material impact on the Company’s operating results or financial condition.

 

In April 2003, the FASB issued SFAS 149, “Amendment of Statement on Derivative Instruments and Hedging Activities.” This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The Company did not have any derivative instruments or hedging activities during the six months ended June 29, 2003. The Company does not believe that the adoption of SFAS No. 149 will have a material effect on its operating results or financial condition.

 

10

 

 

In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of FASB 150 had no impact on the Company’s operating results or financial condition.

 

7.             LONG-TERM DEBT

 

In December of 2000, the Company entered into a $25.0 million revolving credit facility (“Revolving Facility”) with a bank. The Revolving Facility matures on December 31, 2003 and contains a $15.0 million sub-limit to support letters of credit. Interest rates on outstanding borrowings are periodically adjusted based on certain financial ratios and are initially set, at the Company’s option, at LIBOR plus 1.0% or Prime minus 0.5%. The Revolving Facility requires the Company to maintain certain financial ratios and contains limitations on, among other things, the Company’s ability to incur indebtedness, pay dividends and make acquisitions without the bank’s permission. The Revolving Facility is secured by substantially all of the Company’s assets. As of December 31, 2002 and June 29, 2003, there were no outstanding borrowings under the Revolving Facility. The Company has letters of credit of $4.3 million outstanding as of June 29, 2003 against which no amounts have been drawn. Subsequent to quarter end, the Company obtained a waiver for the quarter ended June 29, 2003 of certain financial covenants under the Revolving Facility for which it was out of compliance.  In order for amounts to be available to the Company under the Revolving Facility in the future, management is negotiating with the lender to amend the financial covenants. Furthermore the Company is negotiating a new credit facility which would replace the existing credit facility. However, there can be no assurance that such negotiations will be successful or that the Company will be able to close on a new credit facility.

 

8.             STOCKHOLDERS’ EQUITY

 

On March 31, 2003, the Company’s Board of Directors authorized the repurchase of up to $2.0 million of the Company’s common stock. The new program was immediately effective. Purchases under the stock repurchase program may be made in the open market, through block trades or otherwise. Depending on market conditions and other factors, these purchases may be commenced or suspended at any time or from time-to-time without prior notice.  During the quarter ended June 29, 2003, approximately $526,000 has been utilized to purchase 511,115 shares of the Company’s common stock at a weighted average purchase price of $1.03 per share. The repurchases reduced the Company’s cash and interest income during the period but correspondingly reduced the number of the Company’s outstanding shares of common stock. As of June 29, 2003 approximately $1.5 million remains available under the stock repurchase plan.

 

On May 29, 2003, the Company’s Board of Directors (the “Board”) unanimously adopted a resolution seeking stockholder approval to amend the Company’s Certificate of Incorporation to effect a reverse stock split of the Company’s common stock.  The primary reason the Company’s Board believes that a reverse stock split may be desirable is that it may help the Company’s common stock maintain its listing on the Nasdaq National Market. The Company’s stockholders approved this amendment to the Company’s Certificate of Incorporation on July 15, 2003 at the Company’s Annual Meeting of Stockholders.

 

11

 

Under the amendment, the Board would have authority to implement a reverse stock split at any time prior to the date of the Company’s next annual meeting of stockholders in 2004.  In addition, the Board may, in its sole discretion, determine not to effect, and abandon, the reverse stock split without further action by its stockholders.  The Board, may subsequently effect, in its sole discretion, the reverse stock split based upon a ratio of one-for-two, one-for-three, one-for-four, one-for-five, one-for-six, one-for-seven, one-for-eight, one-for-nine or one-for-ten.  If the Board elects to effect a reverse stock split, the number of issued and outstanding shares of common stock would be reduced in accordance with an exchange ratio determined by our Board within the limits set forth by this amendment. Except for adjustments that may result from the treatment of fractional shares, each stockholder will hold the same percentage of the Company’s outstanding common stock immediately following the reverse stock split as such stockholder held immediately prior to the reverse stock split.  The par value of the Company’s common stock would remain unchanged at $0.01 per share.  The amendment does not change the number of the authorized shares of the Company’s common stock. 

 

STOCK OPTION PLANS—During 2000, the Company’s “2000 Stock Incentive Plan” and “2000 Non-Employee Director Stock Compensation Plan” (collectively the “Plans”) were adopted and approved by the board of directors and our shareholders. The Plans may grant incentive awards in the form of options to purchase shares of the Company’s common stock, restricted shares, common stock and stock appreciation rights to participants, which include non-employee directors, officers and employees of and consultants to the Company and its affiliates. On May 22, 2002, the  Board approved the adoption of an amendment to the Company’s “2000 Stock Incentive Plan” to increase the number of shares of Common Stock authorized for issuance pursuant to the “2000 Stock Incentive Plan” from 16,500,000 to 19,000,000 shares.  This plan amendment did not affect any other terms of the “2000 Stock Incentive Plan”.  On May 29, 2003, the Board approved the adoption of an amendment to the Company’s “2000 Non-Employee Director Compensation Plan” to increase the number shares of Common Stock authorized for issuance pursuant to the “2000 Non-Employee Director Compensation Plan” from 570,000 to 800,000 which was approved by the Company’s stockholders on July 15, 2003 at the Company’s Annual Meeting of Stockholders. Also on May 29, 2003, the Board approved the adoption of a second amendment to the Company’s “2000 Stock Incentive Plan” so that options granted to employees under the “2000 Stock Incentive Plan” will qualify as performance-based compensation under Internal Revenue Code Section 162(m) and thereby not be subject to a deduction limitation. Particularly, the amendment to the “2000 Stock Incentive Plan” provides that no employee or prospective employee shall be granted one or more options within any fiscal year which in the aggregate are for the purchase of more than 3,000,000 shares. The total number of shares of common stock authorized for issuance pursuant to the Plans is 19,800,000 shares. As of June 29, 2003 the amount of shares reserved for future grants was 5,782,639. Stock options may include incentive stock options, nonqualified stock options or both, in each case, with or without stock appreciation rights.

 

On May 23, 2001, the Company’s Board of Directors approved the adoption of the Company’s 2001 Employee Stock Incentive Plan (the “Plan”). The Plan may grant incentive awards in the form of options to purchase shares of the Company’s common stock, restricted shares, common stock and stock appreciation rights to participants, which include employees which are not officers and directors of the Company and its affiliates and consultants to the Company and its affiliates. The total number of shares of common stock reserved and available for grant under the Plan is 2,000,000 shares. Shares subject to award under the Plan may be authorized and unissued shares or may be treasury shares. Stock options may include incentive stock options, nonqualified stock options or both, in each case, with or without stock appreciation rights.

 

12

 

9.             LOSS PER SHARE CALCULATION 

 

Per share amounts are computed based on the weighted average number of basic and diluted  common and common equivalent shares outstanding during the respective periods.  The net loss per share calculation is as follows (in thousands, except per share amounts):

 

		Three Months Ended						Six Months Ended
		June 29, 2003			June 30, 2002			June 29, 2003			June 30, 2002
Net loss		$	(3,853	)	$	(5,269	)	$	(8,042	)	$	(9,991	)
Denominator for basic net loss per share:
Weighted average shares outstanding		56,416			56,567			56,503			56,364
Less weighted average shares subject to repurchase		(62		)	(275		)	(69		)	(190		)
Weighted average shares outstanding		56,354			56,292			56,434			56,174
Denominator for diluted net loss per share:
Weighted average shares outstanding		56,354			56,292			56,434			56,174
Effect of dilutive stock options					—			—			—
Diluted weighted average common shares		56,354			56,292			56,434			56,174
Basic and diluted loss per share		$	(0.07	)	$	(0.09	)	$	(0.14	)	$	(0.18	)

 

For the three months and six months ended June 29, 2003, the incremental shares from the assumed exercise of 364,539 and 298,936 stock options, respectively, were not included in computing the diluted per share amounts because the effect of such assumed conversion would be anti-dilutive. The Employee Stock Purchase Plan was suspended in November 2002 due to the Fox Paine Acquisition Proposal and therefore there were no shares related to contributions under the Employee Stock Purchase Plan as of June 29, 2003. For the three months and six months ended June 30, 2002, the incremental shares from the assumed exercise of 4,710,269 and 6,453,478 stock options, respectively, and 15,442 shares related to contributions under the Employee Stock Purchase Plan for pending purchases, were not included in computing the diluted per share amounts because the effect of such assumed conversion and issuance would be anti-dilutive. 

 

10.          RESTRUCTURING CHARGES

 

During fiscal 2002 and 2001, the Company recorded significant restructuring charges representing the direct costs of exiting certain product lines or businesses and the costs of downsizing its business. Such charges were established in accordance with EITF 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)” and Staff Accounting Bulletin No. 100, “Restructuring and Impairment Charges”. These charges include workforce reductions, consolidation of excess facilities and asset impairments as detailed in Note 10 of the Company’s Annual Report on Form 10-K as of December 31, 2002.

 

During the quarter ended March 30, 2003, it was determined that one of the employees slated to be terminated would instead be retained for another position.  As such, approximately $21,000 of the third quarter 2002 restructuring charge was reversed.

 

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The following table summarizes restructuring accrual activity recorded during the years 2002 and 2001 and the six months ended June 29, 2003, respectively (in thousands):

 

		Workforce Reduction			Lease Loss			Asset Impairment			Total
Total charge		$	786		$	34,880		$	8,364		$	44,030
Non-cash charges		—			(5,455		)	(8,364		)	(13,819		)
Cash payments		(437		)	(1,755		)	—			(2,192		)
Balance at December 31, 2002		349			27,670			—			28,019
Non-cash charges		(21		)	12			—			(9		)
Cash payments		(49		)	(979		)	—			(1,028		)
Balance at June 29, 2003		$	279		$	26,703		$	—		$	26,982

 

During the quarter ended June 29, 2003, approximately $5,000 of the remaining severance and $520,000 of remaining lease loss was paid. Of the accrued restructuring charge at June 29, 2003, the Company expects approximately $2.6 million of the lease loss and the remaining severance of approximately $279,000 to be paid out over the next twelve months. As such, these amounts are recorded as current liabilities and the remaining $24.1 million to be paid out over the remaining life of the lease of approximately nine years is recorded as a long-term liability. 

 

11.          SALE OF PRODUCT LINE

 

On May 14, 2003, the Company completed the sale of its Thin-Film product line to M/A-COM, a unit of Tyco Electronics previously announced in December, 2002.  The sale includes equipment, inventory, intellectual property, training and services.  The Company will receive total proceeds of approximately $1.8 million of which approximately $1.4 million is receivable and recorded as an other current asset at June 29, 2003 in the accompanying financial statements. The net gain of approximately $1.1 million is recorded as other income in the accompanying financial statements for the three and six months ended June 29, 2003. The Company had initially received two advance payments on this agreement of approximately $272,000 in the quarter ended December 31, 2002 and approximately $181,000 in the quarter ended March 30, 2003, both of which were included as accrued liabilities in the Company’s consolidated balance sheets for those periods. These advance payments are now recognized as part of the approximately $1.8 million of proceeds during the quarter ended June 29, 2003. 

 

12.          OTHER MATTERS 

 

In September 2002 the Company announced the receipt of a proposal from an affiliate, Fox Paine & Company LLC (“Fox Paine”) to acquire all of the shares of the Company’s common stock held by unaffiliated stockholders (the “Acquisition Proposal”). Fox Paine and its affiliates currently own approximately 66% of the Company’s outstanding shares or approximately 37.0 million shares of a total of approximately 56.5 million shares outstanding. The Company’s Board of Directors formed a special committee composed of two independent directors not affiliated with Fox Paine (the “Special Committee”) to review the Acquisition Proposal. On March 27, 2003, Fox Paine withdrew its Acquisition Proposal. During the six months ended June 29, 2003, the Company incurred approximately $772,000 of costs and expenses related to the Acquisition Proposal.  The Company expects these expenses to continue through the remainder of 2003.

 

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Item 2.                              MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS

 

Special Notice Regarding Forward-Looking Statements. The following discussion and analysis contains forward-looking statements including financial projections, statements as to the plans and objectives of management for future operations, and statements as to our future economic performance, financial condition or results of operations. These forward-looking statements are not historical facts but rather are based on current expectations, estimates, projections about our industry, our beliefs and our assumptions. Words such as “may,” “will,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks” and “estimates” and variations of these words and similar expressions are intended to identify forward-looking statements. Our actual results may differ materially from those projected in these forward-looking statements as a result of a number of factors, including, but not limited to, the continuation or worsening of poor economic and market conditions in our industry and in general, technological innovation in the wireless communications markets, the availability and the price of raw materials and components used in our products, the demand for wireless systems and products generally as well as those of our customers and changes in our customer’s product designs. Readers of this report are cautioned not to place undue reliance on these forward-looking statements. 

 

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes and other disclosures included elsewhere in this Form 10-Q and our Annual Report filed on Form 10-K for the year ended December 31, 2002. Except for historic actual results reported, the following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties. See “Special Notice Regarding Forward-looking Statements” above and “Risk Factors That May Affect Future Results” below for a discussion of certain factors that could cause future actual results to differ from those described in the following discussion. 

 

OVERVIEW

 

We design, develop and manufacture innovative, high quality commercial communications products that enable voice, data and image transport over wireless and broadband cable networks around the world. Our products are comprised of advanced, highly functional RF semiconductors, components and integrated assemblies which address the Radio Frequency challenges of both current and next generation wireless and broadband cable networks. These products are used by telecommunication equipment manufacturers in the network infrastructure supporting and facilitating mobile communications and enhanced voice services. We believe our core expertise in semiconductor technology, coupled with our exceptional RF design, integration, and manufacturing capabilities, are critical to our long-term success. 

 

When we began our operations in the commercial communications market, we initially benefited from significant increases in spending on capital equipment by communications service providers, which resulted in increased demand for our products. However, the demand for telecommunications equipment has been very weak for the last two years and the first half of 2003. We project this weakness in demand to continue throughout the remainder of 2003 and potentially beyond based on customer forecasts for the purchase of our products. The primary reason for this weakness in demand for these products is an overall decline in capital spending by communication service providers. A significant contributing factor to the decline in capital expenditures has been the numerous early stage communication service providers, who have previously been able to access the capital markets, that are having difficulties in finding new sources of capital and, in certain instances, have filed for bankruptcy. In addition, several of the more established service providers financed the build out of their networks with debt. Many of these service providers have shifted their focus to debt reduction and profitability enhancement. As a result, we believe that these companies have had to greatly reduce their capital expenditures. This reduction in capital expenditures has been accentuated by the general economic slowdown, which has had a negative impact on communication service providers’ revenues and profitability.

 

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On a long-term basis, we believe that the demand for commercial communications equipment and our products will rebound. Since 2001, we have introduced many new products which will further position us to benefit from the roll-out of 2.5G and 3G wireless and Cable Access Television (“CATV”). In the first half of 2003, we introduced thirteen new RF semiconductor products primarily targeted at wireless infrastructure applications.  During 2002, we introduced forty new RF semiconductor products.  In the first half of 2003 we had seventy-four new design wins at major Original Equipment Manufacturers (“OEMs”) expanding on the over one hundred design wins we achieved during 2002. During 2003, we are continuing to concentrate our resources on the development of RF semiconductors and expect to maintain our accelerated pace of new product introductions and design wins. While customer interest, new product introductions, accelerating pace of design wins and new orders are encouraging, there is no assurance that they will have a positive impact on our overall sales.

 

Our current manufacturing operations are highly automated which has required us to make significant investments in equipment and fixed overhead. As a result, the volume of product we produce and sell has a significant impact on our gross profit margin. Until demand increases, the slow down in spending on commercial communications equipment will negatively impact our gross margin. In addition, we typically generate lower gross margin on new product introductions. Over time, we typically become more efficient relative to new products through learning and increased volumes as well as through introducing lower cost elements to the product designs. We expect our new product introductions to continue to be a higher percentage of our sales mix, which will continue to have a negative impact on our gross margin. In addition, new product lines contain a greater degree of uncertainty due to a lack of visibility and predictability of customer demand and potential competition which will contribute to a higher level of inventory risk in our near future. 

 

Since the beginning of 2001, we have been taking aggressive steps designed to more closely align our production costs with our customers’ current forecasted demand for our products. As part of this effort, we reduced our workforce by approximately 48% during 2001 and reduced non-employee costs including sales and marketing, general and administrative, and overhead expenses. Our cost reduction initiatives have also included temporary shutdowns of our manufacturing facilities and significant reductions in capital spending. We took further action in the third quarter of 2002, primarily directed at production costs, by reducing our workforce by an additional 22%, initiating a plan to sell excess manufacturing equipment and by consolidating our manufacturing operations and abandoning our excess leased space under our second restructuring plan (see Note 10 to the unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q). 

 

During 2002, we began to design and manufacture semiconductors utilizing other manufacturing technologies at third-party foundries. We believe that this approach is required in order to continue to offer competitive products and expect that a greater number of our future products would be developed in this fashion.  In December 2002, we determined that over the course of 2003, we will transition to a fully outsourced business model and we recorded related restructuring charges. We believe that this business strategy offers considerable advantages such as allowing us to focus our resources on product development and marketing, minimizing capital expenditures, reducing operating expenses, allowing us to continue to offer competitive pricing, reducing time to market, reducing technology and product risks and facilitating the migration of our products to new process technologies, which reduce costs and optimize performance. However, there are also significant business risks associated with our dependence upon third parties for our manufacturing needs and there can be no assurance that our outsourcing strategy will be a success. 

 

We expect that reduced end-customer demand, underutilization of our manufacturing capacity until we transition to a fully outsourced business model and other factors will continue to adversely affect our operating results in the near term and we anticipate incurring additional losses throughout 2003. In order to return to profitability, we must achieve substantial revenue growth and we currently face an environment of uncertain demand in the markets our products address.  We cannot assure you as to whether or when we will return to profitability or whether we will be able to sustain such profitability, if achieved.

 

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Critical Accounting Policies 

 

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a continuous basis, we evaluate all our significant estimates including those related to doubtful accounts receivable, inventory valuation, impairment of long-lived assets, income taxes, restructuring including accruals for abandoned lease properties, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstance, 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. Actual results may differ from these estimates under different assumptions or conditions and such differences could be material. 

 

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. 

 

Revenue Recognition 

 

We recognize revenue in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements”, as amended. SAB 101 requires that four basic criteria must be met before revenue can be recognized:  (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the fee charged for products delivered and the collectibility of those fees. Revenues from our distributor are recognized upon shipment based on the following factors:  our sales price is fixed and determinable by contract at the time of shipment, payment terms are fixed at shipment and are consistent with terms granted to other customers, the distributor has full risk of physical loss, the distributor has separate economic substance, we have no obligation with respect to the resale of the distributor’s inventory, and we believe we can reasonably estimate the potential returns from our distributor based on their history and our visibility in the distributor’s success with its products and into the market place in general. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. 

 

Allowance for Doubtful Accounts

 

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Management specifically analyzes accounts receivable and historic bad debts, changes in customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Material differences may result in the amount and timing of expenses for any period if management made different judgments or utilized different estimates. For example, in the three months ended June 29, 2003 we recovered approximately $162,000 of accounts receivable which was previously reserved in our allowance for doubtful accounts. Our allowance for doubtful accounts was approximately $125,000 as of June 29, 2003. Approximately 82% of our accounts receivable or $3.6 million as of June 29, 2003 was concentrated with our top three customers, each, including their respective manufacturing subcontractors, accounting for more than 10% of our sales, and in aggregate accounting for 71% of our sales in the second quarter of 2003.

 

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Write-down of Excess and Obsolete Inventory

 

We write down our inventory for estimated obsolete or unmarketable inventory for the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Management specifically identifies obsolete products and analyzes historical usage, forecasted production based on demand forecasts, current economic trends and historical write-offs when evaluating the adequacy of the provision for excess and obsolete inventory. Due to rapidly changing customer forecasts and orders, additional write-downs of excess or obsolete inventory, while not currently expected, could be required in the future. In addition, the sale of previously written down inventory could result from significant unforeseen increases in customer demand. Material differences in estimates of excess and obsolete inventory may result in the amount and timing of cost of sales for any period if management made different judgments or utilized different estimates. 

 

Income Taxes

 

As part of the process of preparing our unaudited condensed consolidated financial statements, we are required to estimate our income tax provision (benefit) in each of the jurisdictions in which we operate. This process involves us estimating our current income tax provision (benefit) together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our unaudited condensed consolidated balance sheet. 

 

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. 

 

Restructuring

 

During fiscal 2002 and 2001, we recorded significant restructuring charges representing the direct costs of exiting certain product lines or businesses and the costs of downsizing our business. Such charges were established in accordance with EITF 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)”. These charges include abandoned leased properties comprised of future lease payments net of anticipated sublease income, broker commissions and other facility costs, and asset impairment charges on tenant improvements deemed no longer realizable. In determining these estimates, we make certain assumptions with regards to our ability to sublease the space and reflected offsetting assumed sublease income in line with our best estimate of current market conditions. Should there be a further significant change in market conditions, the ultimate losses on these could be higher and such amount could be material. During 2002, we recorded restructuring charges of $27.9 million related to restructuring activities initiated in 2002 and also recorded additional charges of $6.3 million related to restructuring activities initiated in 2001, primarily due to changes in estimated sublease income. 

 

Impairment of Long-Lived Assets

 

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, we review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Factors we consider that could trigger an impairment review include the following:  significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of our use of the acquired assets or the strategy for our overall business; significant negative industry or economic trends; or significant technological changes, which would render equipment and manufacturing process obsolete. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of these assets to future undiscounted cash flows expected to be generated by these assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying

 

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amount of the assets exceeds the fair value of the assets. During 2002, we recognized an asset impairment of $4.4 million for assets held and used and $3.9 million for assets held for sale.

 

Significant management judgment is required in the forecasting of future operating results which are used in the preparation of projected cash flows and should different conditions prevail, material write downs of our long-lived assets could occur.

 

Recent Developments

 

In April 2003 we began to implement our announced $2.0 million share repurchase program. As of June 29, 2003 we repurchased 511,115 shares of our common stock for approximately $526,000, thus reducing cash and interest income during the period with a corresponding reduction of the shares outstanding.

 

On May 14, 2003, we completed the sale of our Thin-Film product line to M/A-COM, a unit of Tyco Electronics previously announced in December, 2002. The sale includes equipment, inventory, intellectual property, training and services.  We will receive total proceeds of approximately $1.8 million of which approximately $1.4 million is receivable and recorded as an other current asset in the accompanying financial statements as of June 29, 2003. The net gain of approximately $1.1 million is recorded as other income-net in the accompanying financial statements for the three and six months ended June 29, 2003.

 

CURRENT OPERATIONS

 

Three Months Ended June 29, 2003 Compared to Three Months Ended June 30, 2002

 

Sales – We recognized $5.5 million and $8.7 million in sales for the three months ended June 29, 2003 and June 30, 2002, respectively. This $3.2 million or 37% decrease in sales primarily reflects our decision in 2002 to exit our fiber optics business. RF semiconductor sales during the second quarter of 2003 totaled $3.5 million, representing 64% of total sales and a decrease of $511,000 or 13% over the second quarter of 2002 sales of $4.0 million. Our RF semiconductor sales includes sales of our Thin-Film products which represents approximately $313,000 and $608,000 for the three months ended June 29, 2003 and June 30, 2002, respectively. As we announced on December 10, 2002, we entered into an agreement to sell our Thin-Film product line to M/A-COM, a unit of Tyco Electronics. The product line was transfered to M/A-COM and title passed on May 14, 2003.  Excluding our Thin-Film sales, our Semiconductor IC sales decreased $216,000 or 6% to $3.2 million in the second quarter of 2003 from $3.4 million from the same period last year. The decrease in our semiconductor IC sales primarily resulted from overall softness in the wireless infrastructure market, particularly in Asia, where they were impacted by the outbreak of SARS and delays at a major telecom provider. Additionally, the anticipated volume production starts of several of our customers’ wireless infrastructure programs were delayed until our third quarter of 2003. Wireless product sales during the second quarter of 2003 totaled $2.0 million, representing 36% of total sales and stayed flat in comparison to the second quarter of 2002 sales of $2.0 million. Looking forward to the third quarter of 2003, we believe that revenues from our semiconductor IC products will increase sequentially based on forecasted customer demand while our revenues from our wireless products will remain relatively flat.  As we previously announced, we currently anticipate that our total third quarter revenues will be in the range of $6.5 to $7.5 million. However, there can be no asurance that our actual third quarter revenues will be within the anticipated range.

 

We depend on a small number of customers for a majority of our sales. During the three months ended June 29, 2003, we had three customers which each accounted for more than 10% of our sales and in aggregate accounted for 71% of our sales.  During the three months ended June 30, 2002, we had three customers which each accounted for more than 10% of our sales and in aggregate accounted for 77% of our sales. We have diversified our customer base over the last few years and intend to further diversify our customer base and product offering in the future. However, we anticipate that we will continue to sell a majority of our products to a relatively small group of customers.

 

Cost of Goods Sold – Our cost of goods sold for the three months ended June 29, 2003 was $3.6 million, a decrease of $3.3 million or 48% as compared with cost of goods sold of $6.9 million in the three months ended June 30, 2002. As a

 

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percentage of sales, our cost of goods sold decreased to 65% of sales in the three months ended June 29, 2003 from 79% in the three months ended June 30, 2002. As a percentage of sales, the decrease in our cost of goods sold reflects the cost reductions generated by our restructuring program implemented in our third quarter of 2002 including reductions in wages and benefits, rent, and depreciation expenses. These reduced operating expenses were partially offset by additional expenses incurred to transition our semiconductor manufacturing processes to outside foundries. In absolute dollars, the decrease in our cost of goods sold reflects the factors previously noted as well as our decline in sales during 2003. We have a significant amount of unabsorbed overhead costs related to the increased manufacturing infrastructure we put in place to support our customers’ demand in the second half of 2000. This increased infrastructure includes, among other things, a new manufacturing facility and investments in equipment. Our 2002 restructuring program has reduced our unabsorbed overhead through the write down of excess facilities and equipment, but we will still have fixed manufacturing costs that these efforts will not impact. Given the current economic slowdown, our capacity may not be fully utilized and the ongoing costs thereof will still be incurred until such time as the market demand for our products increases or our transition to an outsourced business model is complete. In addition, we typically generate lower gross margin on new product introductions which we expect to be a higher percentage of our sales mix going forward. Over time, we typically become more efficient relative to new products through learning and increased volumes as well as through introducing lower cost elements to the product designs. New product lines also contain a greater degree of inventory risk due to uncertainty regarding a lack of visibility and predictability of customer demand and potential competition

 

Research and Development – Our research and development expense for the three months ended June 29, 2003 was $4.3 million, a decrease of approximately $376,000 or 8% as compared with research and development expense of $4.7 million in the three months ended June 30, 2002. The decrease in absolute dollars is primarily related to a decrease in procured materials used in our research and development. Research and development efforts in the both quarters were attributable to spending on the development of RF semiconductor products. As a percentage of sales, research and development expenses increased to 78% of sales in the three months ended June 29, 2003 from 53% of sales in the three months ended June 30, 2002. The increase in research and development expense as a percentage of sales relates to our decline in sales during the second quarter of 2003. Product research and development is essential to our future success and we expect to continue to make investments in new product development and engineering talent.  In particular, we will continue to focus our research efforts and resources on RF semiconductor development.

 

Selling and Administrative – Selling and administrative expense for the three months ended June 29, 2003 was $2.7 million or 49% of sales, a slight increase of approximately $91,000 or 4% as compared with selling and administrative expense of $2.6 million or 30% of sales in the three months ended June 30, 2002. The increase in absolute dollars is primarily related to an increase in legal, advertising and promotion, and insurance expenses partially offset by reduced wages and benefits, and bad debt recoveries.  In the three months ended June 29, 2003 we recovered approximately $162,000 of accounts receivable which was previously reserved in our allowance for doubtful accounts. In the three months ended June 30, 2002 we recorded a bad debt expense of approximately $147,000 for a customer believed to be in financial difficulty. As a percentage of sales, the increase in selling and administrative expense reflects the decrease in sales during the second quarter of 2003.

 

Amortization of Deferred Stock Compensation – Amortization of deferred stock compensation expense for both periods represents the granting of restricted stock during 2002 at a price below fair market value and the issuance of stock options during 2000 at prices deemed below fair market value. As of June 29, 2003, the balance of our remaining unamortized deferred stock compensation was approximately $166,000 to be amortized over the next 21 months.

 

Recapitalization Merger – We incurred recapitalization merger expense of $35,000 in the three months ended June 29, 2003 related to our consideration of the proposed Fox Paine transaction. On September 19, 2002, we announced the receipt of a proposal from an affiliate, Fox Paine & Company LLC (“Fox Paine”) to acquire all of the shares of our common stock held by unaffiliated stockholders (the “Acquisition Proposal”). Fox Paine and its affiliates currently own approximately 66% of our outstanding shares or approximately 37.0 million shares of a total of approximately 55.9 million shares outstanding. Our Board of Directors formed a special committee composed of two independent directors not affiliated with Fox Paine (the “Special Committee”) to review the Acquisition Proposal. These expenses include legal and financial consulting fees as well as compensation to the members of the Special Committee. On March 27, 2003, Fox Paine withdrew its Acquisition Proposal, however, we expect these expenses to continue through the remainder of 2003.

 

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Interest Income – Interest income primarily represents interest earned on cash equivalents and short-term available-for-sale investments. Our interest income in the three months ended June 29, 2003 was approximately $195,000, a decrease of $141,000 or 42% as compared with interest income of $336,000 in the three months ended June 30, 2002. This decrease primarily resulted from decreased average amounts of funds available for investment and a decrease in interest rates.  To the extent we continue to utilize our cash in the operation of our business, interest income is expected to decrease going forward. Additionally, our interest income will be impacted by changes in the market interest rates of our investments, which are generally lower than they were a year ago.

 

Interest Expense – Our interest expense for the three months ended June 29, 2003 was approximately $38,000, a decrease of approximately $22,000 or 37% as compared with interest expense of approximately $60,000 for the three months ended June 30, 2002. Interest expense for both periods relates to fees associated with our revolving credit facility and outstanding letters of credit. 

 

Other Income -Net –In the three months ended June 29, 2003 we recorded a gain of approximately $1.1 million related to the sale of our Thin-Film product line to M/A-COM, a unit of Tyco Electronics previously announced in December, 2002.  The sale includes equipment, inventory, intellectual property, training and services for which we will receive total proceeds of approximately $1.8 million. For further discussion, see Note 11 to the unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q.

 

Income Tax Benefit – In the three months ended June 29, 2003 we recorded a tax benefit of $16,000 related to an adjustment to our deferred tax asset for additional federal income tax refund determined after finalizing our 2002 carryback claim filed in the first quarter of 2003. Beginning in 2002, it was determined that it was not more likely than not that any additional deferred tax assets would be realized through the application of carryforward claims, thus we will not record income tax benefits on future net operating losses.

 

Six Months Ended June 29, 2003 Compared to Six Months Ended June 30, 2002

 

Sales – Sales for the six months ended June 29, 2003 were $13.2 million, a decrease of $8.6 million, or 39%, from sales of $21.8 million in the six months ended June 30, 2002. This decline in sales resulted primarily from our decision in 2002 to exit our fixed wireless and fiber optics businesses.  This decrease was partially offset by the increase in sales of our RF semiconductor products. RF semiconductor sales during the first six months of 2003 totaled $9.0 million, representing 68% of total sales and an increase of 15% over the first six months of 2002 sales of $7.8 million. Our RF semiconductor sales includes sales of our Thin-Film products which represents approximately $855,000 and $1.3 million for the six months ended June 29, 2003 and June 30, 2002, respectively. As we announced on December 10, 2002, we have entered into an agreement to sell our Thin-Film product line to M/A-COM, a unit of Tyco Electronics. The product line was transfered to M/A-COM and title passed on May 14, 2003. Excluding our Thin-Film sales, our Semiconductor IC sales increased 25% to $8.2 million in the first six months of 2003 from $6.5 million from the same period last year. Wireless product sales during the first six months of 2003 totaled $4.2 million, representing 32% of total sales and a decrease of $4.4 million or 51% over the first six months of 2002 sales of $8.6 million. Wireless product sales for the first half of 2002 included $3.0 million for final product delivery of our last major fixed wireless contract. Fiber optic sales represented an insignificant amount of sales in relation to total sales for the first six months of 2003. 

 

We depend on a small number of customers for a majority of our sales. During the six months ended June 29, 2003, we had two customers which each accounted for more than 10% of our sales and in aggregate accounted for 67% of our sales.  During the six months ended June 30, 2002, we had four customers which each accounted for more than 10% of our sales and in aggregate accounted for 75% of our sales. We have diversified our customer base over the last few years and intend to further diversify our customer base and product offering in the future. However, we anticipate that we will continue to sell a majority of our products to a relatively small group of customers.

 

Cost of Goods Sold – Our cost of goods sold for the six months ended June 29, 2003 was $8.4 million a decrease of $8.6 million or 51% as compared with cost of goods sold of $17.0 million in the six months ended June 30, 2002. As a percentage of sales, our cost of goods sold decreased to 64% of sales in the six months ended June 29, 2003 from 78% in

 

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the same period of 2002. The decrease in our cost of goods sold as a percentage of sales primarily relates to cost reductions generated by our restructuring program implemented in our third quarter of 2002 including reductions in wages and benefits, rent, and depreciation expenses. These reduced operating expenses were partially offset by additional expenses incurred to transition our semiconductor manufacturing processes to outside foundries. During the first half of 2002, our cost of goods sold benefited from the sale of $5.9 million of fixed wireless CPE inventory of which $3.1 million had been previously written off in 2001. Due to rapidly changing customer forecasts and orders, additional write-downs of excess or obsolete inventory, while not currently expected, could be required in the future. In addition, the sale of previously written down inventory could result from significant unforeseen increases in customer demand. In absolute dollars, the decrease in our cost of goods sold reflects the factors noted above as well as our decline in sales during the first half of 2003. We have a significant amount of unabsorbed overhead costs related to the increased manufacturing infrastructure we put in place to support our customers’ demand in the second half of 2000. This increased infrastructure includes, among other things, a new manufacturing facility and investments in equipment. Our 2002 restructuring program has mitigated our unabsorbed overhead through the write down of excess facilities and equipment, but we will still have fixed manufacturing costs that these efforts will not impact. Given the current economic slowdown, our capacity may not be fully utilized and the ongoing costs thereof will still be incurred until such time as the market demand for our products increases or our transition to an outsourced business model is complete. In addition, we typically generate lower gross margin on new product introductions which we expect to be a higher percentage of our sales mix going forward. Over time, we typically become more efficient relative to new products through learning and increased volumes as well as through introducing lower cost elements to the product designs. New product lines also contain a greater degree of inventory risk due to uncertainty regarding a lack of visibility and predictability of customer demand and potential competition

 

Research and Development – Our research and development expense for the six months ended June 29, 2003 was $8.8 million, a decrease of approximately $348,000 or 4% as compared with research and development expense of $9.1 million in the six months ended June 30, 2002. The decrease in absolute dollars is primarily related to a decrease in procured materials used in our research and development. Research and development efforts in the both quarters were attributable to spending on the development of RF semiconductor products. As a percentage of sales, research and development expenses increased to 66% of sales in the six months ended June 29, 2003 from 42% of sales in the six months ended June 30, 2002. The increase in research and development expense as a percentage of sales relates to our decline in sales during the first half of 2003. Product research and development is essential to our future success and we expect to continue to make investments in new product development and engineering talent. In particular, we will continue to focus our research efforts and resources on RF semiconductor development.

 

Selling and Administrative – Selling and administrative expense for the six months ended June 29, 2003 was $5.4 million or 41% of sales, a decrease of approximately $641,000 or 11% as compared with selling and administrative expense of $6.0 million or 28% of sales for the six months ended June 30, 2002. The decrease in absolute dollars is primarily related to reduced wages and benefits including severance, and recovery of approximately $224,000 of previously reserved accounts receivable as bad debt partially offset by increased insurance expense. As a percentage of sales, the increase in selling and administrative expense reflects the decrease in sales during the first half of 2003.

 

Amortization of deferred stock compensation – Amortization of deferred stock compensation expense for both periods represents the granting of restricted stock during 2002 at a price below fair market value and the issuance of stock options during 2000 at prices deemed below fair market value. As of June 29, 2003, the balance of our remaining unamortized deferred stock compensation was approximately $166,000 to be amortized over the next 21 months.

 

Recapitalization Merger – We incurred recapitalization merger expense of $772,000 in the six months ended June 29, 2003 related to our consideration of the proposed Fox Paine transaction. On September 19, 2002, we announced the receipt of a proposal from an affiliate, Fox Paine & Company LLC (“Fox Paine”) to acquire all of the shares of our common stock held by unaffiliated stockholders (the “Acquisition Proposal”). Fox Paine and its affiliates currently own approximately 66% of our outstanding shares or approximately 37.0 million shares of a total of approximately 55.9 million shares outstanding. Our Board of Directors formed a special committee composed of two independent directors not affiliated with Fox Paine (the “Special Committee”) to review the Acquisition Proposal. These expenses include legal

 

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and financial consulting fees as well as compensation to the members of the Special Committee. On March 27, 2003, Fox Paine withdrew its Acquisition Proposal, however we expect these expenses to continue through the remainder of 2003.

 

Restructuring charges – During the six months ended June 29, 2003, it was determined that one of the employees slated to be terminated would instead be retained for another position.  As such, approximately $21,000 of the third quarter 2002 restructuring charge was reversed. For further discussion, see Note 10 to the unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q.

 

Interest Income – Interest income primarily represents interest earned on cash equivalents and short-term available-for-sale investments. Our interest income in the six months ended June 29, 2003 was approximately $414,000, a decrease of $221,000 or 35% as compared with interest income of approximately $635,000 in the six months ended June 30, 2002. This decrease primarily resulted from decreased average amounts of funds available for investment and a decrease in interest rates. To the extent we continue to utilize our cash in the operation of our business, interest income is expect to decrease going forward. Additionally, our interest income will be impacted by changes in the market interest rates of our investments, which are generally lower than they were a year ago.

 

Interest Expense – Our interest expense for the six months ended June 29, 2003 was approximately $50,000, a decrease of approximately $32,000 or 39% as compared with interest expense of approximately $82,000 for the six months ended June 30, 2002.  Interest expense for both periods relates to fees associated with our revolving credit facility and outstanding letters of credit.

 

Other Income-Net –In the six months ended June 29, 2003 other income-net primarily related to the gain of approximately $1.1 million we recorded related to the sale of our Thin-Film product line to M/A-COM, a unit of Tyco Electronics previously announced in December, 2002.  The sale includes equipment, inventory, intellectual property, training and services for which we will receive total proceeds of approximately $1.8 million. For further discussion, see Note 11 to the unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q.

 

Income Tax Benefit – In the six months ended June 29, 2003 we recorded a tax benefit of $647,000 related to an income tax refund of $480,000 from the State of Maryland as the result of amending our 1999 state tax return and an adjustment to our deferred tax asset of $167,000 for additional federal income tax refund determined after finalizing our 2002 carryback claim filed in the first quarter of 2003. Beginning in 2002, it was determined that it was not more likely than not that any additional deferred tax assets would be realized through the application of carryforward claims, thus we will not record income tax benefits on future net operating losses.

 

LIQUIDITY AND CAPITAL RESOURCES

 

On June 29, 2003, cash and equivalents and short-term investments totaled $64.2 million, a decrease of approximately $500,000 from the December 31, 2002 balance of $64.7 million.

 

In December of 2000, we entered into a $25.0 million revolving credit facility (“Revolving Facility”) with a bank. The Revolving Facility matures on December 31, 2003 and contains a $15.0 million sub-limit to support letters of credit. Interest rates on outstanding borrowings are periodically adjusted based on certain financial ratios and are initially set, at our option, at LIBOR plus 1.0% or Prime minus 0.5%. The Revolving Facility requires that we maintain certain financial ratios and contains limitations on, among other things, our ability to incur indebtedness, pay dividends and make acquisitions without the bank’s permission. The Revolving Facility is secured by substantially all of our assets. As of June 29, 2003, there were no outstanding borrowings under the Revolving Facility. We have letters of credit of $4.3 million outstanding as of June 29, 2003 against which no amounts have been drawn. Subsequent to quarter end, we obtained a waiver for the quarter ended June 29, 2003 of certain financial covenants under the Revolving Facility for which we were out of compliance.  In order for amounts to be available to us under the Revolving Facility in the future, we are negotiating with the lender to amend the financial covenants. Furthermore we are negotiating a new credit facility which would replace the existing credit facility. However, there can be no assurance that our negotiations will be successful or that we will be able to close on a new credit facility.

 

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Net Cash Provided by Operating Activities – Net cash provided by operations was $357,000 and $14.0 million in the six months ended June 29, 2003 and June 30, 2002, respectively. Net loss in the six months ended June 29, 2003 and June 30, 2002 was $8.0 million and $10.0 million, respectively. Items impacting the difference between net loss and cash flows from operations in the first half of 2003 were $2.0 million provided by working capital and $6.0 million provided by a decrease in our deferred tax assets. The $2.0 million provided by working capital primarily relates to an approximate $900,000 decrease in inventories and a $1.2 million decrease in other assets related to the amortization of prepaid insurance and collection of interest receivable. The $6.0 million decrease in deferred tax assets relates to the realization of a refund claim generated by the carryback of our 2002 net operating loss.  Significant items impacting the difference between net loss and cash flows from operations in the first half of 2002 were $12.6 million provided by working capital and $8.2 million provided by the utilization of deferred tax assets. The $12.6 million provided by working capital primarily relates to a $4.2 million decrease in inventories and a $7.1 million decrease in receivables. The $8.2 million provided by the utilization of deferred tax assets relates to the receipt of an income tax refund generated by the carryback of our 2001 net operating loss. During the second quarter of 2003, we were required to offer more favorable payment terms to significant customers in order to remain competitive in the current business environment. As a result, our average payment terms have increased from 30 days to 60 days.

 

Net Cash Provided by Investing Activities – Net cash provided by investing activities was $12.4 million and $4.2 million in the six months ended June 29, 2003 and June 30, 2002, respectively. In the first half of 2003, we received $33.6 million in proceeds from the sale of short-term investments which was partially offset by $20.9 million used to purchase short-term investments.  In the first half of 2002, we received $30.7 million in proceeds from the sale of short-term investments which was partially offset by $24.9 million used to purchase short-term investments and $1.6 million to invest in property, plant and equipment. During 2003, we expect to invest approximately $1.0 to $2.0 million in capital expenditures of which approximately $547,000 was purchased in the first half. We have funded our capital expenditures from cash, cash equivalents and short-term investments and expect to continue to do so throughout 2003.

 

Net Cash Provided (Used) by Financing Activities – Net cash used in financing activities totaled $558,000 in the six months ended June 29, 2003.  In the first half of 2003, we spent net cash of approximately $526,000 related to the repurchase of our common stock under our stock repurchase program announced March 31, 2003 (see Note 8 to the unaudited condensed consolidated financial statements included elsewhere in the Form 10-Q) and $32,000 of financing costs associated with our revolving credit facility. Net cash provided by financing activities totaled $616,000 in the six months ended June 30, 2002. In the first half of 2002, we received net cash of approximately $628,000 from the sale of our common stock to employees through our employee stock purchase and option plans which was partially offset by $12,000 of financing costs associated with our revolving credit facility.

 

Based on our current plans and business conditions, we believe that our existing cash, cash equivalents and short-term investments, together with our expected cash flows from operations and anticipated available borrowings under our credit facility, will be sufficient to meet our liquidity and capital spending requirements for at least the next twelve months. Thereafter, we will utilize our cash, cash flows and borrowings to the extent available and, if desirable or necessary, we may seek to raise additional capital through the sale of debt or equity. There can be no assurances, however, that future borrowings and capital resources will be available on favorable terms or at all. Our cash flows are highly dependent on demand for our products, timing of orders and shipments with key customers and our ability to manage our working capital, especially inventory and accounts receivable, as well as controlling our production and operating costs in line with our revenue.

 

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Item 3.                                                           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

 

The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates. We do not use derivative financial instruments for speculative or trading purposes.

 

Cash, Cash Equivalents and Investments – Cash and cash equivalents consist of money market funds and commercial paper acquired with remaining maturity periods of 90 days or less and are stated at cost plus accrued interest which approximates market value. Short-term investments consist primarily of high-grade debt securities (A rating or better) with maturity greater than 90 days from the date of acquisition and are classified as available-for-sale. Short-term investments classified as available-for-sale are reported at fair market value with unrealized gains or losses excluded from earnings and reported as a separate component of stockholders’ equity, net of tax, until realized. These available-for-sale securities are subject to interest rate risk and will rise or fall in value if market interest rates change. They are also subject to short-term market risk. We have the ability to hold our fixed income investments until maturity, and therefore we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our investment portfolio.

 

The following table provides information about our investment portfolio and constitutes a “forward-looking statement.” For investment securities, the table presents principal cash flows and related weighted average interest rates by expected maturity dates.

 

Expected Maturity Dates		Expected Maturity Amounts (in thousands)			Weighted Average Interest Rate
Cash equivalents:
2003		$	53,774		1.06	%
Short-term investments:
2003		8,488			1.20	%
Fair value at June 29, 2003		$	62,262

 

Item 4.                                                           CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

In order to ensure that the information required to be disclosed in this report is recorded, processed, summarized and reported on a timely basis, we have adopted internal controls and procedures.  We conducted an evaluation (the “Evaluation”), under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”) as of the end of the period covered by this report.  Based on the Evaluation, our CEO and CFO concluded that our Disclosure Controls are effective as of the end of the period covered by this report.

 

Changes in Internal Control

 

We have also evaluated our internal control over financial reporting, and there have been no changes in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

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CEO and CFO Certifications

 

In Exhibits 31.1 and 31.2 of this report there are Certifications of the CEO and the CFO.  The Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications).  This Item of this report, which you are currently reading is the information concerning the Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

 

 

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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

 

You should carefully consider the risks described below and all other information contained in this report and in our other filings with the SEC, including but not limited to information under the heading “Risk Factors That May Affect Future Results” in our most recently filed Form 10-K in evaluating us and our business before making an investment decision. If any of the following risks, or other risks and uncertainties that we have not yet identified or that we currently think are immaterial, actually occur and are material, our business, financial condition and results of operations could be materially and adversely affected. In that event, the trading price of our common stock could decline and you may lose part or all of your investment.

 

We have recently incurred substantial operating losses and we anticipate additional future losses.

 

In the six months ended June 29, 2003, our sales were $13.2 million and we incurred an operating loss of $10.2 million. In addition, our sales for the year ended December 31, 2002 were $40.2 million compared to $62.2 million for 2001.  The decrease in revenue was due to sharply reduced end-customer demand in many of the communications end-markets, which our products address. We incurred an operating loss of $52.5 million for the year ended December 31, 2002.

 

We expect that reduced end-customer demand, underutilization of our manufacturing capacity and other factors will continue to adversely affect our operating results in the near term and we anticipate incurring additional losses in 2003. In order to return to profitability, we must achieve substantial revenue growth and we currently face an environment of uncertain demand in the markets our products address. We cannot assure you as to whether or when we will return to profitability or whether we will be able to sustain such profitability, if achieved.

 

If our common stock ceases to be listed for trading on the Nasdaq National Market, it may harm our stock price and make it more difficult for you to sell your shares.

 

Our common stock is listed on the Nasdaq National Market and the bid price for our common stock has recently been below $1.00 per share during certain periods. The Nasdaq National Market rules for continued listing require, among other things, that the bid price for our common stock not fall below $1.00 per share for a period of 30 consecutive trading days. On May 6, 2003 we received notification from Nasdaq that for the prior 30 consecutive trading days the price of our common stock had closed below the minimum bid price requirement. However, Nasdaq subsequently notified us on May 30, 2003 that we regained compliance when the bid price of our common stock subsequently closed at $1.00 per share or more for a minimum of 10 consecutive trading days. While we have taken steps to address this situation in the future, including obtaining stockholder approval authorizing our Board to implement up to a one-for-ten reverse stock split, we cannot assure you that even if we implement a reverse stock split our stock will maintain such minimum bid price requirement or that we will be able to meet or maintain all of the Nasdaq National Market continued listing requirements in the future. If, in the future, our minimum bid price is again below $1.00 for 30 consecutive trading days, under the current Nasdaq National Market rules we will have a period of 180 days to attain compliance by meeting the minimum bid price requirement for 10 consecutive days during the compliance period.

 

If our common stock ceases to be listed for trading on the Nasdaq National Market for failure to meet the minimum bid price requirement, we expect that our common stock would be traded on the NASD’s Over-the-Counter Bulletin Board unless Nasdaq grants an additional grace period for transfer to Nasdaq’s SmallCap Market, which also has a similar $1.00 minimum bid requirement. In addition, our stock could then potentially be subject to the Securities and Exchange Commission’s “penny stock” rules, which place additional disclosure requirements on broker-dealers. These additional disclosure requirements may harm your ability to sell your shares if it causes a decline in the ability or willingness of broker-dealers to sell our common stock. We also expect that the level of trading activity of our common stock would decline if it is no longer listed on the Nasdaq National Market or SmallCap Market. As such, if our common stock ceases to be listed for trading on the Nasdaq National Market or SmallCap Market, it may harm our stock price, increase the volatility of our stock price and make it more difficult for you to sell your shares of our common stock.

 

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External factors such as general economic conditions can harm our business.

 

External factors such as slower economic activity, concerns about inflation, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns in the telecommunications and related industries, unemployment trends, international conflicts and terrorist and military activity have adversely affected our business in the past. As a result of unfavorable general economic conditions during 2002 we experienced a significant slow down in customer orders, an increase in the number of cancellations and reschedulings of backlog and higher overhead costs as a percentage of our reduced net sales. In 2003, concerns remain regarding the timing, strength and duration of economic recovery in the semiconductor industry and commercial communications infrastructure markets. In addition, political and social turmoil related to international conflicts, terrorist acts and the severe acute respiratory syndrome (“SARS”) outbreak make it difficult for us to accurately forecast and plan future business activities and may adversely affect our business. We cannot provide assurance that our business will not suffer as a result of external factors.

 

A small number of customers account for a high percentage of our sales and the loss of, or a reduction in orders from, a significant customer could result in a reduction of sales.

 

We depend on a small number of customers for a majority of our sales. During the six months ended June 29, 2003, we had two customers which each accounted for more than 10% of our sales and in aggregate accounted for 67% of our sales, including sales to their respective manufacturing subcontractors. Sales to our 10% customers, including sales to their respective manufacturing subcontractors, in aggregate accounted for 74% of our sales for the six months ended June 30, 2002. In addition, most of our sales result from purchase orders or from contracts that can be cancelled on short-term notice. We expect that our key customers will continue to account for a substantial portion of our revenue in 2003 and in the foreseeable future. The loss of or a reduction in orders from a significant customer for any reason could cause our sales to decrease.

 

We depend solely on Richardson Electronics, Ltd. for distribution of our RF semiconductor products.

 

Richardson Electronics, Ltd. is the sole worldwide distributor of our complete line of RF semiconductor products. This sole distributor is our largest semiconductor customer and our sales to Richardson Electronics, Ltd. represent 54% and 44% of our Semiconductor sales for the six months ended June 29, 2003 and June 30, 2002, respectively. We cannot assure you that this exclusive relationship will improve sales of our semiconductor products or that it is the most effective method of distribution. If this sole distributor fails to successfully market and sell our products, our semiconductor sales could materially decline. Our agreement with this distributor does not require it to purchase our products and is terminable at any time. If this distribution relationship is discontinued, our RF semiconductor sales could materially decline.

 

Our future success depends significantly on strategic relationships with certain of our customers. If we cannot maintain these relationships or if these customers develop their own solution or adopt a competitor’s solutions instead of buying our products, our operating results would be adversely affected.

 

In the past, we have relied on our strategic relationships with certain customers who are technology leaders in our target markets. We intend to pursue and continue to form these strategic relationships in the future but we cannot assure you that we will be able to do so. These relationships often require us to develop new products that typically involve significant technological challenges. Our partners frequently place considerable pressure on us to meet their tight development schedules. Accordingly, we may have to devote a substantial amount of our limited resources to our strategic relationships, which could detract from or delay our completion of other important development projects. Delays in development could impair our relationships with our strategic partners and negatively impact sales of the products under development. Moreover, it is possible that our customers may develop their own solutions or adopt a competitor’s solution for products that they currently buy from us. If that happens, our business, financial condition and results of operations could be materially and adversely affected.

 

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Our quarterly operating results may fluctuate significantly. As a result, we may fail to meet or exceed the expectations of securities analysts and investors, which could cause our stock price to decline.

 

Our quarterly revenues and operating results have fluctuated significantly in the past and may continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. If our operating results do not meet our publicly stated guidance or the expectations of securities analysts or investors, our stock price may decline. Fluctuations in our operating results may be due to a number of factors, including the following:

 

•                  continued slow down and uncertainty in capital spending by communications service providers;

 

•                  the volume of our product sales and pricing concessions on volume sales;

 

•                  the timing, rescheduling, reduction or cancellation of significant customer orders and the ability of our customers to manage their inventories;

 

•                  the gain or loss of a key customer;

 

•                  the qualification, availability and pricing of competing products and technologies and the resulting effect on sales and pricing of our products;

 

•                  our ability to specify, develop or acquire, complete, introduce, market and transition to volume production new products and technologies in a timely manner and the acceptance of our new products by our customers;

 

•                  the timing of customer-industry qualification and certification of our products and the risks of non-qualification or non-certification;

 

•                  the rate of which our present and future customers and end users adopt our technologies in our target markets;

 

•                  the rate of adoption and acceptance of new industry standards in our target markets;

 

•                  the effects of new and emerging technologies;

 

•                  patent and other intellectual property disputes, customer indemnification claims and other types of litigation risks;

 

•                  the effectiveness of our expense and product cost control and reduction efforts;

 

•                  fluctuations in our manufacturing yields and other problems or delays in the fabrication, assembly, testing or delivery of our products;

 

•                  changes in manufacturing capacity and the utilization of this capacity;

 

•                  the risks of producing products with new suppliers and at new fabrication and assembly facilities;

 

•                  fluctuations in the manufacturing yields of any third party semiconductor foundries we employ and other problems or delays in the fabrication, assembly, testing or delivery of our products;

 

•                  the availability and pricing of third party semiconductor foundry and assembly and test capacity and raw materials;

 

•                  cost and expense of outsourcing our semiconductor manufacturing;

 

•                  our ability to retain and hire key executives, technical personnel and other employees in the numbers, with the capabilities and at the compensation levels that we need to implement our business and product plans;

 

•                  changes in our product mix or customer mix;

 

•                  the extent and duration of the current downturn in the economy and the weakness in demand by our customers;

 

•                  lack of visibility into the finished product inventories of our customers and end-users;

 

•                  increased in-house production by our customers;

 

•                  continued excessive inventories held by our customers or end-users;

 

•                  the quality of our products and any remediation costs;

 

•                  the effects of natural disasters and other events beyond our control;

 

•                  the level of orders received that we can ship in a fiscal quarter;

 

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•                  our inability to utilize our line of credit or comply with its terms;

 

•                  the availability and affordability of raw materials;

 

•                  cyclical nature of semiconductor business;

 

•                  continued reduction or loss of customer orders due to economic and business factors affecting our customers;

 

•                  should we begin to acquire technologies and businesses, the risks inherent in these acquisitions, including the timing and successful completion of technology and product development through volume production, integration issues, costs and unanticipated expenditures, change relationships with customers, suppliers and strategic partners, potential contractual, intellectual property or employment issues, accounting treatment and charges, and the risks that the acquisition cannot be completed successfully or that anticipated benefits are not realized;

 

•                  increased warranty claims;

 

•                  recognition of non-recurring revenue generated from life-time buys of discontinued products or settlements of contract cancellations for orders containing inventory protection clauses;

 

•                  the eventual actual cost of our abandonment of our leased facilities;

 

•                  our ability to sublease the excess space we abandoned in our leased facilities;

 

•                  our ability to successfully complete our restructuring programs;

 

•                  the impact of international conflicts and acts of terrorism on economic and market conditions;

 

•                  the impact of regional and global infectious illnesses (such as the SARS outbreak) on economic and market conditions;

 

•                  dependency on a limited number of outsourced semiconductor wafer fabrication facilities;

 

•                  diversion of management’s attention and resources as a result of defending against litigation matters;

 

•                  continued poor economic and market conditions in our industry; and

 

•                  external factors including general economic and market conditions.

 

Due to all of the foregoing factors, and the other risks discussed in this report, you should not rely on period-to-period comparisons of our operating results as an indication of future performance.

 

Under our realigned manufacturing strategy, we will be increasingly dependent upon third parties for the manufacture of our products.

 

As we transition to a complete outsourcing business model, we will obtain an increasing portion of our wafer requirements from outside wafer fabrication facilities, known as foundries.  There are significant risks associated with our reliance on third-party foundries, including:

 

•                  the lack of ensured wafer supply, potential wafer shortages and higher wafer prices;

 

•                  limited control over product delivery schedules, quality assurance and control, manufacturing yields and production costs; and

 

•                  the unavailability of, or delays in obtaining, access to key fabrication process technologies.

 

We have no long-term contracts with any foundry and we do not have a guaranteed level of production capacity at any foundry. The ability of each foundry to provide wafers to us is limited by its available capacity and our foundry suppliers could provide that limited capacity to its other customers. In addition, our foundry suppliers could reduce or even eliminate the capacity allocated to us on short notice. Moreover, such a reduction or elimination is possible even after we have submitted a purchase order. If we choose to use a new foundry, it typically takes several months to complete the qualification process before we can begin shipping products from the new foundry.

 

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The foundries we use may experience financial difficulties or suffer damage or destruction to their facilities. If these events or any other disruption of wafer fabrication capacity occur, we may not have a second manufacturing source immediately available. We may therefore experience difficulties or delays in securing an adequate supply of our products, which could impair our ability to meet our customers’ needs and have a material adverse effect on our operating results. In the event of these types of delays, we cannot assure you that the required alternate capacity, particularly wafer production capacity, would be available on a timely basis or at all. Even if alternate wafer production capacity is available, we may not be able to obtain it on favorable terms, which could result in a loss of customers. We may be unable to obtain sufficient manufacturing capacity to meet demand, either at our own facilities or through foundry or similar arrangements with others.

 

In addition, the highly complex and technologically demanding nature of semiconductor manufacturing has caused foundries to experience from time to time lower than anticipated manufacturing yields, particularly in connection with the introduction of new products and the installation and start-up of new process technologies. Lower than anticipated manufacturing yields may affect our ability to fulfill our customers’ demands for our products on a timely and cost-effective basis.

 

We cannot be certain that we will be able to maintain our good relationships with our existing foundries. In addition, we cannot be certain that we will be able to form relationships with other foundries as favorable as our current ones.  Moreover, transferring from our internal fabrication facility or our existing foundries to another foundry, could require a significant amount of time and loss of revenue, and we cannot assure you that we could make a smooth and timely transition.  If foundries are unable or unwilling to continue to supply us with these semiconductor products in required time frames and volumes or at commercially acceptable costs, our business may be harmed.

 

If we are unable to develop and introduce new semiconductors successfully and in a cost-effective and timely manner or to achieve market acceptance of our new semiconductors, our operating results would be adversely affected.

 

The future success of our semiconductor business will depend on our ability to develop new semiconductor solutions for existing and new markets, introduce these products in a cost-effective and timely manner and convince leading equipment manufacturers to select these products for design into their own new products. Our quarterly results in the past have been, and are expected in the future to continue to be, dependent on the introduction of a relatively small number of new products and the timely completion and delivery of those products to customers. The development of new semiconductor devices is highly complex, and from time to time we have experienced delays in completing the development and introduction of new products and lower than anticipated manufacturing yields in the early production of such products. Our ability to develop and deliver new semiconductor products successfully will depend on various factors, including our ability to:

 

•                  accurately predict market requirements and evolving industry standards;

 

•                  accurately define new products;

 

•                  timely complete and introduce new product designs;

 

•                  timely qualify and obtain industry interoperability certification of our products and the products of our customers into which our products will be incorporated;

 

•                  obtain sufficient foundry capacity;

 

•                  achieve high manufacturing yields;

 

•                  shift our products to smaller geometry process technologies to achieve lower cost and higher levels of design integration; and

 

•                  gain market acceptance of our products and our customers’ products.

 

If we are not able to develop and introduce new products successfully and in a cost-effective and timely manner, our business, financial condition and results of operations would be materially and adversely affected.

 

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Our new semiconductor products generally are incorporated into our customers’ products at the design stage. We often incur significant expenditures for the development of a new product without any assurance that an equipment manufacturer will select our product for design into its own product. The value of our semiconductors largely depends on the commercial success of our customers’ products and on the extent to which those products accommodate components manufactured by our competitors. We cannot assure you that we will continue to achieve design wins or that equipment that incorporates our products will ever be commercially successful.

 

The amount and timing of revenue from newly designed semiconductors is often uncertain.

 

We have announced a significant number of new semiconductor products and design wins for new and existing semiconductors. Achieving a design win with a customer does not create a binding commitment from that customer to purchase our products. Rather, a design win is solely an expression of interest by potential customers in purchasing our products and is not supported by binding commitments of any nature. Accordingly, a customer may choose at any time to discontinue using our products in their designs or product development efforts. Even if our products are chosen to be incorporated in our customer’s products, we still may not realize significant revenues from that customer if their products are not commercially successful. A design win may not generate revenue if the customer’s product is rejected by their end market. Typically, most new products or design wins have very little impact on near-term revenue. It may take well over a year before a new product or design win generates meaningful revenue.

 

Once a manufacturer of communications equipment has designed a supplier’s semiconductor into its products, the manufacturer may be reluctant to change its source of semiconductors due to the significant costs associated with qualifying a new supplier and potentially redesigning its product. Accordingly, our failure to achieve design wins with equipment manufacturers, which have chosen a competitor’s semiconductor, could create barriers to future sales opportunities with these manufacturers.

 

Our semiconductor products typically have lengthy sales cycles and we may ultimately be unable to recover our investment in new products.

 

After we have developed and delivered a semiconductor product to a customer, the customer will usually test and evaluate our product prior to designing its own equipment to incorporate our product. Our customer may need three to six months or longer to test, evaluate and adopt our semiconductors and an additional three to nine months or more to begin volume production of equipment that incorporates our semiconductors. Moreover, in light of the significant economic slow down in the telecommunications sector, it may take significantly longer than three to nine months before customers commence volume production of equipment incorporating some of our semiconductors. Due to this lengthy sales cycle, we may experience significant delays from the time we increase our expenses for research and development and sales and marketing efforts and make investments in inventory until the time that we generate revenue from these products. It is possible that we may never generate any revenue from these products after incurring such expenditures. Even if a customer selects our semiconductors to incorporate into its equipment, we have no assurances that the customer will ultimately market and sell its equipment or that such efforts by our customer will be successful. The delays inherent in our lengthy sales cycle increase the risk that a customer will decide to cancel or change its product plans. Such a cancellation or change in plans by a customer could cause us to lose sales that we had anticipated. In addition, our business, financial condition and results of operations could be materially and adversely affected if a significant customer curtails, reduces or delays orders during our sales cycle or chooses not to release equipment that contains our products.

 

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The resources devoted to product research and development and sales and marketing may not generate material revenue for us, and from time to time, we may need to write off excess and obsolete inventory. If we incur significant marketing and inventory expenses in the future that we are not able to recover, and we are not able to compensate for those expenses, our operating results could be adversely affected. In addition, if we sell our products at reduced prices in anticipation of cost reductions and we still have higher cost products in inventory, our operating results would be harmed.

 

If we are unable to respond to the rapid technological changes taking place in our industry, our existing products could become obsolete and we could face difficulties making future sales.

 

The markets in which we compete are characterized by rapidly changing technologies, evolving industry standards and frequent improvements in products and services. If the technologies supported by our products become obsolete or fail to gain widespread acceptance, as a result of a change in industry standards or otherwise, we could face difficulties making future sales.

 

We must continue to make significant investments in research and development to seek to develop product enhancements, new designs and technologies on a cost effective basis. If we are unable to develop and introduce new products or enhancements in a timely manner in response to changing market conditions or customer requirements, or if our new products do not achieve market acceptance, our sales could decline. Additionally, initial lower margins are typically experienced with new products under development.

 

Our existing and potential customers operate in an intensely competitive environment and our success will depend on the success of our customers.

 

The companies in our target markets, communications equipment companies and service providers, face an extremely competitive environment. Some of the semiconductor and wireless products we design and sell are customized to work with specific customers’ systems. If the companies with whom we establish business relations are not successful in building their systems, promoting their products, including new revenue-generating services, receiving requisite approvals and accomplishing the many other requirements for the success of their businesses, our growth will be limited. Furthermore, our customers may have difficulty obtaining parts from other suppliers causing these customers to cancel or delay orders for our products. In addition, we have limited ability to foresee the competitive success of our customers and to plan accordingly.

 

If the broadband cable and wireless communications markets fail to grow or they decline, our sales may not grow or may decline.

 

Our future growth depends on the success of the broadband cable and wireless communications markets. The rate at which these markets will grow is difficult to predict. These markets may fail to grow or decline for many reasons, including:

 

•                  insufficient consumer demand for broadband cable or wireless products or services;

 

•                  the inability of the various communications service providers to access adequate capital to build their networks;

 

•                  inefficiency and poor performance of broadband cable or wireless communications services compared to other forms of broadband access; and

 

•                  real or perceived security or health risks associated with wireless communications.

 

Throughout the last two years and the first half of 2003, the demand for telecom equipment has been very soft. This weakness in demand is currently projected to continue throughout the remainder of 2003 and potentially beyond based on customer forecasts for the purchase of our products. If the markets for our products in broadband cable or wireless communications decline, fail to grow, or grow more slowly than we anticipate, the use of our products may be reduced and our sales could suffer.

 

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If we fail to accurately forecast component and material requirements for our manufacturing facilities, we could incur additional costs or experience manufacturing delays.

 

We use rolling forecasts based on anticipated product orders to determine our component requirements. It is very important that we accurately predict both the demand for our products and the lead times required to obtain the necessary components and materials. Lead times for components and materials that we order vary significantly and depend on factors such as specific supplier requirements, the size of the order, contract terms and current market demand for the components. For substantial increases in production levels, some suppliers may need six months or more lead time. As a result, we may be required to make financial commitments in the form of purchase commitments. We lack visibility into the finished goods inventories of our customers and the end-users. This lack of visibility impacts our ability to accurately forecast our requirements. If we overestimate our component and material requirements, we may have excess inventory, which would increase our costs. An additional risk for potential excess inventory results from our volume purchase commitments with certain material suppliers, which can only be reduced in certain circumstances. Additionally, if we underestimate our component and material requirements, we may have inadequate inventory, which could interrupt our manufacturing and delay delivery of our products to our customers. Any of these occurrences would negatively impact our sales and profitability. We have incurred, and may in the future incur, charges related to excess and obsolete inventory. While these charges may be partially offset by subsequent sales of previously written-down inventory, there can be no assurance that any such sales will be significant. As we broaden our product lines we must purchase a wider variety of components to utilize in our manufacturing processes. In addition, new product lines contain a greater degree of uncertainty due to a lack of visibility of customer acceptance and potential competition. Both of these factors will contribute a higher level of inventory risk in our near future.

 

We depend on single or limited source suppliers for some of the key components and materials in our products, which makes us susceptible to supply shortages or price fluctuations that could adversely affect our operating results.

 

We typically purchase our components and materials through purchase orders, and we have no guaranteed supply arrangements with any of our suppliers. We currently purchase several key components and materials used in the manufacture of our products from single or limited source suppliers. In the event one of our sole source suppliers is unable or unwilling to sell us material components this could have a significant adverse effect on our operations. Additionally, we may fail to obtain required components in a timely manner in the future. We may also experience difficulty identifying alternative sources of supply for the components used in our products. We would experience delays if we were required to test and evaluate products of potential alternative suppliers. Furthermore, financial or other difficulties faced by our suppliers or significant changes in demand for the components or materials they supply to us could limit the availability of those components or materials to us. In addition, we utilize overseas vendors in our semiconductor business to provide GaAs wafers, fabricate certain products and package the majority of our products. These vendors are located in Singapore, The Philippines, Malaysia, Taiwan and France. Reliance on oversea vendors subject us to risks and challenges such as:

 

•                  compliance with a wide variety of foreign laws and regulations;

 

•                  changes in laws and regulations relating to the import or export of semiconductor products;

 

•                  legal uncertainties regarding taxes, tariffs, quotas, export controls, export licenses and other trade barriers;

 

•                  political and economic instability in, foreign conflicts involving or the impact of regional and global infectious illnesses (such as the SARS outbreak) on the countries of our manufacturers and subcontractors causing delays in our ability to obtain our product;

 

•                  reduced protection for intellectual property rights in some countries; and

 

•                  fluctuations in freight rates and transportation disruptions.

 

Political and economic instability and changes in governmental regulations in these areas as well as the United States could affect the ability of our overseas vendors to supply materials or services. Any interruption or delay in the supply of our required components, materials or services, or our inability to obtain these components, materials or services from

 

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alternate sources at acceptable prices and within a reasonable amount of time, could impair our ability to meet scheduled product deliveries to our customers and could cause customers to cancel orders.

 

We rely on the significant experience and specialized expertise of our senior management in the RF industry and must retain and attract qualified engineers and other highly skilled personnel in a highly competitive job environment to maintain and grow our business.

 

Our performance is substantially dependent on the continued services and on the performance of our senior management and our highly qualified team of engineers, who have many years of experience and specialized expertise in our business. Our performance also depends on our ability to retain and motivate our other executive officers and key employees. The loss of the services of any of our executive officers or of a number of our engineers could harm our ability to maintain and build our business. We have no “key man” life insurance policies.

 

Our future success also depends on our ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial, marketing and customer service personnel. If we fail to attract, integrate and retain the necessary personnel, our ability to maintain and build our business could suffer significantly. Additionally, California State law can create unique difficulties for a California based company attempting to enforce covenants not to compete with employees which could be a factor in our future ability to retain key management and employees in a competitive environment.

 

Our business is subject to the risks of product returns, product liability and product defects.

 

Products as complex as ours frequently contain undetected errors or defects, especially when first introduced or when new versions are released. The occurrence of errors could result in product returns from and reduced product shipments to our customers. In addition, any failure by our products to properly perform could result in claims against us by our customers. Such failure also could result in the loss of or delay in market acceptance of our products or harm our reputation. Due to the recent introduction of some of our products, we have limited experience with the problems that could arise with these products.

 

Our purchase agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims. However, the limitation of liability provision contained in these agreements may not be effective as a result of federal, state or local laws or ordinances or unfavorable judicial decisions in the United States or other countries. Although we maintain $25.0 million of insurance to protect against claims associated with the use of our products, our insurance coverage may not adequately cover all claims asserted against us. In addition, even ultimately unsuccessful claims could result in costly litigation, divert our management’s time and resources and damage our customer relationships.

 

We use a number of specialized technologies, some of which are patented, to design, develop and manufacture our products. Infringement of our intellectual property rights could hurt our competitive position, harm our reputation and cost us money.

 

We regard the protection of our copyrights, patents, service marks, trademarks, trade dress and trade secrets as critical to our future success and plan to rely on a combination of copyright, patent, trademark and trade secret law, as well as on confidentiality procedures and contractual provisions, to protect our proprietary rights. We seek patent protection for our unique developments in circuit designs, processes and algorithms. Adequate protection of our intellectual property rights may not be available in every country where our products and services are made available. We intend, as a general policy, to enter into confidentiality and invention assignment agreements with all of our employees and contractors, as well as into nondisclosure agreements with parties with which we conduct business, to limit access to and disclosure of our proprietary information; however, we have not done so on a uniform basis. As a result, we may not have adequate remedies to preserve our trade secrets or prevent third parties from using our technology without authorization. We cannot assure you that all future employees, contractors and business partners will agree to these contracts, or that, even if agreed to, these contractual arrangements or the other steps we have taken to protect our intellectual property will prove sufficient to prevent misappropriation of our technology or to deter independent third-party development of similar technologies. If we are unable to execute these agreements or take other steps to prevent misappropriation of our technology or to deter

 

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independent development of similar technologies, our competitive position and reputation could suffer and we could be forced to make significant expenditures.

 

We regularly file patent applications with the U.S. Patent and Trademark Office and in selected foreign countries covering particular aspects of our technology and intend to prosecute such applications to the fullest extent of the law. Based upon our assessment of our current and future technology, we may decide to file additional patent applications in the future, and may decide to abandon current patent applications. We cannot assure you that any patent application we have filed or will file will result in an issued patent, or, if patents are issued to us, that such patents will provide us with any competitive advantages and will not be challenged by third parties or invalidated by the U.S. Patent and Trademark Office or foreign patent office. Any failure to protect our existing patents or to secure new patents may limit our ability to protect the intellectual property rights that such patents or patent applications were intended to cover. Furthermore, the patents of others may impair our ability to do business.

 

We have several registered trademarks and service marks, in the United States and abroad, and are in the process of registering others in the United States. Nevertheless, we cannot assure you that the U.S. Patent and Trademark Office will grant us these registrations. Should we decide to apply to register additional trademarks or service marks in foreign countries, there is no guarantee that we will be able to secure such registrations. The inability to register or decision not to register in certain foreign countries and adequately protect our trademarks and service marks could harm our competitive position, harm our reputation and negatively impact our future profitability.

 

We must gain access to improved process technologies.

 

For our semiconductor products, our future success will depend upon our ability to continue to gain access to new and/or improved process technologies in order to adapt to emerging industry standards or competitive market conditions. In the future, we may be required to transition one or more of our products to process technologies with smaller geometries, other materials or higher speed in order to reduce costs and/or improve product performance. We may not be able to gain access to new process technologies in a timely or affordable manner. In addition, products based on these technologies may not achieve market acceptance.

 

Our controlling stockholder has the ability to take action that may adversely affect our business, our stock price and our ability to raise capital.

 

As of June 29, 2003, Fox Paine & Company, LLC (“Fox Paine”) is the indirect beneficial owner of 66.3% of our outstanding share capital. As a result, Fox Paine has and will continue to have control over the outcome of matters requiring stockholder approval, including the power to:

 

•                  elect all of our directors and the directors of our subsidiaries;

 

•                  amend our charter or by-laws; and

 

•                  agree to or prevent mergers, consolidations or the sale of all or substantially all our assets or our subsidiaries’ assets.

 

Fox Paine also will be able to delay, prevent or cause a change in control relating to us. Fox Paine’s control over us and our subsidiaries, and its ability to delay or prevent a change in control relating to us could adversely affect the market price of our common stock.

 

Fox Paine’s controlling interest could also subject us to a class action lawsuits which could result in substantial costs and divert our management’s attention and financial resources from more productive uses. As previously announced, we received a proposal from Fox Paine to acquire all of the shares of our common stock held by unaffiliated stockholders (the “Acquisition Proposal”). The Acquisition Proposal was withdrawn by Fox Paine on March 27, 2003. Three putative class action lawsuits and one lawsuit by our former chief executive officer were filed against Fox Paine, the Company and certain of our current and former directors in connection with the Acquisition Proposal. The lawsuits sought to enjoin the Acquisition Proposal and unspecified compensatory damages. Although each of these lawsuits have been voluntarily dismissed without prejudice as a result of the withdrawal of the Acquisition Proposal, we cannot assure you that, in the future, no other purported class action lawsuits will be filed against us based on similar allegations. During the first half of

 

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2003, we have incurred approximately $772,000 of costs and expenses related to the Acquisition Proposal. We expect these expenses to continue into the third quarter and the remainder of 2003. Furthermore, we cannot assure you that Fox Paine will not in the future attempt to acquire complete control of the Company or engage in a going private transaction.

 

In addition, Fox Paine receives management fees from us which could influence their decisions regarding us.

 

Fox Paine may in the future make significant investments in other communications companies. Some of these companies may be our competitors. Fox Paine and its affiliates are not obligated to advise us of any investment or business opportunities of which they are aware, and they are not restricted or prohibited from competing with us.

 

The sale of a substantial number of shares of our common stock by Fox Paine or the perception that such sale could occur, could negatively affect the market price of our common stock and could also materially impair our future ability to raise capital through an offering of securities.

 

We have also identified the following additional risks which are described in detail in our Form 10-K for the year ended December 31, 2002:

 

i.                       We face intense competition, and, if we do not compete effectively in our markets, we will lose sales and have lower margins.

 

ii.                    We may pursue acquisitions and investments in new businesses, products or technologies that involve numerous risks, including the use of cash and diversion of management’s attention.

 

iii.                 Claims that we are infringing third-party intellectual property rights may result in costly litigation.

 

iv.                Changes in the regulatory environment of the communications industry may reduce the demand for our products.

 

v.                   Our future profitability could suffer from known or unknown liabilities that we retained when we sold parts of our company.

 

vi.                If we fail to comply with environmental regulations we could be subject to substantial fines.

 

vii.             If RF emissions pose a health risk, the demand for our products may decline.

 

viii.          Our facilities are concentrated in an area susceptible to earthquakes.

 

ix.                  Our stock price is highly volatile.

 

x.                     Our business experiences seasonality.

 

xi.                  We may need to raise additional capital in the future through the issuance of additional equity or convertible debt securities or by borrowing money, and additional funds may not be available on terms acceptable to us.

 

xii.               There are inherent risks associated with sales to our foreign customers.

 

xiii.            Future sales of our common stock could depress its market price.

 

xiv.           You may be unable to recover damages from Arthur Andersen LLP in the event financial information audited by Arthur Andersen LLP included or incorporated in this Annual Report on Form 10-K and any of our other public filings is determined to contain false statements.

 

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PART II — OTHER INFORMATION

 

Item 1.  LEGAL PROCEEDINGS

 

We are currently involved in litigation and regulatory proceedings incidental to the conduct of our business and expect that we will be involved in other litigation and regulatory proceedings from time to time. While we believe that any adverse outcome of such pending matters will not materially affect our business or financial condition, there can be no assurance that this will be the case.

 

Item 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

 

Not applicable.

 

Item 3.  DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

At our Annual Meeting of Stockholders held on July 15, 2003 our stockholders:

 

(a)          Elected each of the following nine nominees as directors, each to serve for a one-year term and to hold office until their successors are duly elected and qualified. The vote for each director was as follows:

 

Nominee		For		Withheld
Michael R. Farese, Ph.D.		49,184,767		618,954
W. Dexter Paine, III		47,723,461		2,080,260
Wray T. Thorn		47,760,163		2,043,558
Charles E. Robinson		49,123,684		680,037
J. Thomas Bentley		47,766,663		2,037,058
Robert N. Lowe, Jr.		49,180,417		623,304
Bruce W. Diamond		49,344,288		459,433
Stavro E. Prodromou, Ph.D.		49,349,888		453,833
Dag F. Wittusen		49,344,276		459,445

 

(b)              Approved an amendment to the Company’s Certificate of Incorporation to effect a reverse stock split at a ratio ranging from one-for-two to one-for-ten by the votes indicated:

 

For		Against		Abstain
49,120,848		670,403		12,470

 

(c)               Approved an amendment and restatement of the Company’s 2000 Non-Employee Director Stock Compensation Plan by the votes indicated:

 

For		Against		Abstain
47,405,263		2,385,183		13,275

 

(d)              Approved an amendment to the Company’s 2000 Stock Incentive Plan by the votes indicated:

 

For		Against		Abstain
47,663,172		2,132,294		8,255

 

(e)               Ratified the appointment of Deloitte & Touche, LLP as the Company’s independent auditors for the fiscal year 2003 by the votes indicated:

 

For		Against		Abstain
47,696,670		2,099,601		7,450

 

 

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Item 5.  OTHER INFORMATION

 

Not applicable.

 

Item 6.  EXHIBITS AND REPORTS ON FORM 8-K

 

(a)               Exhibits

 

The exhibits listed on the following index to exhibits are filed as part of this Form 10-Q.

 

Exhibit Number		Exhibit Description
10.1		Amended and Restated WJ Communications, Inc. 2002 Non-Employee Director Stock Compensation Plan
10.2		Second Amendment to WJ Communications, Inc. 2000 Stock Incentive Plan
31.1		Certification of Michael R. Farese, Chief Executive Officer, pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.
31.2		Certification of Fred J. Krupica, Chief Financial Officer, pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.
32.1		Certification of Michael R. Farese, Ph.D., Principal Executive Officer, Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
32.2		Certification of Fred J. Krupica, Principal Financial Officer, 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.

 

On April 2, 2003, the Company issued a press release announcing that its Board of Directors has authorized the repurchase of up to $2 million of the Company’s common stock.  The new program is effective immediately.  This event was reported in the Company’s report on Form 8-K filed with the Securities and Exchange Commission on April 2, 2003.

 

On April 22, 2003, the Company issued a press release announcing its financial results for the quarterly period ended March 30, 2003. This event was reported in the Company’s report on Form 8-K filed with the Securities and Exchange Commission on April 22, 2003.

 

On May 6, 2003, the Company received notice from Nasdaq warning that the Company’s common stock failed to comply with the Nasdaq National Market rules for continued listing as a result of closing below the $1.00 minimum bid price requirement for the prior 30 consecutive trading days.  The Company was given 180 calendar days, or until November 3, 2003, to regain compliance. This event was reported in the Company’s report on Form 8-K filed with the Securities and Exchange Commission on May 6, 2003.

 

On May 30, 2003, the Company received notice from Nasdaq that the Company’s common stock has regained compliance with the Nasdaq National Market rules for continued listing as a result of having had a closing bid price at $1.00 per share or greater for at least 10 consecutive trading days. This event was reported in the Company’s report on Form 8-K filed with the Securities and Exchange Commission on June 2, 2003.

 

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On June 26, 2003, the Company issued a press release relating to its anticipated revenues for the quarterly period ended June 29, 2003. This event was reported in the Company’s report on Form 8-K filed with the Securities and Exchange Commission on June 27, 2003.

 

On July 22, 2003, the Company issued a press release announcing its financial results for the quarterly period ended June 29, 2003. This event was reported in the Company’s report on Form 8-K filed with the Securities and Exchange Commission on July 22, 2003.

 

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SIGNATURES

 

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, in the City of San Jose, State of California, on the 12th day of August 2003.

 

 

			WJ COMMUNICATIONS, INC.
			(Registrant)
Date	August 12, 2003		By:	/s/ MICHAEL R. FARESE, Ph.D.
				Michael R. Farese, Ph.D. President and Chief Executive Officer (principal executive officer)
Date	August 12, 2003		By:	/s/ FRED J. KRUPICA
				Fred J. Krupica Chief Financial Officer (principal financial officer)

 

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