<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
---
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number 0-31029
MICROTUNE, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2883117
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
2201 Tenth Street
Plano, Texas 75074
(Address of principal executive office and zip code)
(972) 673-1600
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
YES X NO
--- ---
As of October 31, 2000, 38,350,790 shares of the Registrant's common stock were
outstanding.
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Microtune, Inc.
FORM 10-Q
September 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
Part I Financial Information ----
<S> <C>
Item 1. Financial Statements.................................................................................. 3
Consolidated Balance Sheets at September 30, 2000 and December 31, 1999 (unaudited)....................... 3
Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2000
and 1999 (unaudited)..................................................................................... 4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999 (unaudited)... 5
Notes to Consolidated Financial Statements (unaudited).................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 12
Item 3. Qualitative and Quantitative Disclosure About Market Risk............................................. 16
Factors affecting future results.......................................................................... 17
Part II Other Information
Item 1. Legal Proceedings..................................................................................... 28
Item 2. Changes In Securities and Use of Proceeds............................................................. 28
Item 4. Submission of Matters to a Vote of Security Holders................................................... 28
Item 6. Exhibits and Reports on Form 8-K...................................................................... 28
Signatures..................................................................................................... 30
</TABLE>
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PART I Financial Information
Item 1. Financial Statements
Microtune, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Assets September 30, 2000 December 31, 1999
------------------- ------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents.............................................. $ 31,134 $ 6,331
Marketable securities.................................................. 50,862 13,798
Accounts receivable, net of allowance for doubtful accounts of $638 at
September30, 2000................................................. 10,556 164
Inventories............................................................ 13,982 -
Deferred income taxes.................................................. 1,448 -
Other current assets................................................... 1,896 22
-------- --------
Total current assets.............................................. 109,878 20,315
Property and equipment, at cost:
Leasehold improvements................................................. 1,652 418
Manufacturing equipment................................................ 12,248 -
Other equipment........................................................ 2,909 2,445
Furniture and fixtures................................................. 737 82
Computer software...................................................... 1,795 724
-------- --------
19,341 3,669
Less accumulated depreciation.......................................... 5,133 1,879
-------- --------
14,208 1,790
Intangible assets, net of accumulated amortization of $2,143..................... 6,804 -
Goodwill, net of accumulated amortization of $4,160.............................. 23,692 -
Deferred income taxes............................................................ 423 -
Other assets and deferred charges................................................ 307 172
-------- --------
Total assets................................................. $155,312 $ 22,277
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable....................................................... $ 7,044 $ 223
Accrued expenses....................................................... 7,910 84
Accrued compensation................................................... 1,543 365
-------- --------
Total current liabilities......................................... 16,497 672
Deferred income taxes............................................................ 3,077 -
Other noncurrent liabilities..................................................... 1,095 -
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value
Authorized shares - 25,000 at September 30, 2000 and 18,999 at
December 31, 1999
Issued and outstanding series A through D convertible shares - 7,830
at December 31, 1999.............................................. - 8
Common stock, $0.001 par value
Authorized shares - 150,000 at September 30, 2000 and 100,000 at
December 31, 1999
Issued and outstanding shares - 38,342 at September 30, 2000 and 7,943
at December 31, 1999.............................................. 38 8
Additional paid-in capital.................................................. 179,353 36,819
Loans receivable from stockholders.......................................... (788) (207)
Accumulated other comprehensive loss........................................ (988) -
Accumulated deficit......................................................... (42,972) (15,023)
-------- --------
Total stockholders' equity........................................ 134,643 21,605
-------- --------
Total liabilities and stockholders' equity................... $155,312 $ 22,277
======== ========
See accompanying notes.
</TABLE>
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Microtune, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
------- ------- -------- -------
Net revenues............................................. $19,935 $ - $ 48,896 $ -
Cost of revenues......................................... 12,654 - 32,585 -
------- ------- -------- -------
Gross margin............................................. 7,281 - 16,311 -
Operating expenses:
Research and development:
Stock option compensation...................... 365 107 991 522
Other.......................................... 4,093 612 9,770 1,423
------- ------- -------- -------
4,458 719 10,761 1,945
Acquired in-process research and development........ - - 12,692 -
Selling, general and administration:
Stock option compensation...................... 715 43 2,093 177
Other.......................................... 4,073 1,661 12,170 4,172
------- ------- -------- -------
4,788 1,704 14,263 4,349
Amortization of intangible assets and goodwill...... 1,829 - 6,222 -
------- ------- -------- -------
Total operating expenses....................... 11,075 2,423 43,938 6,294
------- ------- -------- -------
Loss from operations..................................... (3,794) (2,423) (27,627) (6,294)
Other income (expense):
Interest income..................................... 864 161 1,360 359
Foreign currency translation and transaction gains
(losses), net.................................. (547) - (476) -
Other............................................... 20 - 480 -
------- ------- -------- -------
Loss before provision for income taxes................... (3,457) (2,262) (26,263) (5,935)
Provision for income taxes............................... 936 - 1,686 -
------- ------- -------- -------
Net loss................................................. $(4,393) $(2,262) $(27,949) $(5,935)
======= ======= ======== =======
Basic and diluted loss per common share.................. $ (0.16) $ (0.36) $ (1.96) $ (0.87)
======= ======= ======== =======
Weighted-average shares used in computing basic and
diluted loss per common share....................... 27,023 6,264 14,265 6,841
======= ======= ======== =======
</TABLE>
See accompanying notes.
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Microtune, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Operating activities:
Net loss.................................................... $ (27,949) $ (5,935)
Adjustments to reconcile net loss to cash used in operating
activities, net of effects of business combination:
Depreciation........................................... 4,361 745
Amortization of intangible assets and goodwill......... 6,222 -
Acquired in-process research and development........... 12,692 -
Foreign currency translation and transaction gains
(losses), net..................................... 476 -
Stock option compensation.............................. 3,084 699
Deferred income taxes.................................. (794) -
Changes in operating assets and liabilities:
Accounts receivable............................... (2,560) -
Inventories....................................... (4,713) -
Other assets...................................... 305 (17)
Accounts payable.................................. 2,488 (25)
Accrued expenses.................................. 3,084 38
Accrued compensation.............................. (2,870) 66
------------ ------------
Net cash used in operating activities........ (6,174) (4,429)
Investing activities:
Net cash acquired in acquisition of HMTF Acquisition........ 3,550 -
Purchases of marketable securities.......................... (101,373) (12,038)
Proceeds from sales and maturities of marketable securities. 64,308 15,324
Purchases of property and equipment......................... (11,234) (847)
Sale of property and equipment.............................. 249 -
Purchase of intangible assets............................... (887) -
Payments on loans receivable................................ (77) -
Proceeds from loans receivable.............................. 335 -
------------ ------------
Net cash provided by (used in) investing
activities.............................. (45,129) 2,439
Financing activities:
Proceeds from initial public offering of common stock....... 66,770 -
Proceeds from issuance of Series F preferred stock.......... 9,600 -
Proceeds from exercise of stock options..................... 143 189
Proceeds from the release of funds in escrow................ - 3,000
Proceeds from loans receivable from stockholders............ 432 -
------------ ------------
Net cash provided by financing activities.... 76,945 3,189
Effect of foreign currency exchange rate changes on cash......... (839) -
------------ ------------
Net increase in cash and cash equivalents........................ 24,803 1,199
Cash and cash equivalents at beginning of period................. 6,331 712
------------ ------------
Cash and cash equivalents at end of period....................... $ 31,134 $ 1,911
============ ============
</TABLE>
See accompanying notes.
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Microtune, Inc.
Notes to Consolidated Financial Statements
September 30, 2000
(Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements as of and for the three and nine
months ended September 30, 2000 and 1999 have been prepared by Microtune, Inc.
(the Company) pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. These unaudited condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's
Registration Statement on Form S-1 declared effective on August 4, 2000.
In the opinion of management, all adjustments which are of a normal and
recurring nature and are necessary for a fair presentation of the financial
position, results of operations, and cash flows as of and for the three and nine
months ended September 30, 2000 have been made. Results of operations for the
three and nine months ended September 30, 2000 are not necessarily indicative of
results of operations to be expected for the entire year.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. Completion of Initial Public Offering
On August 4, 2000, the Company completed its initial public offering. The
Company issued 4.6 million shares of common stock in exchange for net proceeds
of approximately $66.8 million. Upon the completion of the initial public
offering, all then outstanding convertible preferred stock converted into an
aggregate of 23.1 million shares of common stock and all outstanding warrants
were automatically exercised for 2.2 million shares of common stock.
3. Acquisition of HMTF Acquisition (Bermuda), Ltd.
On January 10, 2000, the Company combined with HMTF Acquisition (Bermuda), Ltd.
(HMTF Acquisition), the ultimate parent company of Temic Telefunken
Hochfrequenztechnik GmbH (Temic), in a transaction accounted for as a purchase
business combination. HMTF Acquisition acquired Temic on December 22, 1999.
Temic is now called Microtune GmbH & Co. KG (Microtune KG). Microtune KG
manufactures, markets and sells RF systems solutions. The consideration in the
combination consisted of 3,318,513 shares of Series E Preferred Stock and
warrants to purchase up to 2,212,342 shares of common stock at an exercise price
of $0.001 per share. The results of operations of HMTF Acquisition are included
in the results of the Company from the date of acquisition. The components of
the aggregate cost of the combination were as follows (in thousands, except
share data):
<TABLE>
<S> <C>
Fair market value of 3,318,513 shares of Series E Preferred Stock................. $55,548
Fair market value of warrants to purchase 2,212,342 shares of the
Company's common stock.................................................... 7,411
Transaction costs................................................................. 185
-------
Total combination cost............................................................ $63,144
=======
</TABLE>
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The fair values of the Series E Preferred Stock and the warrants were based on
the estimated fair value of the Company's common stock at the date of the
combination and the cash purchase price paid by HMTF Acquisition for Microtune
KG on December 22, 1999 of $60.0 million.
The cost of the acquisition has been allocated to the assets and liabilities
acquired and to acquired in-process research and development, with the remainder
recorded as excess cost over net assets acquired, based on estimates of fair
values as follows (in thousands):
<TABLE>
<S> <C>
Working capital......................................................... $11,206
Property and equipment.................................................. 6,118
Intangible assets....................................................... 8,037
Goodwill................................................................ 27,898
Acquired in-process research and development costs charged to expense... 12,692
Deferred income taxes................................................... (1,490)
Other assets and liabilities, net....................................... (2,329)
Loans receivable from stockholders...................................... 1,012
-------
Total combination cost.................................................. $63,144
=======
</TABLE>
The estimates of the fair values of intangible assets and acquired in-process
research and development were determined based on information furnished by
management of Microtune KG.
Amounts allocated to acquired in-process research and development were expensed
at the date of acquisition because the purchased research and development had no
alternative future uses, and had not reached technological feasibility based on
the status of design and development activities that required further refinement
and testing. The acquired in-process research and development projects were
assessed, analyzed and valued using the exclusion approach articulated by the
Securities and Exchange Commission. The estimates used in valuing the research
and development were based upon assumptions regarding future events and
circumstances management believes to be reasonable, but that are inherently
uncertain and unpredictable. The relative stage of completion and projected
operating cash flows of the underlying in-process projects acquired were the
most significant and uncertain assumptions utilized in the valuation analysis of
the acquired in-process research and development. Such uncertainties could give
rise to unforeseen budget overruns and revenue shortfalls in the event that the
Company is unable to successfully complete and commercialize the projects.
The acquired in-process technology relates to the development of new tuners and
modules for cable modem, set-top box, multimedia and automotive applications,
focusing on increased functionality, cost effectiveness and size reduction,
while maintaining a low level of power consumption. The estimated percentage
completion of the development projects as of the acquisition date was
approximately 70%, 50%, 70% and 60% for projects in the cable modem, set- top
box, multimedia and automotive product groups, respectively. The estimated cost
of completion of the development projects as of the acquisition date was
approximately $375,000, $50,000, $375,000 and $2,050,000 for projects in the
cable modem, set-top box, multimedia and automotive product groups,
respectively. As of September 30, 2000, the amounts expended towards completing
the development projects as of the acquisition date were approximately $300,000,
$40,000, $305,000 and $1,045,000 for projects in the cable modem, set-top box,
multimedia and automotive product groups, respectively. There have been no
significant changes in estimates of costs required to complete the development
efforts since the acquisition date. The estimated dates of completion of the
development projects as of September 30, 2000 were December 2000, November 2000,
November 2000 and December 2002 for projects in the cable modem, set-top box,
multimedia and automotive product groups, respectively.
The value of the acquired in-process research and development was determined by
discounting the estimated projected net cash flows related to the applicable
products for the next ten years, including costs to complete the development of
the technology and the future revenues to be earned upon release of the
products. The rate
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utilized to discount the net cash flows to present value was 22% based on the
weighted average cost of capital adjusted for the risks associated with the
estimated growth, profitability, developmental and market risks of the acquired
development projects. Projected net cash flows from such products are based on
estimates of revenues and operating profit related to such products. Management
expects that the purchased research and development generally will be
successfully developed into commercially viable products. However, there can be
no assurance that commercial viability or timely release of these products will
be achieved.
In connection with the combination with HMTF Acquisition, the Company acquired
the principal assets of The Tuner Company, an independent distributor of
products for Microtune KG in North America, for $931,000 and the assumption of
certain liabilities.
During the three months ended September 30, 2000, the Company converted its
German subsidiary from a GmbH (corporation) to a KG (partnership) effective
January 1, 2000. As this action was contemplated in the acquisition of HMTF
Acquisition, the impact of this change in structure was reflected as an
adjustment of the purchase price allocation on the conversion date resulting in
reductions of goodwill and the non-current deferred income tax liability of
$2,530,000.
The following unaudited pro forma information presents the results of operations
of the Company as if the combination with HMTF Acquisition and the acquisition
of The Tuner Company had occurred as of January 1, 1999. The pro forma
information has been prepared by combining the results of operations of the
Company, HMTF Acquisition, Microtune KG and The Tuner Company with adjustments
to eliminate the 1999 charge for acquired in-process research and development
costs and to record additional amortization expense and the impact on the
provision for income taxes resulting from the application of purchase
accounting. The pro forma information does not purport to be indicative of what
would have occurred had the acquisition occurred as of that date, or of results
of operations that may occur in the future (in thousands, except per share
data):
Revenue................................................... $ 46,759
Loss from operations...................................... (13,865)
Net loss.................................................. (11,160)
Basic and diluted net loss per common share............... (1.82)
Prior to the combination with HMTF Acquisition, the Company was in the
development stage and had been engaged primarily in raising capital, recruiting
RF and analog engineers, product research and development, and developing
relationships with potential customers and suppliers.
4. Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101 on revenue recognition. Management believes that the
adoption of SAB No. 101, which is effective in the fourth quarter of 2000, will
not have a material impact on the revenues, earnings or financial position of
the Company.
The Financial Accounting Standards Board has issued Financial Accounting
Standard (FAS) No. 133 on accounting for derivatives and hedges, which as
amended, will be effective for the Company's fiscal year beginning January 1,
2001. FAS No. 133 requires that all derivatives be recognized at fair value on
the balance sheet and that related gains and losses be included in net income or
comprehensive income depending on the nature of the hedging relationship.
Currently, the Company has not entered into contracts that will be classified as
derivative financial instruments under FAS No. 133. However, the Company may
enter into contracts that are classified as derivative financial instruments in
the future. Management believes that FAS No. 133 will not have an impact on the
results of operations or financial position of the Company when
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adopted, however management cannot estimate its impact on future results of
operations and financial position.
5. Income Taxes
The provision for the three and nine months ended September 30, 2000 consists of
foreign income taxes and U.S. state franchise taxes.
On July 14, 2000, the German government approved a tax reform that will reduce
tax rates of retained earnings, currently 40%, and earnings distributed as a
dividend, currently 30%, to a flat rate of 25% effective January 1, 2001. This
change was treated as a discreet event for income tax purposes resulting in a
reduction in net deferred tax assets and an increase in the provision for income
taxes of approximately $134,000 for the three and nine months ended September
30, 2000.
6. Foreign Currency Gains (Losses)
Effective July 1, 2000, the Company changed the functional currency of its
Philippine and German subsidiaries to the U.S. Dollar from the German Mark. The
functional currency was changed to the U.S. Dollar from the German Mark at these
locations as a result of the manner these entities are now managed and operated.
Foreign currency exchange gains and losses resulting from the remeasurement of
financial statements not denominated in U.S. dollars are recognized currently in
the statement of operations as a component of foreign currency gains and losses.
7. Earnings Per Share
Basic earnings (loss) per common share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding during each period.
Diluted earnings (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during each
period and common equivalent shares consisting of preferred stock, stock
options, warrants, restricted stock subject to repurchase rights and employee
stock purchase plan shares.
The following table sets forth anti-dilutive securities that have been excluded
from diluted earnings per share (in thousands):
Nine Months Ended
September 30,
-----------------------
2000 1999
-------- --------
Preferred stock convertible into common stock....... - 12,925
Stock options....................................... 7,773 2,839
Warrants............................................ - 41
Restricted common stock............................. 239 945
Employee stock purchase plan........................ 8 -
-------- --------
Total anti-dilutive securities excluded............. 8,020 16,750
======== ========
8. Cash, Cash Equivalents and Marketable Securities
Cash and cash equivalents consist of bank deposits and money market funds. The
Company considers highly liquid investments with original maturities of three
months or less to be cash equivalents.
The Company's investments in debt securities are comprised of high-credit
quality debt securities in accordance with the Company's investment policy.
Management determines the appropriate classification of its investments in debt
securities at the time of purchase and reevaluates such determinations at each
balance sheet date. At September 30, 2000 and December 31, 1999, the Company's
debt securities were classified as
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available for sale. As of September 30, 2000 and December 31, 1999, the Company
owned asset-backed commercial paper stated at cost of $50.9 million and $13.8
million, respectively, which approximated its fair value at September 30, 2000
and December 31, 1999. The Company's investment in asset-backed commercial paper
matured within 32 days of September 30, 2000 and December 31, 1999. The fair
value of marketable securities is estimated based on quoted market prices.
9. Inventories
Inventories as of September 30, 2000 consist of the following (in thousands):
Finished goods............................... $ 4,129
Work in process.............................. 1,617
Raw materials................................ 8,236
-------
$13,982
=======
10. Accrued Expenses
Accrued expenses as of September 30, 2000 consist of the following (in
thousands):
Accrued warranty obligation.................. $1,048
Accrued income taxes......................... 2,054
Deferred income taxes........................ 695
Other........................................ 4,113
------
$7,910
======
11. Stock Plans
During 1999 through July 2000, the Company issued stock options that were deemed
to have been issued at less than fair market value at the date of grant and
recorded $17.2 million and $3.2 million in 2000 and 1999, respectively, for
deferred stock compensation. This deferred stock compensation is being
recognized over the respective vesting periods of the stock options, which range
from one to six years. As of September 30, 2000 and December 31, 1999,
unamortized deferred stock compensation was $16.4 million and $2.3 million,
respectively.
The Company began an employee stock purchase plan on August 4, 2000, the date of
the Company's initial public offering, for all eligible employees. Under the
plan, shares of the Company's common stock may be purchased at six month
intervals at 85% of the lower of the fair market value on the first day or the
last day of each six-month period. Employees may purchase shares having a value
not exceeding 15% of their gross compensation during an offering period. At
September 30, 2000, 400,000 shares were reserved for future issuance.
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12. Geographic Information and Significant Customers
The Company's headquarters and main design center are located in Plano, Texas.
The Company has other sales offices and design centers in the United States.
The Company also has a significant design center in Germany and two
manufacturing facilities in the Philippines. Revenues by geographical area are
summarized below for the three and nine months ended September 30, 2000 (in
thousands):
<TABLE>
Three Months Nine Months
Ended Ended
September 30, September 30,
2000 2000
--------------- ---------------
<S> <C> <C>
North America.......................................... $ 9,829 $ 23,680
Europe................................................. 2,452 9,047
Asia Pacific........................................... 7,133 15,109
Other.................................................. 521 1,060
--------------- ---------------
$ 19,935 $ 48,896
=============== ===============
</TABLE>
Sales to DaimlerChrysler and Motorola/General Instrument accounted for
approximately 22% and 11%, respectively, of consolidated net revenues for the
nine months ended September 30, 2000 and approximately 16% and 13%,
respectively, of consolidated net revenues for the three months ended
September 30, 2000.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations'
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "believes,"
"anticipates," "estimates," "expects," and words of similar import, may
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Readers are referred to the
disclosures under the caption "Factors Affecting Future Results" in this report
and to the risk factors set out in the Company's Registration Statement on Form
S-1 declared effective on August 4, 2000, which describes factors that could
cause actual events to differ from those contained in the forward looking
statements.
Overview
History
We were incorporated in Texas in May 1996 and began operations in August
1996. In June 2000, we reincorporated in Delaware. From inception until December
31, 1999, our primary activities consisted of raising capital, recruiting radio
frequency and analog engineers, developing our silicon integrated circuit tuner
for broadband radio frequencies and initiating relationships with potential
customers and suppliers.
In January 2000, we combined with Temic Telefunken Hochfrequenztechnik GmbH
and its affiliated companies. Temic was founded in the early 1900's in Germany.
In the late 1940's, Temic began developing mechanical radio frequency tuners,
and in the late 1960's, it was the first company to develop an electronic radio
frequency tuner. The two companies have been operating as one company since the
combination in January 2000. In addition, Temic converted to a KG and changed
its name to Microtune GmbH & Co. KG, referred to as Microtune KG, in August
2000.
Financial Information
We are a radio frequency silicon and systems company, specializing in high-
performance radio frequency tuners and transceivers to the broadband
communications markets. We design and develop highly integrated broadband
gateway radio frequency integrated circuits and modules for use in cable modems,
PC/TVs, set-top boxes, cable telephony, digital TV and other consumer
electronics devices.
Since inception we have incurred significant losses, and as of
September 30, 2000, we had an accumulated deficit of approximately $43.0
million. As a result of our combination with Microtune KG, our primary
activities have expanded to include the design, manufacture and sale of radio
frequency modules. In March 2000, we began shipment of our single chip silicon
tuner. To date, substantially all of our revenues have been derived from sales
of our tuner modules rather than from our modules containing our silicon chips,
known as MicroModules, or our single chip silicon tuner, which we are beginning
to market at this time and from which we expect to receive revenue in the
future. These tuner modules were primarily developed, manufactured and marketed
by Microtune KG prior to the combination. Our limited combined operating
history makes the prediction of future results of operations difficult, and
accordingly, we may not achieve or sustain revenue growth or profitability.
The time lag between product availability and volume shipment can be
significant due to a sales process that includes customer qualification of our
products and can take as long as two years, during which we continue to evolve
our technology. As a result of our combination with Microtune KG, we have
broadened our product suite to include radio frequency modules.
We recognize revenues from our products upon shipment to a customer or upon
notification of customer receipt, depending on the contract terms. We provide at
least a one year warranty on all products and record a related provision for
estimated warranty costs at the date of sale.
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We traditionally experience seasonal fluctuations in our revenues from
January through August, primarily as a result of consumer electronics
manufacturers using this time frame to develop new products for the holiday
season. We experienced this seasonality worldwide, but particularly in our
European markets in 1999. In addition, one of our key customers decreased its
production in the same time period in 1999. This trend did not occur in 2000,
because of a shift in our product mix to more cable modem products, which have
been in high demand, but sales of these products have been limited by component
shortages.
We have invested heavily in research and development of our radio frequency
integrated circuits and systems technology. We expect to increase our investment
in these areas in absolute dollars to further develop our radio frequency
products. This investment will include the continued recruitment of radio
frequency and analog integrated circuit designers and systems engineers,
acquisition of test, development and production equipment and expansion of
facilities for research and manufacturing. As a result, we may continue to incur
substantial losses from operations for the foreseeable future.
We use IBM and x-FAB to manufacture our wafers and Amkor to assemble our
radio frequency integrated circuits. We perform final testing, packing and
shipping of our radio frequency integrated circuits at our facility in Plano,
Texas and at Amkor. With respect to our tuner modules, we perform all of our
assembly, tuning and test functions in our factories in Manila, Philippines. As
a result of our combination, we have recently experienced a period of rapid
growth and expansion. To manage this growth and any future growth effectively,
we intend to enhance our existing operational and financial systems and hire
additional qualified administrative, finance and information technology
personnel. We also moved our U.S. corporate headquarters to a new facility in
Plano, Texas during September 2000, which is expected to increase our operating
expenses in absolute dollars.
Results of Operations
The following table sets forth, for the periods presented, certain data
from our consolidated statements of operations expressed as a percentage of net
revenues:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
2000 2000
----------------- -----------------
<S> <C> <C>
Net revenues............................................... 100% 100%
Cost of revenues........................................... 63 67
---- ----
Gross margin............................................... 37 33
Operating expenses:
Research and development:
Stock option compensation........................ 2 2
Other............................................ 21 20
---- ----
23 22
Acquired in-process research and development.......... - 26
Selling, general and administration:
Stock option compensation........................ 4 4
Other............................................ 20 25
---- ----
24 29
Amortization of intangible assets and goodwill........ 9 13
---- ----
Total operating expenses......................... 56 90
---- ----
Loss from operations....................................... (19) (57)
Other income .............................................. 2 3
---- ----
Loss before provision for income taxes..................... (17) (54)
Provision for income taxes................................. 5 3
---- ----
Net loss................................................... (22)% (57)%
==== ====
</TABLE>
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Comparison of the Three and Nine Months Ended September 30, 2000 and 1999.
Net Revenues.
Revenues are recorded net of a provision for returns. Our net revenues from
the sale of our products were $19.9 million and $48.9 million in the three and
nine months ended September 30, 2000, respectively. We did not generate net
revenues from the sale of our products in the nine months ended September 30,
1999. Recent supplier capacity constraints have affected our ability to meet
customer demand for our products in the nine months ended September 30, 2000. We
expect these supplier capacity constraints to continue through the remainder of
2000 and possibly into 2001, and they may adversely affect revenue growth during
that time.
Cost of Revenues.
Cost of revenues includes the cost of purchases for subcontracted
materials, integrated circuit assembly, factory labor and overhead and warranty
costs. In addition, we perform final testing of our products and incur cost for
the depreciation of our test and handling equipment, labor, quality assurance
and logistics. We have only recently begun manufacturing our silicon products
and as a result expect our costs to decrease on a per unit basis as our
suppliers and our test personnel develop experience in producing our products.
Our subcontracted materials experience cyclical trends in pricing due to
fluctuations in demand. In many cases, we do not have written commitments from
our suppliers for guaranteed supply. Our cost of revenues in the three and nine
months ended September 30, 2000 were $12.7 million and $32.6 million,
respectively, or 63% and 67% of net revenues, respectively. During 2000, gross
margins have improved primarily due to our strategy of adding increased
functionality to our radio frequency tuner modules, increased efficiencies in
our manufacturing facilities and the change in our product mix with increased
focus in the cable modem market. We do not expect gross margins to consistently
increase each quarter. As we add new products to our manufacturing lines, we
will incur higher cost of revenues, which we expect will be offset as we
negotiate volume discounts with our suppliers and become more efficient in
manufacturing each new product. We did not generate revenues from the sale of
products in the nine months ended September 30, 1999 and, therefore, did not
incur cost of revenues.
Research and Development.
Research and development expenses consist of personnel-related expenses,
lab supplies, training and prototype subcontract materials. We expense all of
our research and development costs in the period incurred. Research and
development expenses increased 520% from $0.7 million in the three months ended
September 30, 1999 to $4.5 million, or 23% of net revenues, in the three months
ended September 30, 2000. Research and development expenses increased 453% from
$1.9 million in the nine months ended September 30, 1999 to $10.8 million, or
22% of net revenues, in the nine months ended September 30, 2000. The increase
in research and development expenses in the three and nine months ended
September 30, 2000 primarily reflects the addition of $0.9 million and $2.6
million, respectively, of expenses associated with Microtune KG operations, as
well as recruiting of engineers, purchases of additional prototype materials
associated with the design process and an increase in the stock compensation
charge related to options granted to employees. We expect that research and
development expenses will increase in absolute dollars in future periods, and
may increase or fluctuate significantly as a percentage of total revenues from
period to period. Stock option compensation does not affect our total
stockholders' equity or cash flows.
Acquired In-Process Research and Development.
As a result of our combination with Microtune KG, we recorded acquired in-
process research and development costs of $12.7 million for the nine months
ended September 30, 2000. Amounts allocated to acquired in-process research and
development were expensed at the date of combination, because the purchased
research and development had not reached technological feasibility based on the
status of design and development activities that required further refinement and
testing.
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<PAGE>
Selling, General and Administrative.
Selling, general and administrative expenses include our personnel-related
expenses for administrative, financial, human resources, marketing and sales,
and information technology departments, and include expenditures related to
legal, public relations and financial advisors. In addition, these expenses
include promotional and marketing costs, sales commissions, shipping costs to
customers and reserves for bad debts. Selling, general and administrative
expenses increased 181% from $1.7 million in the three months ended September
30, 1999 to $4.8 million, or 24% of net revenues, in the three months ended
September 30, 2000. Selling, general and administrative expenses increased 228%
from $4.3 million in the nine months ended September 30, 1999 to $14.3 million,
or 29% of net revenues, in the nine months ended September 30, 2000. The
increase in selling, general and administrative expenses in the three and nine
months ended September 30, 2000 primarily reflects the addition of $2.4 million
and $6.7 million of expenses associated with Microtune KG operations as well as
recruiting of sales and administrative personnel, and an increase in the stock
option compensation charge related to options granted to employees. Stock option
compensation does not affect our total stockholders' equity or cash flows.
Amortization of Intangible Assets and Goodwill.
The amortization of intangible assets and goodwill of $1.8 million and $6.2
million in the three and nine months ended September 30, 2000, respectively,
results principally from our combination with Microtune KG. The combination has
been accounted for using the purchase method of accounting. The purchase price
allocated to intangible assets of $8.0 million is being amortized over the
estimated useful lives of the related assets of one to five years. Goodwill
resulting from the transaction totaled $27.9 million and is being amortized over
five years. We had immaterial amortization charges in the three and nine months
ended September 30, 1999.
Other Income (Expense).
Other income (expense) consists of interest income from investment of cash
and cash equivalents, foreign currency gains and losses and other non-operating
income and expenses.
Interest income increased 437% from $0.2 million in the three months ended
September 30, 1999 to $0.9 million in the three months ended September 30, 2000.
Interest income increased 279% from $0.4 million in the nine months ended
September 30, 1999 to $1.4 million in the nine months ended September 30, 2000.
Interest income is earned from high quality, short-term investments from cash
generated by our five private placement equity rounds of funding and our initial
public offering on August 4, 2000.
The foreign currency translation and transaction loss of $0.5 million in
the three and nine months ended September 30, 2000 relates to the operations of
Microtune KG and its subsidiaries. We used the German Mark as the functional
currency for Microtune KG's and its subsidiaries' financial statements through
June 30, 2000. Foreign currency exchange gains and losses resulting from the
remeasurement of financial statements not denominated in German Marks of
Microtune KG and its subsidiaries outside of Germany into German Marks were
recognized in the statements of operations as a component of foreign currency
gains and losses through June 30, 2000. Foreign currency exchange gains and
losses resulting from the translation of financial statements denominated in
German Marks of Microtune KG and its subsidiaries into U.S. Dollars were
included as a component of stockholders' equity through June 30, 2000.
Starting July 1, 2000 we use the U.S. Dollar as the functional currency for
Microtune KG's and its subsidiaries' financial statements. The functional
currency was changed to the U.S. Dollar from German Marks for these entities as
a result of the manner these entities are now managed and operated. Foreign
currency exchange gains and losses resulting from the remeasurement of financial
statements not denominated in U.S. dollars of Microtune KG and its subsidiaries
into U.S. Dollars are recognized currently in the statement of operations as a
component of foreign currency gains and losses.
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<PAGE>
Income Taxes.
Prior to our combination with Microtune KG, we had not recognized any
provision for income taxes. We have a net operating loss carryforward for U.S.
federal income tax purposes of approximately $13.5 million as of December 31,
1999. In addition, we have unutilized research and development tax credits of
$0.4 million. Due to the uncertainty of our ability to utilize these deferred
tax assets they have been fully reserved.
The provision for income taxes in the three and nine months ended September
30, 2000 consists of foreign income taxes on the income of Microtune KG and its
subsidiaries and U.S. state franchise taxes.
Liquidity and Capital Resources
Since inception, we have funded our operations primarily through the
issuance of convertible preferred stock which has generated net cash proceeds of
approximately $44.2 million. On August 4, 2000, the Company issued 4.6 million
common stock shares in its initial public offering that raised net proceeds of
approximately $66.8 million. As of September 30, 2000, we had net working
capital of $93.4 million, including $82.0 million of cash, cash equivalents and
marketable securities. Our marketable securities consist of high quality, short-
term investments.
At September 30, 2000, Microtune KG had credit agreements with two banks
which provide for borrowings of up to $2.7 million. Both agreements are
cancellable upon notification by the bank. Borrowings under these agreements
bear interest at rates determined from time to time by the banks (rates were
7.50% and 8.00% at September 30, 2000). At September 30, 2000, no borrowings
were outstanding under these credit agreements.
Investments in property and equipment were $0.6 million in 1997, $1.5
million in 1998, $0.9 million in 1999 and $11.2 million in the nine months ended
September 30, 2000. We expect capital expenditures to increase substantially
over the next 12 months as we expand our manufacturing and test capacity to
support our anticipated increase in production. Other uses of cash include the
funding of operating activities, which were $2.3 million in 1997, $2.7 million
in 1998, $6.5 million in 1999 and $6.2 million in the nine months ended
September 30, 2000.
Item 3. Qualitative and Quantitative Disclosure About Market Risk
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors including those set forth in the "Factors Affecting Future Results"
section.
Following our combination with Microtune KG, we now transact both sales and
purchases in multiple foreign currencies, including Euros, German Marks and
Philippine Pesos. Due to the volatile nature of the currency markets, there is a
potential risk of foreign currency translation losses, as well as gains. We
currently do not use derivative financial instruments to hedge our balance sheet
exposures against future movements in exchange rates. However, we are currently
evaluating our exchange risk management strategy, including changes in our
organizational structure and other capital structuring techniques to manage our
currency risk.
Our net investment in foreign subsidiaries, translated into U.S. dollars
using exchange rates at September 30, 2000 was $48 million. A potential loss in
the value of this net investment resulting from a hypothetical 10% adverse
change in foreign exchange rates would be approximately $4.8 million.
On January 1, 1999, 11 European Union member states (Germany, France, the
Netherlands, Austria, Italy, Spain, Finland, Ireland, Belgium, Portugal and
Luxembourg) adopted the Euro as their common national currency. Until January 1,
2002, either the Euro or a participating country's national currency will be
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<PAGE>
accepted as legal tender. Beginning on January 1, 2002, Euro- denominated bills
and coins will be issued, and by July 1, 2002, only the Euro will be accepted as
legal tender. We do not expect future balance sheets, statements of operations
or statements of cash flows to be materially impacted by the Euro conversion.
As of September 30, 2000, we had short-term investments of $50.9 million.
All of these short-term investments consisted of highly liquid investments with
remaining maturities not greater than 90 days. These investments are subject to
interest rate risk and will decrease in value if market interest rates increase.
A hypothetical increase or decrease in market interest rates by 10% from the
September 30, 2000 rates would cause the fair value of these short-term
investments to change by an insignificant amount. We have the ability to hold
these investments until maturity, and therefore we do not expect the value of
these investments to be affected to any significant degree by the effect of a
sudden change in market interest rates. Declines in interest rates over time
will, however, reduce our interest income.
At September 30, 2000 we did not own any equity investments. Therefore, we
did not have any direct equity price risk.
Factors Affecting Future Results
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth below and elsewhere in this report.
If we are unable to migrate our customers over time from our modules using
discrete components to the MicroTuner or our modules that incorporate the
MicroTuner, our operating results could be harmed.
Currently, substantially all of our revenues are from the sale of our tuner
modules using discrete, third-party components. Our future success will depend
on our ability to successfully migrate our customers from our modules that use
discrete components to the all-silicon MicroTuner, or MicroModules containing
the MicroTuner, by convincing leading equipment manufacturers to select these
products for design into their own products. If we are not able to convince
these manufacturers to incorporate our silicon products our operating results
could be harmed.
We have not completed our integration with Microtune KG's operations and we may
be unable to do so effectively.
We have recently combined with Microtune KG and we are still in the process
of integrating Microtune KG's German and Philippines operations with ours.
Integrating operations of two ongoing businesses can be difficult especially
when they are located in different countries. In addition to integrating the
operational aspects of our two companies, we will also face challenges
coordinating and consolidating our financial reporting functions. For example,
our accounting functions utilize different software programs, and Microtune KG's
consolidated financial statements have historically been prepared based on
German generally accepted accounting principles. We may not be able to complete
this integration on a timely and cost-effective basis.
As a result of the Microtune KG acquisition, we have recorded $35.9 million of
goodwill and acquired intangibles, the amortization of which will negatively
affect our net profits.
As a result of the Microtune KG acquisition, we have recorded $35.9 million
of goodwill and acquired intangibles which will be amortized over one to five
years. This will increase our net loss or decrease our net income by
approximately $7.5 million in 2000 and $7.1 million in each of 2001 through
2004. To the extent we do not generate sufficient cash flow to recover the
amount of the investment recorded, the investment could be considered impaired
and could be subject to earlier write-off. In such event, our net
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income or net loss in any given period could be lower or greater, respectively,
than anticipated and the market price of our stock could decline.
We are dependent upon third parties, some of which compete with us, for the
supply of components for our module manufacturing. Our failure to obtain
components for our module manufacturing would seriously harm our ability to ship
modules to our customers in a timely manner.
Many of the components for our modules are sole-sourced, meaning that we
are dependent upon one supplier for a specific component. At times we have
experienced significant difficulties in obtaining an adequate supply of
components necessary for our manufacturing operations, which have on occasion
prevented us from delivering radio frequency products to our customers in a
timely manner. For example, we are currently not receiving our expected
allocation of components from a significant sole-source supplier which has
constrained, and which we expect to continue to constrain, our ability to meet
customer demand through the remainder of 2000 and possibly into 2001.
We usually do not have long-term supply agreements with our suppliers and
instead obtain components on a purchase order basis. Our suppliers typically
have no obligation to supply products to us for any specific period, in any
specific quantity or at any specific price, except as set forth in a particular
purchase order. Our requirements often represent a small portion of the total
production capacity of our suppliers, and our suppliers may reallocate capacity
to other customers even during periods of high demand for our radio frequency
products. In addition, some of our suppliers offer or may offer products that
compete with our radio frequency products. As a result, these suppliers may
preferentially allocate their components to in-house or third party
manufacturers, rather than us.
If our suppliers were to become unable or unwilling to continue
manufacturing or supplying the components that we utilize in our radio frequency
products, our business would be seriously harmed. As a result, we would have to
identify and qualify substitute suppliers or design around the component. This
would be time-consuming and difficult, and may result in unforeseen
manufacturing and operations problems. This may also require our customers to
requalify our or their products, which may be a lengthy process. The loss of a
significant supplier or the inability of a supplier to meet performance and
quality specifications or delivery schedules could impede our ability to meet
customer demand for timeliness, performance and quality, which could harm our
reputation and our business.
If we are unable to develop and introduce new radio frequency products
successfully and in a cost-effective and timely manner or to achieve market
acceptance of our new products, our operating results would be substantially
harmed.
Our future success will depend on our ability to develop new radio
frequency products for existing and new markets, introduce these products in a
cost-effective and timely manner, meet customer specifications 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 and market
acceptance of a relatively small number of new products and the timely
completion and delivery of those products to customers. For example, we believe
that market acceptance of our radio frequency integrated circuits for the cable
modem market will be limited until the time that we introduce radio frequency
integrated circuits with the power requirements that conform to the evolving
specifications of some cable modem manufacturers.
The development of new radio frequency products is highly complex, and from
time to time we have experienced delays in completing the development and
introduction of new products. In addition, some of our new product development
efforts are focused on producing silicon products utilizing architectures and
technologies with which we have no experience, and delivering performance
characteristics such as low power consumption at levels that we have not
previously achieved. If we are not able to develop and
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<PAGE>
introduce these new products successfully and in a cost-effective and timely
manner, we will not be able to successfully penetrate all of our target markets
and our operating results would be substantially harmed.
We are experiencing capacity constraints. If we fail to increase production
from our manufacturing facilities, we will be unable to meet the current and
anticipated demand for our radio frequency modules which could damage our
relationships with our customers and result in diminished revenues.
We are experiencing capacity constraints at our module manufacturing
facilities due to increased current and anticipated demand for our radio
frequency modules. We are in the process of adding additional production
equipment and hiring and training new employees. As we increase capacity and add
new products, we must maintain and improve our line, assembly and test yields in
order to meet our manufacturing goals.
We have two module manufacturing facilities in Manila, Philippines,
although one of them has only recently begun operations. We also have one
integrated circuit test facility in Plano, Texas. The lease covering our first
manufacturing facility in the Philippines expires in December 2000. We are
currently in negotiations to extend this lease. However, we may not be able to
negotiate an extension on commercially reasonable terms or at all. If we are
unable to obtain an extension and are unable to find substitute facilities
promptly and on commercially reasonable terms, we will encounter further
capacity constraints and may experience an interruption of our ability to
manufacture our radio frequency modules. In addition, we are currently in the
process of expanding our production capacity at our second manufacturing
facility in the Philippines by installing additional production equipment. This
expansion is not expected to be completed during the year 2000.
If we fail to increase production and achieve satisfactory yields from our
manufacturing facilities, we will be unable to meet the anticipated demand for
our radio frequency products. Our failure to meet our customers' demand for our
radio frequency products could damage our relationships with our customers and
result in diminished revenues.
We face intense competition in the broadband communications and radio frequency
tuner markets, which could reduce our market share in existing markets and
affect our ability to enter new markets.
The broadband communications and radio frequency tuner markets are
intensely competitive. We expect competition to continue to increase in the
future as industry standards become well known and as other competitors enter
our target markets. We compete with, or may in the future compete with, a
number of major domestic and international suppliers of integrated circuit and
system modules in the cable modem, PC/TV, set-top box, cable telephony, digital
TV and automotive markets. We currently compete with tuner system module
manufacturers such as Alps, Panasonic and Philips Electronics and potentially
with semiconductor companies such as Broadcom and Conexant. This competition has
resulted and may continue to result in declining average selling prices for our
radio frequency products.
Many of our current and potential competitors have advantages over us,
including:
. longer operating histories and presence in key markets;
. greater name recognition;
. access to larger customer bases;
. significantly greater financial, sales and marketing, manufacturing,
distribution, technical and other resources; and
. relationships with potential customers as a result of the sales of other
components, which relationships our competitors can leverage into sales
of products competitive with our radio frequency products.
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<PAGE>
As a result, our competitors may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements or may be able to
devote greater resources to the development, promotion and sale of their
products than us.
Consolidation by industry participants, including in some cases,
acquisitions of some of our customers or suppliers by our competitors, or vice
versa, could create entities with increased market share, customer base,
technology and marketing expertise in markets in which we compete. In fact, some
of our suppliers offer or may offer products that compete with our radio
frequency products. These developments may significantly and adversely affect
our current markets, the markets we are seeking to serve and our ability to
compete successfully in those markets.
If we do not anticipate and adapt to evolving industry standards in the radio
frequency tuner and broadband communications markets, our products could become
obsolete and we could lose market share.
Products for broadband communications applications generally are based on
industry standards that are continuously evolving. If new industry standards
emerge, our products or our customers' products could become unmarketable or
obsolete. We may also have to incur substantial unanticipated costs to comply
with these new standards.
Our ability to adapt to changes and to anticipate future standards and the
rate of adoption and acceptance of those standards will be a significant factor
in maintaining or improving our competitive position and prospects for growth.
Our inability to anticipate the evolving standards in the broadband
communications market and, in particular, in the radio frequency tuner market,
or to develop and introduce new products successfully into these markets could
result in diminished revenues and consequently harm our business.
The average selling price of our products will likely decrease over time. If the
selling price reductions are greater than we expect, our operating results will
be harmed.
Historically, the average selling price of our products has decreased over
the products' lives. In addition, as the markets for radio frequency integrated
circuit tuners and transceivers mature, we believe that it is likely that the
average unit prices of our radio frequency products will decrease in response to
competitive pricing pressures, increased sales discounts and new product
introductions. To offset these decreases, we rely primarily on achieving yield
improvements and other cost reductions for existing products and on introducing
new products that can often be sold at higher average selling prices.
In addition, we will seek to increase the sales of our higher margin
products. However, our sales, product and process development efforts may not be
successful, and our new products or processes may not achieve market acceptance.
To the extent that our cost reductions and emphasis on higher margin products do
not occur in a timely manner, our results of operations could suffer.
We expect our quarterly operating results to fluctuate.
Our quarterly results of operations have fluctuated in the past and may
fluctuate significantly in the future due to a number of factors, many of which
are not in our control. These factors include:
. timing, cancellation and rescheduling of significant customer orders
which result in revenues being shifted from one quarter to another;
. ability of our customers to procure the necessary components for their
end-products that utilize our radio frequency tuners to conduct their
operations as planned for any quarter;
. pricing concessions on volume sales to particular customers for
established time frames;
. changes in our product and customer mix between quarters;
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. labor disputes at our manufacturing facilities in the Philippines, which
may cause temporary slowdowns or shutdowns of operations; and
. quality problems with our radio frequency tuners that result in
significant returns.
We believe that transitioning our silicon products to higher performance process
technologies will be important to our future competitive position. If we fail
to make this transition efficiently, our competitive position could be seriously
harmed.
We continually evaluate the benefits, on a product-by-product basis, of
migrating to higher performance process technologies in order to produce more
efficient and higher performance integrated circuits. We believe this migration
is required to remain competitive. Other companies in the industry have
experienced difficulty in migrating to new process technologies and,
consequently, have suffered reduced yields, delays in product deliveries and
increased expense levels.
Moreover, we are dependent on our relationships with foundries to migrate
to higher performance processes successfully. Our foundry suppliers may not make
higher performance process technologies available to us on a timely or cost-
effective basis, if at all. If our foundry suppliers do not make higher
performance process technologies available to us on a timely or cost-effective
basis or if we experience difficulties in migrating to these advanced processes,
our competitive position and business prospects could be seriously harmed.
Because we depend on a few significant customers for a substantial portion of
our revenues, the loss of a key customer could seriously harm our business.
We have derived a substantial portion of our revenues in the past from
sales to a relatively small number of customers. As a result, the loss of any
significant customer could significantly harm our revenues. DaimlerChrysler and
Motorola/General Instrument accounted for approximately 22% and 11%,
respectively, of our net revenues for the nine months ended September 30, 2000
and 16% and 13%, respectively, of our net revenues for the three months ended
September 30, 2000. Sales to our twenty largest customers, including sales to
their respective manufacturing subcontractors, accounted for approximately 85%
of total sales for the three months ended September 30, 2000. We believe that
our future operating results will continue to depend on the success of our
largest customers and on our ability to sell existing and new products to these
customers in significant quantities. The loss of a key customer or a reduction
in our sales to any key customer could harm our revenues and consequently our
financial condition.
If we are unable to continue to sell existing and new products to our key
customers in significant quantities or to attract new significant customers, our
future operating results could be harmed.
We may not be able to maintain or increase sales to our key customers or to
attract new significant customers for a variety of reasons, including the
following:
. most of our customers can stop purchasing our radio frequency tuners
with limited notice to us without incurring any significant contractual
penalty;
. most of our customers typically buy our radio frequency tuners through a
purchase order, which does not require them to purchase a minimum amount
of our radio frequency tuners;
. many of our customers and potential customers have pre-existing
relationships with our current or potential competitors, which
relationships may affect their decision to purchase our radio frequency
tuners;
. some of our customers or potential customers offer or may offer products
that compete with our radio frequency tuners; and
. our longstanding relationships with some of our larger customers may
also deter other potential customers who compete with these customers
from buying our radio frequency tuners.
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If we do not maintain or increase sales to existing customers or attract
significant new customers, our revenues would diminish and consequently our
business would be harmed.
The sales cycle for our radio frequency tuners is long, and we may incur
substantial non-recoverable expenses and devote significant resources to sales
that may not occur when anticipated or at all.
Our customers typically conduct significant evaluation, testing,
implementation and acceptance procedures before they purchase our radio
frequency tuners. As a result, we may expend significant financial and other
resources to develop customer relationships before we recognize any revenues
from these relationships, and we may never recognize any revenues from these
efforts. Our customers' evaluation processes are frequently lengthy and may
range from three months to one year or more. In many situations, our customers
design their products to specifically incorporate our radio frequency tuners,
and our radio frequency tuners must be designed to meet their stringent
specifications. This process can be complex and may require significant
engineering, as well as sales, marketing and management efforts on our part.
This process becomes more complex as we simultaneously qualify our products with
multiple customers.
Uncertainties involving the ordering and shipment of our radio frequency
products could harm our business.
Our sales are typically made pursuant to individual purchase orders, and we
generally do not have long-term supply arrangements with our customers.
Generally, our purchase orders provide that our customers may cancel orders
until 90 days prior to the shipping date and may reschedule shipments up to 30
days prior to the shipping date; however, in the past, we have permitted
customers to cancel orders less than 90 days before the expected date of
shipment, in many cases with little or no penalty. Moreover, we routinely
manufacture or purchase inventory based on estimates of customer demand for our
radio frequency products, which demand is difficult to predict. The cancellation
or deferral of product orders, the return of previously sold products or
overproduction due to the failure of anticipated orders to materialize could
result in our holding excess or obsolete inventory that could substantially harm
our business, financial condition and results of operations. In addition, our
inability to produce and ship radio frequency products to our customers in a
timely manner could harm our reputation and damage our relationships with our
customers.
We customize a substantial portion of our radio frequency tuners to address our
customers' specific radio frequency needs. If we do not sell our customer-
specific products in large volumes, we may be unable to cover our fixed costs or
may be left with substantial unsaleable inventory.
We manufacture a substantial portion of our radio frequency tuners to
address the needs of individual customers. Frequent product introductions by
systems manufacturers make our future success dependent on our ability to select
development projects that will result in sufficient volumes to enable us to
achieve manufacturing efficiencies. Because customer-specific radio frequency
tuners are developed for unique applications, we expect that some of our current
and future customer-specific radio frequency tuners may never be produced in
volume and may impair our ability to cover our fixed manufacturing costs. In
addition, if our customers fail to purchase these customized radio frequency
tuners from us, we risk having substantial unsaleable inventory. If substantial
unsaleable inventory occurs, our financial condition would be harmed.
Other technologies for the broadband communications market will compete with
some of our target markets. If these technologies prove to be more reliable,
faster or less expensive or become more popular, the demand for our radio
frequency tuners and our revenues may decrease.
Some of our target markets, such as cable modem and cable telephony
services, are competing with a variety of different non-radio frequency based
broadband communications technologies, including digital subscriber line
technology. Many of these technologies will compete effectively with cable modem
and cable telephony services. If any of these competing technologies are more
reliable, faster or less expensive, reach
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more customers or have other advantages over radio frequency-based broadband
technology, the demand for our radio frequency tuners and our revenues may
decrease.
We depend on the continued growth of the broadband communications market
generally, and the radio frequency tuner market specifically, for our success.
We derive a substantial portion of our revenues from sales of radio
frequency tuners for broadband communication applications. These markets are
characterized by the following:
. intense competition;
. rapid technological change; and
. short product life cycles, especially in the consumer electronics
markets.
Although the broadband communications market, in general, has grown rapidly
in the last few years, it may not continue to grow or a significant slowdown in
this market may occur. In particular, the set-top box, cable modem and cable
telephony markets may not grow at a rate sufficient for us to achieve
profitability or at all. Because of the uncertainty of the level of competition
and the strength of competitors in the broadband communications market, the
unproven technology of many products addressing this market and the short life
cycles of many consumer products, it is difficult to predict the potential size
and future growth rate of the radio frequency tuner market. In addition, the
broadband communications market is transitioning from analog to digital, as well
as expanding to new services, including internet access, cable telephony and
interactive television. The future growth of the radio frequency turner market
is partially dependent upon the market acceptance of products and technologies
addressing the broadband communications market, and we cannot assure you that
the radio frequency technologies upon which our products are based will be
accepted by the market. If the demand for radio frequency tuners is not as great
as we expect, we may not be able to generate sufficient revenues to become
successful.
The semiconductor industry is cyclical. If there is a sustained upturn in the
semiconductor market, there could be a resulting increased demand for foundry
services, significantly increasing prices and reducing product availability.
Some of the radio frequency module products that we provide to the
broadband communications market require semiconductors. The semiconductor
industry periodically experiences increased demand and production capacity
constraints. An increased demand for semiconductors could substantially increase
the cost of producing our radio frequency products and consequently reduce our
profit margins. As a result, we may experience substantial period-to-period
fluctuations in future results of operations due to general semiconductor
industry conditions.
We primarily depend on a single third-party wafer foundry to manufacture all of
our integrated circuit products, which reduces our control over the integrated
circuit manufacturing process.
We do not own or operate a semiconductor fabrication facility. We primarily
rely on IBM, an outside foundry, to produce most of our single-chip silicon
tuners, although we are in the process of qualifying x-FAB for manufacturing our
silicon tuners. We do not have a long-term supply agreement with IBM and instead
obtain manufacturing services on a purchase order basis. IBM has no obligation
to supply products to us for any specific period, in any specific quantity or at
any specific price, except as set forth in a particular purchase order. Our
requirements represent a small portion of the total production capacity of this
foundry, and IBM may reallocate capacity to other customers even during periods
of high demand for our integrated circuits. If IBM were to become unable or
unwilling to continue manufacturing our integrated circuits, our business would
be seriously harmed. As a result, we would have to identify and qualify
substitute foundries, which would be time-consuming and difficult, resulting in
unforeseen manufacturing and operations problems. In addition, if competition
for foundry capacity increases, our product costs may increase, and we may be
required to pay significant amounts to secure access to manufacturing services.
If we do not qualify or
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receive supplies from additional foundries, including x-FAB, we may be exposed
to increased risk of capacity shortages due to our dependence on IBM.
We depend on a single third-party subcontractor for integrated circuit packaging
which reduces our control over the integrated circuit packaging process
Our integrated circuit products are packaged by a sole independent
subcontractor, Amkor, using facilities located in South Korea. We do not have
long-term agreements with Amkor and typically obtain services from them on a
purchase order basis. Our reliance on Amkor involves risks such as reduced
control over delivery schedules, quality assurance and costs. These risks could
result in product shortages or increase our costs of packaging our products. If
Amkor is unable or unwilling to continue to provide packaging services of
acceptable quality, at acceptable costs and in a timely manner, our business
would be seriously harmed. We would also have to identify and qualify substitute
subcontractors, which could be time consuming and difficult and may result in
unforeseen operations problems.
We may be unable to integrate operations that we may acquire in the future.
From time to time, we expect to continue to evaluate acquisitions and may
make additional acquisitions in the future. Our acquisition of Microtune KG was
our first acquisition of a business. Accordingly, we have limited organizational
experience in acquiring and integrating businesses, and we will need to develop
the relevant skills if we are to be successful in realizing the benefits of any
future acquisitions. If in the future we acquire technologies or businesses, we
could have difficulty integrating acquired technology into our product offerings
or integrating our technology with an acquired company's products. We could also
have difficulty coordinating and integrating overall business strategies,
controls, procedures and policies, as well as sales and marketing and research
and development efforts. Assimilating employees into our corporate culture and
coordinating operations across geographically dispersed locations could prove to
be difficult or time consuming. Moreover, we currently do not know and cannot
predict the accounting treatment of any future acquisition, in part because we
cannot be certain what accounting regulations, conventions or interpretations
may prevail in the future. These difficulties could disrupt our ongoing
business, distract our management and employees and increase our expenses.
Furthermore, we may have to incur debt or issue equity securities to pay for any
future acquisitions, and those issuances could be dilutive to our existing
stockholders.
Our inability to generate revenues from international sales could harm our
financial results.
For the three and nine months ended September 30, 2000, 51% and 52%,
respectively, of our net revenues were from sales outside of North America. We
plan to increase our international sales activities by hiring additional
international sales personnel. Our international sales will be limited if we
cannot do so. Even if we are able to expand our international operations, we may
not succeed in maintaining or increasing international market demand for our
products.
Currency fluctuations related to our international operations could harm our
financial results.
We expect a significant portion of our international revenues and expenses
to be denominated in foreign currencies. Accordingly, we could experience
fluctuations in our financial results due to changing exchange rates rather than
operational changes. We may choose to engage in currency hedging activities to
reduce these fluctuations in the future.
Our international operations, including our operations in Germany, the
Philippines and Korea, may be negatively affected by actions taken or events
that occur in countries over which we have no control.
We currently have facilities and suppliers located outside of the U.S.,
including research and development operations in Ingolstadt, Germany, and two
manufacturing facilities in Manila, Philippines. Furthermore, our current
integrated circuit packaging partner is located in Korea, and future foundry and
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packaging partners also may be located internationally. As a result, our
operations are affected by the local conditions in those countries, as well as
actions taken by the governments of those countries. For example, if the
Philippines government enacts restrictive laws or regulations, or increases
taxes paid by manufacturing operations in that country, the cost of
manufacturing our products in Manila could increase substantially, causing a
decrease in our gross margins and profitability. In addition, if the U.S.
imposes significant import restrictions on our products, our ability to import
our products into the U.S. from our international manufacturing and packaging
facilities could be diminished or eliminated. Local economic and political
instability in areas in the far east, in particular in the Philippines where
there has been political instability in the past, could result in unpleasant or
intolerable conditions for our workers, and ultimately could result in a
shutdown of our facilities in that country.
International operations that we may initiate or acquire in the future may
subject us to additional business risks, including political instability, and
changing or conflicting laws, regulations and tax schemes.
We may acquire or open additional international operations in Europe and
the Pacific Rim region. International expansion or acquisitions, and any
subsequent international operations, could be affected by the local conditions
in those countries, as well as actions taken by the governments of those
countries. To expand our operations internationally, we will have to comply with
the laws and regulations of each country in which we conduct business. For
example, if a foreign government enacts restrictive laws or regulations, or
increases taxes paid by manufacturing operations in that country, the cost of
manufacturing our products in that country could increase substantially, causing
a decrease in our gross margins and profitability. We cannot assure you that we
will be successful in obtaining the necessary regulatory approval, or in
complying with applicable regulations, in those countries or, if such approvals
are obtained or such regulations are complied with, that we will be able to
continue to comply with these regulations.
Our success could be jeopardized if key personnel leave.
Our future success depends largely upon the continued service of our
executive officers and other key management and technical personnel. Our success
also depends on our ability to continue to attract, retain and motivate
qualified personnel. Our personnel represent a significant asset as the source
of our technological and product innovations. The competition for qualified
personnel is intense in the radio frequency silicon and radio frequency systems
industries. We cannot assure you that we will be able to continue to attract and
retain qualified management, technical and other personnel necessary for the
design, development, manufacture and sale of our radio frequency products. We
may have difficulty attracting and retaining key personnel particularly during
periods of poor operating performance. The loss of the services of one or more
of our key employees or our inability to attract, retain and motivate qualified
personnel could harm our business.
Our manufacturing operations could be jeopardized and our production decreased
if our labor unions cause labor slowdowns or shutdowns at our union factory.
One of our manufacturing facilities is covered by union representation.
This facility currently manufactures the majority of our tuner module products.
If we experience labor slowdowns or shutdowns at this facility due to actions by
the labor union, our manufacturing output, and consequently our revenues, could
be diminished.
We must manage our growth.
If we fail to manage our growth, our reputation and results of operations
could be harmed. Since December 31, 1999, our total number of employees has
grown from 51 to 149 as of September 30, 2000, excluding manufacturing personnel
in Manila, Philippines, largely as a result of our acquisition of Microtune KG.
In addition, as of September 30, 2000, we had 1,719 employees, primarily
manufacturing personnel, in the Philippines. The resulting growth has placed,
and is expected to continue to place, significant demands on
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our personnel, management and other resources. We must continue to improve our
operational, financial and management information systems to keep pace with the
growth of our business.
Our business may be harmed if we fail to protect our proprietary technology.
We rely on a combination of patents, trademarks, copyrights, trade secret
laws, confidentiality procedures and licensing arrangements to protect our
intellectual property rights. We currently have patents issued and pending in
the U.S. and in foreign countries. We intend to seek further U.S and
international patents on our technology. We cannot be certain that patents will
be issued from any of our pending applications or that patents will be issued in
all countries where our products can be sold or that any claims will be allowed
from pending applications or will be of sufficient scope or strength to provide
meaningful protection or any commercial advantage. Our competitors may also be
able to design around our patents. The laws of some countries in which our
products are or may be developed, manufactured or sold, including various
countries in Asia, may not protect our products or intellectual property rights
to the same extent as do the laws of the U.S., increasing the possibility of
piracy of our technology and products. Although we intend to vigorously defend
our intellectual property rights, we may not be able to prevent misappropriation
of our technology. Our competitors may also independently develop technologies
that are substantially equivalent or superior to our technology.
Our ability to sell our radio frequency tuners may suffer if any outstanding
claims of intellectual property infringement against us or one of our customers
is valid or if any other third party claims that we or our customers infringe on
their intellectual property.
The electronics industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions, which have resulted in
significant and often protracted and expensive litigation. In addition, our
customers may be subject to infringement claims for products incorporating our
radio frequency products. If any claims of infringement are made against any of
our customers, our customers may seek to involve us in the infringement claim
and request indemnification from us. For example, in the past, we have been
notified of a claim against one of our PC/TV tuner customers for which the
customer made a claim for indemnification from us. The underlying claim has not
been resolved; however, we do not believe that our tuner infringes on the
intellectual property that is the subject of the underlying claim. We are not,
nor have we ever been, a party to this lawsuit. However, if the litigation
results in an adverse result for our customer, it may reduce or completely
eliminate marketing of its infringing product, which would decrease sales of our
radio frequency tuners to this customer. Further, if our customer prevailed in
its claim for indemnification against us, or if we were found to infringe on any
other third- party intellectual property, we could be required to:
. pay substantial damages such as a royalty on our historical and future
product sales;
. indemnify our customers for their legal fees and damages paid;
. stop manufacturing, using and selling the infringing products;
. expend significant resources to develop non-infringing technology;
. discontinue the use of some of our processes; or
. obtain licenses to the technology.
We may be unsuccessful in developing non-infringing products or negotiating
licenses upon reasonable terms, or at all. These problems might not be resolved
in time to avoid harming our results of operations.
Furthermore, we may initiate claims or litigation against third parties for
infringement of our proprietary rights or to establish the validity of our
proprietary rights. Litigation by or against us or one of our customers could
result in significant expense and divert the efforts of our technical personnel
and management, whether or not the litigation results in a favorable
determination.
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The products of our customers are subject to governmental regulation.
Governmental regulation could place constraints on our customers and
consequently minimize our customers' need or desire for our radio frequency
products. The Federal Communications Commission, or FCC, has broad jurisdiction
over several of our target markets in the U.S. Similar governmental agencies
regulate our target markets in other countries. Although our products are not
directly subject to current regulations of the FCC or any other federal or state
communications regulatory agency, much of the equipment into which our products
are incorporated is subject to direct government regulation. Accordingly, the
effects of regulation on our customers or the industries in which they operate
may, in turn, impede sales of our products. For example, it is possible that
demand for our radio frequency products will decrease if equipment incorporating
our products fails to comply with FCC emissions specifications.
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Part II Other Information
Item 1. Legal Proceedings
The Company is not party to any material legal proceedings.
Item 2. Changes In Securities and Use of Proceeds
Between July 1, 2000 and September 30, 2000, the Company issued 121,197
shares of unregistered common stock upon the exercise of outstanding options to
29 employees and consultants at an average exercise price of $0.33. Between
July 1, 2000 and September 30, 2000, the Company issued 2,212,194 shares of
unregistered common stock upon the exercise of outstanding warrants to 2
entities at an exercise price of $0.001 per share. The sales of the above
securities were deemed to be exempt from registration under the Securities Act
of 1933, as amended (the "Securities Act"), in reliance on Rule 701 promulgated
under Section 3(b) of the Securities Act, and Section 4(2) of the Securities
Act, respectively, as transactions not involving a public offering or
transactions pursuant to compensatory benefit plans and contracts relating to
compensation as provided under Rule 701 and sales to accredited investors
pursuant to Section 4(2). Each recipient had adequate access, through his or her
relationship with the Company to information about the Company.
The Company registered the initial public offering of its common stock, par
value $0.001 per share, on a Registration Statement on Form S-1 (File No. 333-
36340) which was declared effective on August 4, 2000. The offering closed on
August 9, 2000. The managing underwriters of the offering were Goldman Sachs,
Chase H&Q, SG Cowen and Bear, Stearns & Co., Inc. A total of 4,600,000 shares
of common stock were sold by the Company in the offering at a price of $16.00
per share, resulting in gross proceeds of $73.6 million. The underwriting
discount was $5.2 million and the other expenses related to the offering totaled
approximately $1.6 million.
From the time of receipt through September 30, 2000, the Company has
applied its net proceeds from the offerings toward funding capital expenditures.
Net cash used from the offerings for capital expenditures totaled $3.0 million
through September 30, 2000. The Company is currently investing the remainder of
the proceeds in interest-bearing, investment grade securities for future use.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the quarter
ended September 30, 2000.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibit is filed herewith.
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27.1 Financial data schedule
(b) Reports on Form 8-K
There were no Form 8-K's filed during the quarter ended September 30,
2000.
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Signatures
In accordance with the requirements of the Securities Exchange Act of 1934
as amended, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: November 9, 2000
/s/ Everett (Buddy) Rogers
------------------------------------------------------
Everett (Buddy) Rogers
Chief Financial Officer and Vice President of Finance
and Administration
(Principal Financial and Accounting Officer)
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