##### Table of Contents

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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-Q





|x |  | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- |  | ---------------------------------------------------------------------------------------

for the quarterly period ended June 30, 2002.





or





| ̈ |  | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- |  | ----------------------------------------------------------------------------------------

for the transition period from  to
.





Commission File Number: 000-30615





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SIRENZA MICRODEVICES, INC.


(Exact name of registrant as specified in its charter)





Delaware

77-0073042(State or other jurisdiction of

(I.R.S. Employerincorporation or organization)

Identification No.)522 Almanor Avenue, Sunnyvale, CA

94085(Address of principal executive offices)

(Zip Code)





(408) 616-5400


(Registrants telephone number, including area code)





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(Former name, former address and former fiscal year, if changed since last report)





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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) had been subject to such filing requirements for the past 90 days.  Yes  x  No  ̈





As of July 28, 2002, there were 29,910,426 shares of registrants Common Stock outstanding.





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##### Table of Contents




SIRENZA MICRODEVICES, INC.


INDEX





Part I

Financial Information

1Item 1.    
Financial Statements

1Item 2.    
Managements Discussion and Analysis of Financial Condition and Results of Operations

11Item 3.    
Quantitative and Qualitative Disclosures About Market Risk

39Part II

Other Information

39Item 1.    
Legal Proceedings

39Item 2.    
Changes in Securities and Use of Proceeds

40Item 3.    
Defaults Upon Senior Securities

40Item 4.    
Submission of Matters to a Vote of Security Holders

40Item 5.    
Other Information

41Item 6.    
Exhibits and Reports on Form 8-K

41Signatures



42




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##### Table of Contents

Part I.    
Financial Information





Item 1.Financial Statements





Sirenza Microdevices, Inc.





Condensed Consolidated Balance Sheets





(In thousands)





June 30,2002


December 31, 2001(unaudited)AssetsCurrent assets:Cash and cash equivalents

$
14,846


$
15,208Short-term investments


16,043



27,118Accounts receivable, net


1,320



1,158Inventories


2,020



1,894Other current assets


1,048



1,062Total current assets


35,277



46,440Property and equipment, net


6,061



7,285Long-term investments


12,087



9,058Investment in GCS


7,500



Other assets


183



1,260Total assets

$
61,108


$
64,043Liabilities and stockholders equityCurrent liabilities:Accounts payable

$
988


$
1,464Accrued expenses


1,668



1,745Deferred margin on distributor inventory


2,809



3,631Accrued restructuring


1,813



2,155Capital lease obligations, current portion


519



634Total current liabilities


7,797



9,629Capital lease obligations and other long-term liabilities


115



401Stockholders equityCommon Stock


30



30Additional paid-in capital


128,856



128,426Deferred stock compensation


(1,309
)


(1,787
)Accumulated deficit


(74,381
)


(72,656
)Total stockholders equity


53,196



54,013Total liabilities and stockholders equity

$
61,108


$
64,043





See accompanying notes.




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##### Table of Contents

Sirenza Microdevices, Inc.





Condensed Consolidated Statements of Operations





(In thousands,
except per share data)


(unaudited)





Three Months Ended


Six Months EndedJune 30, 2002


June 30, 2001


June 30, 2002


June 30, 2001Net revenues

$
4,863


$
5,355


$
9,733


$
13,155Cost of revenues (exclusive of amortization of deferred stock compensation of $31, $62, $37 and $74 for the three and
six months ended June 30, 2002 and three and six months ended June 30, 2001, respectively)


1,941



3,716



3,621



7,616Gross profit


2,922



1,639



6,112



5,539Operating expenses:Research and development (exclusive of amortization of deferred stock compensation of $48, $96, $68 and $143 for the
three and six months ended June 30, 2002 and three and six months ended June 30, 2001, respectively)


1,394



1,972



3,056



4,503Sales and marketing (exclusive of amortization of deferred stock compensation of $60, $120, $75 and $151 for the three
and six months ended June 30, 2002 and three and six months ended June 30, 2001, respectively)


1,298



1,418



2,431



3,054General and administrative (exclusive of amortization of deferred stock compensation of $100, $200, $154 and $307 for
the three and six months ended June 30, 2002 and three and six months ended June 30, 2001, respectively)


1,226



1,175



2,381



2,229Amortization of deferred stock compensation


239



334



478



675Total operating expenses


4,157



4,899



8,346



10,461Loss from operations


(1,235
)


(3,260
)


(2,234
)


(4,922
)Interest expense


15



31



35



73Interest income and other, net


277



1,192



544



2,067Loss before taxes


(973
)


(2,099
)


(1,725
)


(2,928
)Provision for (benefit from) income taxes






(629
)






(878
)Net loss

$
(973
)

$
(1,470
)

$
(1,725
)

$
(2,050
)Net loss per shareBasic

$
(0.03
)

$
(0.05
)

$
(0.06
)

$
(0.07
)Diluted

$
(0.03
)

$
(0.05
)

$
(0.06
)

$
(0.07
)Shares used to compute net loss per shareBasic


29,862



29,270



29,821



28,771Diluted


29,862



29,270



29,821



28,771





See accompanying notes.




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##### Table of Contents

Sirenza Microdevices, Inc.





Condensed Consolidated Statements of Cash Flows





(In thousands)


(unaudited)





Six Months EndedJune 30, 2002


June 30, 2001Operating ActivitiesNet loss

$
(1,725
)

$
(2,050
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


1,417



1,334Amortization of deferred stock compensation


478



675Changes in operating assets and liabilities:Accounts receivable


(162
)


2,198Inventories


(126
)


(268
)Other assets


(283
)


(404
)Accounts payable


(476
)


94Accrued expenses


(98
)


(831
)Accrued restructuring


(342
)


Deferred margin on distributor inventory


(822
)


(1,851
)Net cash used in operating activities


(2,139
)


(1,103
)Investing ActivitiesSales/maturities of available-for-sale securities, net


8,046



18,653Purchases of property and equipment


(193
)


(2,341
)Investment in GCS


(6,126
)


Net cash provided by investing activities


1,727



16,312Financing ActivitiesPrincipal payments on capital lease obligations


(380
)


(385
)Proceeds from employee stock plans


430



2,758Net cash provided by financing activities


50



2,373Increase (decrease) in cash


(362
)


17,582Cash and cash equivalents at beginning of period


15,208



37,683Cash and cash equivalents at end of period

$
14,846


$
55,265Supplemental disclosures of noncash investing and financing activitiesConversion of GCS loan receivable

$
1,374


$






See accompanying notes.




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##### Table of Contents

Note 1:    Basis of Presentation





The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month and six
month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for any later period.





The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.





The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements of Sirenza Microdevices, Inc. (the Company) for the fiscal year ended December 31, 2001, which are included in the Companys Annual Report on Form 10-K filed with
the Securities and Exchange Commission (SEC) on March 27, 2002.





The unaudited condensed consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries, Sirenza Microdevices, Canada and Sirenza Microdevices UK Limited. Intercompany balances and transactions have been eliminated.





The Company operates on thirteen week fiscal quarters ending on the Sunday closest to the end of the calendar quarter, with the exception
of the fourth quarter, which ends on December 31. The Companys second quarter of fiscal year 2002 ended on June 30, 2002. The Companys second quarter of fiscal year 2001 ended on July 1, 2001. For presentation purposes, the accompanying
unaudited condensed consolidated financial statements refer to the quarters calendar month end for convenience.





Note
2:    Inventories





The Company plans production based on orders received and forecasted
demand and must order wafers and build inventories well in advance of product shipments. The valuation of inventories at the lower of cost or market requires the use of estimates




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regarding the amounts of current inventories that will be sold. These estimates are dependent on the Companys assessment of current and expected orders from its customers, including
consideration that orders are subject to cancellation with limited advance notice prior to shipment. Because the Companys markets are volatile, and are subject to technological risks and price changes as well as inventory reduction programs by
the Companys customers and distributors, there is a risk that the Company will forecast incorrectly and produce excess inventories of particular products. This inventory risk is compounded because many of the Companys customers place
orders with short lead times. As a result, actual demand will differ from forecasts, and such a difference has in the past and may in the future have a material adverse effect on actual results of operations. For example, in the third quarter of
2001, the Company recorded a provision for excess inventories totaling $4.5 million. This additional excess inventory charge was due to a significant decrease in forecasted demand for the Companys products and was calculated in accordance with
the Companys policy, which is based on inventory levels in excess of demand for each specific product.





In
the first and second quarters of 2002, the Company sold inventory products that were previously reserved and accordingly, reduced its provision for excess inventories by approximately $563,000 and $566,000, respectively. The Company may sell
previously reserved inventory products in future periods, which would have a similarly positive impact on the Companys results of operations.





Inventories consist of (in thousands):





June 30, 2002

December 31, 2001(unaudited)Raw materials

$
204

$   242Work-in-process


1,125

1,572Finished goods


691

80Total

$
2,020

$1,894





Note 3:    Investment in GCS





In the first quarter of 2002, the Company converted an outstanding loan receivable of approximately $1.4 million and invested cash of
approximately $6.1 million in Global Communication Semiconductors, Inc. (GCS), a privately held semiconductor foundry, in exchange for 12.5 million shares of GCS Series D-1 preferred stock valued at $0.60 per share. The Companys total
investment of $7.5 million represented approximately 14% of the outstanding voting shares of GCS at the time of the investment. The investment in GCS was within the Companys strategic focus and intended to strengthen the Companys supply
chain for Indium Gallium Phosphide (InGaP) and Indium Phosphide (InP) process technologies. In connection with the investment, the Companys President and CEO joined GCS seven-member board of directors.




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The Company accounted for its investment in GCS under the cost method of
accounting in accordance with accounting principles generally accepted in the United States, as the Companys investment was less than 20% of the voting stock of GCS and the Company cannot exercise significant influence over GCS. The investment
in GCS is classified as a non-current asset on the Companys consolidated balance sheet.





On a quarterly
basis, the Company evaluates its investment in GCS to determine if an other than temporary decline in value has occurred. Factors that may cause an other than temporary decline in the value of the Companys investment in GCS would include, but
not be limited to, a degradation of the general business environment in which GCS operates, the failure of GCS to achieve certain milestones or a series of operating losses in excess of GCS current business plan, or the inability of GCS to
continue as a going concern. If the Company determines that an other than temporary decline in value has occurred, the Company will write-down its investment in GCS to fair value. Such a write-down could have a material adverse impact on the
Companys consolidated results of operations in the period in which it occurs. As of June 30, 2002 the Companys investment in GCS had not experienced an other than temporary decline in value.





The realizability of the Companys $7.5 million investment in GCS is ultimately dependent on the Companys ability to sell its
GCS shares, for which there is currently no public market. Even if the Company is able to sell its GCS shares, the sale price may be less than the price paid by the Company, which could have a material adverse effect on the Companys
consolidated results of operations.





Note 4:    Restructuring Activities





In 2001, companies throughout the worldwide telecommunication industry announced slowdowns or delays in the build out of new wireless and
wireline infrastructure. This resulted in lower equipment production volumes by the Companys customers and efforts to lower their component inventory levels. These actions by the Companys customers resulted in a slowdown in shipments and
a reduction in visibility regarding future sales and caused the Company to revise its cost structure given the then revised revenue levels. As a result, in the fourth quarter of 2001, the Company incurred a restructuring charge of $2.7 million
related to a worldwide workforce reduction and consolidation of excess facilities. The Company realigned its organizational structure to focus on strategic account sales and marketing efforts, centralized engineering and customer and solution
business area management. Prior to the date of the financial statements, management with the appropriate level of authority approved and committed the Company to a plan of termination and consolidation of excess facilities which included the
benefits terminated employees would receive. In addition, prior to the date of the financial statements, the termination benefits were communicated to employees in detail sufficient to enable them to determine the nature and amounts of their
individual severance benefits.




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Worldwide Workforce Reduction





In the fourth quarter of 2001, the Company recorded a charge of $481,000 primarily related to severance and fringe benefits associated with the termination of 27 employees.
Of the 27 terminations, 12 were engaged in manufacturing activities, seven were engaged in research and development activities, five were engaged in sales and marketing activities and three were engaged in general and administrative activities. In
addition, of the 27 terminations, 23 were from sites located in the United States, three were from our Canadian design center and one was from our European sales office.





The workforce reductions began and were concluded in the fourth quarter of 2001 with substantially all of the severance related benefits paid in the fourth quarter of 2001.





Consolidation of Excess Facilities





In the fourth quarter of 2001, the Company recorded a charge of approximately $2.2 million for excess facilities primarily relating to noncancelable lease costs. The
Company estimated the cost for excess facilities based on the contractual terms of its noncancelable lease agreements. Given the current and expected real estate market conditions, the Company assumed none of the excess facilities would be
subleased. However, to the extent the Company does sublease any of its excess facilities, the proceeds received from subleasing will be credited to restructuring charges, the same statement of operations line item originally charged for such excess
facilities.





The following table summarizes the activity related to the Companys accrued restructuring
balance during the second quarter of 2002 (in thousands):





Accrued Restructuring Balance at March 31, 2002

Cash Payments

Non-cash Charges

Accrued Restructuring Balance at June 30, 2002Worldwide workforce reduction

$     19

$    (2)

$

$     17Lease commitments

1,961

(165)



1,796$1,980

$(167)

$

$1,813





The following table summarizes the restructuring costs and
activities through June 30, 2002 (in thousands):




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Amount Charged to Restructuring

Cash Payments

Non-cash Charges

Accrued Restructuring Balance at June 30, 2002Worldwide workforce reduction

$   481

$(464)

$

$    17Lease commitments

2,189

(393)



1,796$2,670

$(857)

$

$1,813





The remaining cash expenditures relating to the worldwide workforce
reduction are expected to be paid in the third quarter of 2002. The remaining cash expenditures related to the noncancelable lease commitments are expected to be paid over the respective lease terms through 2006.





Note 5:    Net Income (Loss) Per Share





The Company computes net income (loss) per share in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share (FAS 128) and SEC Staff Accounting Bulletin No.
98 (SAB 98). Under the provisions of FAS 128 and SAB 98, basic net income (loss) per share is computed by dividing the net income (loss) applicable to common stockholders for the period by the weighted average number of shares of Common Stock
outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) applicable to common stockholders for the period by the weighted average number of shares of Common Stock and potential Common Stock
equivalents outstanding during the period, if dilutive. Potential Common Stock equivalents include incremental shares of Common Stock issuable upon the exercise of stock options.





The following table sets forth the computation of basic and diluted net loss per share for the periods indicated (in thousands, except per share data):





Three Months ended


Six Months endedJune 30, 2002


June 30, 2001


June 30, 2002


June 30, 2001Net loss

$
(973
)

$
(1,470
)

$
(1,725
)

$
(2,050
)Weighted average common shares outstanding


29,862



29,270



29,821



28,771Net loss per share

$
(0.03
)

$
(0.05
)

$
(0.06
)

$
(0.07
)





The effect of options to purchase 4,023,198 and 3,497,493 shares of
Common Stock at average exercise prices of $8.84 and $10.22 for the three and six months ended June 30, 2002 and June 30, 2001, respectively, has not been included in the computation of




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diluted net loss per share applicable to common stockholders as their effect is antidilutive.





Note 6:    Comprehensive Income (Loss)





The Companys comprehensive net loss was the same as its net loss for the three and six months ended June 30, 2002 and 2001.





Note 7:    Segments of an Enterprise and Related Information





The Company has adopted Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an Enterprise and Related Information (FAS 131). FAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. FAS 131 also establishes standards
for related disclosures about products and services, geographic areas, and major customers.





From 2000 to 2001,
the Company operated under two business segments: (1) the Standard Products segment and (2) the Wireless Infrastructure Products segment. At the beginning of 2002, in response to the changes in the market place, the Company reorganized to focus on
end markets. As a result of this reorganization, the Company now operates in three business segments. First is the Wireless Applications business area. This business area is responsible for all wireless infrastructure activity, both standard and
specialized. Second is the Wireline Applications business area. This business area is responsible for the development and marketing of wireline components to both CATV and fiber optics markets. Last is the Terminals business area. This business area
focuses on customers who use the Companys products for applications outside of the Companys core markets of wireless and wireline infrastructure, such as cable television set-top boxes and wireless video transmitters. The Companys
reportable segments are organized as separate functional units with separate management teams and separate performance assessment and resource allocation processes.





The accounting policies of each segment are the same as those described in Note 1: Organization and Summary of Significant Accounting Policies of the Notes to Consolidated
Financial Statements as reflected in the Companys Annual Report on Form 10-K, filed with the SEC on March 27, 2002. The Companys chief operating decision maker (CODM) evaluates performance and allocates resources based on segment
reporting operating income (loss). There are no intersegment sales. Non-segment items include certain corporate manufacturing expenses, advanced research and development expenses, certain sales expenses, general and administrative expenses,
amortization of deferred stock compensation, interest income and other, net, interest expense, and the provision for (benefit from) income taxes, as the aforementioned items are not allocated for purposes of the CODMs review. Assets and
liabilities are not discretely reviewed by the CODM.




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Wireless Applications

Wireline Applications


Terminals Applications

Total Segments

Non-Segment Items


Total CompanyFor the three months ended June 30, 2002Net revenues from external customers

4,114

179


569

4,862

1


4,863Operating income (loss)

1,093

(110
)

61

1,044

(2,279
)

(1,235
)For the six months ended June 30, 2002Net revenues from external customers

8,452

262


1,122

9,836

(103
)

9,733Operating income (loss)

2,455

(483
)

142

2,114

(4,348
)

(2,234
)For the three months ended June 30, 2001Net revenues from external customers

2,938

27


2,277

5,242

113


5,355Operating income (loss)

605

(364
)

956

1,197

(4,457
)

(3,260
)For the six months ended June 30, 2001Net revenues from external customers

7,605

60


5,591

13,256

(101
)

13,155Operating income (loss)

2,126

(826
)

2,745

4,045

(8,967
)

(4,922
)





Note 8:    Contingency





In November 2001, the Company, various of its officers and certain underwriters of its initial public offering of securities were named in
a purported class action lawsuit filed in the United States District Court for the Southern District of New York. The suit, Van Ryen v. Sirenza Microdevices, Inc., et al., Case No. 01-CV-10596, alleges that various underwriters engaged in improper
and undisclosed activities related to the allocation of shares in the Company's initial public offering, including obtaining commitments from investors to purchase shares in the aftermarket at pre-arranged prices. Similar lawsuits concerning more
than 300 other companies initial public offerings were filed during 2001, and this lawsuit is being coordinated with those actions (the coordinated litigation). The Plaintiffs, who filed an amended complaint on or about April 19,
2002, bring claims for violation of several provisions of the federal securities laws and seek an unspecified amount of damages. On or about July 1, 2002, an omnibus motion to dismiss was filed in the coordinated litigation on behalf of the issuer
defendants, of which the Company and its named officers and directors are a part, on common pleadings issues. The Company believes that the allegations against it are without merit and intends to defend the litigation vigorously. However, there can
be no assurance as to the ultimate outcome of this lawsuit and an adverse outcome to this litigation could have a material adverse effect on the Company's consolidated balance sheet, statement of operations or




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cash flows. Even if the Company is entirely successful in defending this lawsuit, it may incur significant legal expenses and its management may expend significant time in the defense.





Note 9:    Impact of Recently Issued Accounting Standards





In July 2002, the Financial Accounting Standards Board (FASB) issued Statement No. 146 (SFAS 146), Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) and must be applied beginning January 1, 2003. SFAS 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred rather than when the exit or disposal plan is approved. The Company is currently evaluating the impact of this adoption.





Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations





Certain statements contained in this Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report are forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial performance. In some cases, forward-looking statements can be identified by terminology such as may, will, should,
expect, anticipate, intend, plan, believe, estimate, potential, or continue, the negative of these terms or other comparable terminology. These
statements involve a number of risks and uncertainties. Actual events or results may differ materially from any forward-looking statement as a result of various factors, including those described below under Risk Factors.





Critical Accounting Policies and Estimates





The discussion and analysis below of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been
included. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosure of contingent assets and liabilities. We base our
estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the




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carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate these estimates on an ongoing basis. Actual results may differ from these estimates under
different assumptions or conditions.





Management believes the following critical accounting policies require the
most significant judgments and estimates to be made in the preparation of our consolidated financial statements.





Investments:In the first quarter of 2002, we converted an outstanding loan receivable of approximately $1.4 million and invested cash of approximately $6.1 million in Global Communication
Semiconductors, Inc. (GCS), a privately held semiconductor foundry, in exchange for 12.5 million shares of GCS Series D-1 preferred stock valued at $0.60 per share. Our total investment of $7.5 million represented approximately 14% of the
outstanding voting shares of GCS at the time of the investment. The investment in GCS was within our strategic focus and intended to strengthen our supply chain for InGaP and InP process technologies. In connection with the investment, our President
and CEO joined GCS seven-member board of directors.





We accounted for our investment in GCS under the cost
method of accounting in accordance with accounting principles generally accepted in the United States, as our investment was less than 20% of the voting stock of GCS and we cannot exercise significant influence over GCS. The investment in GCS is
classified as a non-current asset on our consolidated balance sheet.





On a quarterly basis, we evaluate our
investment in GCS to determine if an other than temporary decline in value has occurred. Factors that may cause an other than temporary decline in the value of our investment in GCS would include, but not be limited to, a degradation of the general
business environment in which GCS operates, the failure of GCS to achieve certain milestones or a series of operating losses in excess of GCS current business plan, or the inability of GCS to continue as a going concern. If we determine that
an other than temporary decline in value has occurred, we will write-down our investment in GCS to fair value. Such a write-down could have a material adverse impact on our consolidated results of operations in the period in which it occurs. As of
June 30, 2002 our investment in GCS had not experienced an other than temporary decline in value.





Excess and
Obsolete Inventories:    We record provisions for excess inventories based on levels of inventory exceeding the forecasted demand of such products within specific time horizons, generally six months or less. We forecast
demand for specific products based on the number of products we expect to sell, with such assumptions dependent on our assessment of market conditions and current and expected orders from our customers, considering that orders are subject to
cancellation with limited advance notice prior to shipment. If forecasted demand decreases based on our estimates or if inventory levels increase disproportionately to forecasted demand, additional inventory write-downs may be required, as was the
case in 2001 when we recorded additional provisions for excess inventories of $7.8 million. Likewise, if we ultimately sell




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inventories that were previously reserved, we would reduce the previously recorded excess inventory provisions which would have a positive impact on our cost of revenues, gross margin and
operating results, as was the case in the first and second quarters of 2002 when we sold a total of $1.1 million of previously reserved inventory products.





Valuation of Deferred Tax Assets:We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized based on our
ability to generate future taxable income. While we have considered future taxable income in assessing the need for the valuation allowance, in the event that we were to determine that we would be able to realize our deferred tax assets in the
future in excess of our net recorded amount, based on our ability to generate future taxable income, an adjustment to the deferred tax asset would increase income in the period such determination was made. Although we have provided for a full
valuation allowance against our deferred tax assets at June 30, 2002, if we have net deferred tax assets recorded in the future and we determine that we would not be able to realize all or part of our net deferred tax assets at such time, an
adjustment to the deferred tax asset would be charged to income in the period such a determination was made, as was the case in the third quarter of 2001 when we incurred charges of $2.3 million to increase our deferred tax asset valuation
allowance.





Long-lived Asset Impairment:    We record long-lived asset impairment
charges when impairment indicators exist and the related undiscounted future cash flows and fair value of long-lived assets are less than the carrying value of such assets, as was the case in 2001 when we recorded $315,000 of impairment charges.
Future adverse changes in market conditions or changes in the estimated useful life of our long-lived assets could result in new impairment indicators, thereby possibly resulting in impairment charges in the future.





Allowance for Doubtful Accounts:    We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowance may be required. To date, we
have not experienced material losses as a result of our customers inability to pay us.





Sales
Returns:    We record estimated reductions to revenues for sales returns, primarily related to quality issues, at the time revenue is recognized. While we engage in extensive product quality programs and processes, including
actively monitoring and evaluating the quality of our foundry and packaging partners, our sales return obligations are effected by failure rates. Should actual product failure rates and the resulting return of failed products differ from our
estimates, revisions to our sales return reserves may be required.




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In addition to the above critical accounting policies we consider the following
accounting policies to be very important in the preparation of our consolidated financial statements:





Pricing
Agreements:We record estimated reductions to revenue for special pricing agreements with our distributors. If market conditions were to decline, we may take actions to increase distributor incentive offerings possibly
resulting in an incremental reduction of revenue at the time the incentive is redeemed.





Restructuring
Charges:    We recorded restructuring charges of $2.7 million in the fourth quarter of 2001 with the assumption that we would not sublease any of our excess facilities through the end of the respective lease term. In the
event that we sublease any of these excess facilities, an adjustment to our restructuring accrual would be charged to income in the period such a sublease occurred. As of June 30, 2002, we have not subleased any of our excess facilities.





Distributor Revenue Accounting:We recognize revenues on sales to our distributors
at the time our products at sold by our distributors to their third party customers. The recognition of sales to our distributors and the related gross profit on the products held by our distributors is deferred until the sale to the third party
customer. The deferred gross profit is included as deferred margin on distributor inventory on our balance sheet. On a monthly basis, we reconcile the value of inventory being held by our distributors, as reported by our distributors, to
our estimate of the value of ending inventory, considering in-transit inventory to and from our distributors and pricing adjustments.





Overview





We are a leading designer and supplier of high performance RF components for
communications equipment manufacturers. Our products are used primarily in wireless communications equipment to enable and enhance the transmission and reception of voice and data signals. Historically, our products meeting standard specifications
widely adopted by communications equipment manufactures have constituted a majority of our revenues and we expect this trend to continue in the near term. Our products are also utilized in broadband wireline and terminal applications.





As a result of the telecommunication industry downturn in 2001 and changing market conditions, effective in 2002, we
reorganized our business to focus on end markets instead of product type. We established three business areas. The first business area focuses on the wireless infrastructure markets. The second business area focuses on the cable and fiber optic
wireline infrastructure markets. Third, we established what we label the terminals business area. This business area focuses on customers who use our products for applications outside of our core markets of wireless and wireline infrastructure, such
as cable television set-top boxes and wireless video transmitters.





Our Wireless Business Area accounted for 85%
of net revenues in the three months ended June 30, 2002. Our Wireline Business Area accounted for 3% of net revenues in




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the three months ended June 30, 2002. Our Terminals Business Area accounted for 12% of net revenues in the three months ended June 30, 2002. We currently expect the relative percentage of net
revenues attributable to each business area to remain at or near the above levels.





We sell our products worldwide
through U.S.-based distributors and through our direct sales force. In the past, we have also sold our products through a private label reseller who sells products under its brand name, although such sales have been zero in recent quarters. Our
products are also sold through a worldwide network of independent sales representatives whose orders are fulfilled either by our distributors or us. Significant portions of our distributors end sales are made to their customers overseas. Sales
to customers located in the United States represented approximately 51% of net revenues in the three months ended June 30, 2002. Sales customers located outside of the United States represented 49% of net revenues in the three months ended June 30,
2002. Sales to one customer located in Sweden, Ericsson, represented 12% of net revenues in the three months ended June 30, 2002. For our direct sales, private label sales and sales to our sales representatives, we recognize revenues when the
product has been shipped, title has transferred, and no further obligations remain. Although we have never experienced a delay in customer acceptance of our products, should a customer delay acceptance in the future, our policy is to delay revenue
recognition until the products are accepted by a customer. Revenues from our distributors are deferred until the distributors resell the products to their customers.





Two distributors, Richardson Electronics Laboratories and Avnet Electronics Marketing, Ericsson, a direct customer, and Planet Technology, our Chinese sales representative
accounted for a substantial portion of our net revenues in the three months ended June 30, 2002. Sales to Ericsson represented 12% of net revenues in the three months ended June 30, 2002. Sales to Planet Technology represented 11% of net revenues
for the three months ended June 30, 2002. Sales to Richardson Electronics Laboratories represented 38% of net revenues in the three months ended June 30, 2002. Sales to Avnet Electronics Marketing represented 10% of net revenues in the three months
ended June 30, 2002. Two distributors, Richardson Electronics Laboratories and Avnet Electronics Marketing and a private label reseller of our products, Minicircuits Laboratories, accounted for a substantial portion of our net revenues in the three
months ended June 30, 2001. Sales to Minicircuits Laboratories represented 21% of net revenues in the three months ended June 30, 2001. There were no sales to Minicircuits Laboratories in the three months ended June 30, 2002. Sales to Richardson
Electronics Laboratories represented 39% of net revenues in the three months ended June 30, 2001. Sales to Avnet Electronics Marketing represented 16% of net revenues in the three months ended June 30, 2001. Richardson Electronics Laboratories and
Avnet Electronics Marketing distribute our products to a large number of end customers. We anticipate that sales through our distributors and Chinese sales representative and to Ericsson will continue to account for a substantial portion of our net
revenues in the near term.





Sales of our products using two of our process technologies accounted for a
significant portion of our net revenues in the three months ended June 30, 2002 and 2001. Sales of our gallium arsenide heterojunction bipolar transistor (GaAs HBT) products




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accounted for 39% of our net revenues in the three months ended June 30, 2002 and 51% of our net revenues in the three months ended June 30, 2001. Sales of our silicon germanium (SiGe)
heterojunction bipolar transistor products accounted for 31% of our net revenues in the three months ended June 30, 2002 and the three months ended June 30, 2001.





Cost of revenues consists primarily of the costs of wafers from our third-party wafer fabs, costs of packaging performed by third-party vendors, costs of testing, costs
associated with procurement, production control, quality assurance, manufacturing engineering, and provisions for excess inventories. We subcontract our wafer manufacturing and packaging and do only final testing and tape and reel assembly at our
facilities. In late 2001, we made the decision to outsource a major portion of our production testing operations. We are currently in the process of qualifying subcontractors to test our products and expect to begin the outsourcing of our production
testing operations in the second half of 2002 or early 2003.





There are a number of factors influencing our gross
margin. Historically, gross margins on our sales through our distributors, to private label resellers and our direct customers have differed materially from each other. As a result, the relative mix of these sales affects our gross margin. Also, the
gross margin on sales of our newer products are typically higher than the gross margin on sales of some of our older products. As a result, the relative mix of new product sales compared to older product sales affects our gross margin. In addition,
we offer a broad range of products in multiple technologies that have historically had different gross margins. As a result, the relative mix of product sales by process technology and within each technology affects our gross margins.





In addition, our gross margins are negatively influenced by provisions for excess inventories, as was the case in the in the
third quarter of 2001 when we recorded provisions for excess inventories of $4.5 million, and positively influenced by the sale of previously reserved inventory products, as was the case in the first and second quarters of 2002 when we sold $563,000
and $566,000, respectively, of previously reserved inventory products.





Also, our gross margin is traditionally
lower in periods with less volume and higher in periods with high volume. We value inventories at the lower of standard cost, which approximates actual on a first-in, first-out basis, or market. In periods in which volumes are low, our manufacturing
overhead costs are allocated to fewer units, thereby decreasing our gross margin. Likewise, in periods in which volumes are high, our manufacturing overhead costs are allocated to more units, thereby increasing our gross margin.





We do not recognize revenue from our sales to distributors until shipment to the distributors customer. We record the
deferred margin on distributor inventory on our balance sheet. As a result, the level of inventory at our distributors can affect our reported gross margin for any particular period.





In the three months ended June 30, 2002, two packaging firms packaged substantially all of our products. Relatives of our founding stockholders own one of these packaging
firms, MPI Corporation in Manila, Philippines. Although we utilized three




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additional packaging subcontractors in the three months ended June 30, 2002, we anticipate that MPI will continue to account for a significant amount of our packaging in the near future.





Research and development expenses consist primarily of salaries and related expenses for personnel engaged in
research and development, material costs for prototype and test units and other expenses related to the design, development and testing of our products and, to a lesser extent, fees paid to consultants and outside service providers. We expense all
of our research and development costs as they are incurred.





Sales and marketing expenses consist primarily of
salaries, commissions and related expenses for personnel engaged in marketing, sales and customer support functions, as well as costs associated with trade shows, promotional activities, advertising and public relations. We pay and expense
commissions to our independent sales representatives when revenues from the associated sale are recognized.





General and administrative expenses consist primarily of salaries and related expenses for executive, finance, accounting, information technology, and human resources personnel, insurance and professional fees.





We currently engage Ernst & Young LLP as our independent auditors. In addition to the audit services they provide with
respect to our annual audited consolidated financial statements included in our Annual Reports on Form 10-K and certain other filings with the Securities and Exchange Commission, Ernst & Young LLP has provided us in the past and may provide in
the future other non-audit services, such as the preparation and review of our tax returns, tax consulation services, review of and provision of consents for registration statements and accounting consultations unrelated to audits. Effective as of
July 30, 2002, the Sarbanes-Oxley Act of 2002 requires that all non-audit services, other than in certain circumstances as provided therein, provided to an issuer by the auditor of the issuer be pre-approved by the audit committee of the issuer.
Accordingly, our audit committee has recently approved all non-audit services currently being provided to us by Ernst & Young LLP, as listed above. We intend to have our audit committee pre-approve any future provision of audit and non-audit
services by our independent auditors.





Comparison of the Three Months Ended June 30, 2002 and June 30, 2001





Net Revenues





Net revenues decreased to $4.9 million for the three months ended June 30, 2002 from $5.4 million for the three months ended June 30, 2001. This decrease was the result of the general economic
slowdown, the resulting softness in the wireless infrastructure markets, changes in buying patterns by equipment manufacturers worldwide and delays in the next generation wireless infrastructure build-out. Sales through our distributors were 48% of
net revenues for the three months ended June 30, 2002 and 55% of net revenues for the three months ended June 30, 2001. Sales to our direct customers comprised 52% of net revenues for the three months ended June 30, 2002, none of which was to our
private label reseller. Sales to our direct customers comprised 45% of net revenues for the three months ended June 30, 2001, of which 21% of net revenues was to our private label reseller and 24% of net revenues was to our factory direct customers.




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Sales of our SiGe and InGaP products were approximately 43% of our total net revenues for the three months ended June 30, 2002 compared to 37% for the three months ended June 30, 2001. Sales of
our GaAs products were approximately 39% of our total net revenues for the three months ended June 30, 2002 compared to 51% for the three months ended June 30, 2001.





Cost of Revenues





Cost of revenues decreased to $1.9 million for the three months ended June 30, 2002 from $3.7 million for the three months ended June 30, 2001, primarily as a result of lower provisions for excess inventories and lower manufacturing
spending as a result of cost reduction actions implemented in the second half of 2001. In addition, in the three months ended June 30, 2002, we sold inventory products that were previously reserved of approximately $566,000. As the cost basis for
previously reserved inventory is zero when such products are sold, there is no cost of revenue element associated with the sale, which results in a 100% gross margin on that sale. We may sell previously reserved inventory products in future periods.
Operations personnel decreased to 29 at June 30, 2002 from 42 at June 30, 2001.





Gross Profit





Gross profit increased to $2.9 million in the three months ended June 30, 2002 from $1.6 million in the three
months ended June 30, 2001. Gross margin increased to approximately 60% in the three months ended June 30, 2002 from 31% in the three months ended June 30, 2001. The increase in gross margin is primarily attributable to the sale of previously
reserved inventory products, lower provisions for excess inventories and lower manufacturing spending as a result of cost reduction actions implemented in the second half of 2001.





Operating Expenses





Research and Development.    Research and development expenses decreased to $1.4 million for the three months ended June 30, 2002 from $2.0 million for the three months ended June 30, 2001. This decrease is
primarily the result of lower salaries and salary related expenses, which reduced costs by $417,000, and lower expenses for engineering materials, which reduced costs by $169,000. Research and development personnel decreased to 30 at June 30, 2002
from 43 at June 30, 2001.





Sales and Marketing.    Sales and marketing expenses
decreased to $1.3 million for the three months ended June 30, 2002 from $1.4 million for the three months ended June 30, 2001. This decrease is primarily the result of lower advertising expenses, which reduced costs by $106,000. Sales, marketing and
applications engineering personnel totaled 22 at both June 30, 2002 and June 30, 2001.





General and
Administrative.    General and administrative expenses totaled $1.2 million for the three months ended June 30, 2002 and the three months ended June 30, 2001. Salaries and salary related expenses and professional fees were
slightly higher in the three months ended June 30, 2002, while travel expenditures were lower. General and administrative personnel decreased to 16 at June 30, 2002 from 19 at June 30, 2001.




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Amortization of Deferred Stock Compensation.    In
connection with the grant of stock options to employees prior to our initial public offering, we recorded deferred stock compensation within stockholders equity of approximately $681,000 in 2000 and $4.5 million in 1999, representing the
difference between the deemed fair value of the common stock for accounting purposes and the exercise price of these options at the date of grant. During the three months ended June 30, 2002 and 2001, we amortized $239,000 and $334,000,
respectively, of this deferred stock compensation. We will amortize the remaining deferred stock compensation over the vesting period of the related options, generally four years. The amount of deferred stock compensation expense to be recorded in
future periods could decrease if options for which accrued but unvested compensation has been recorded are forfeited, as was the case in 2001 when we reduced the amount of deferred stock compensation expense to be recorded in future periods by
$434,000.





Interest and Other Income (Expense), Net





Interest and other income (expense), net includes income from our cash and cash equivalents and available-for-sale securities, interest
expense from capital lease financing obligations and other miscellaneous items. We had net interest and other income of $262,000 for the three months ended June 30, 2002 and $1.2 million for the three months ended June 30, 2001. The decrease in net
interest and other income for the three months ended June 30, 2002 compared to June 30, 2001 is primarily attributable to proceeds received from the settlement of a trademark dispute in the three months ended June 30, 2001, a reduction in our cash
and cash equivalents and available for sale securities and lower interest rates in 2002.





Provision for
(Benefit from) Income Taxes





Our provision for income taxes was zero for the three months ended
June 30, 2002 and our benefit from income taxes was $629,000 for the three months ended June 30, 2001. Our provision for income taxes for the three months ended June 30, 2002 and our benefit from income taxes for the three months ended June 30, 2001
were based on our estimated tax rate for the year.





Comparison of the Six Months Ended June 30, 2002 and June 30, 2001





Net Revenues





Net revenues decreased to $9.7 million for the six months ended June 30, 2002 from $13.2 million for the six months ended June 30, 2001. This decrease was the result of the
general economic slowdown, the resulting softness in the wireless infrastructure markets, changes in buying patterns by equipment manufacturers worldwide and delays in the next generation wireless infrastructure build-out. Sales through our
distributors were 51% of net revenues for the six months ended June 30, 2002 and 54% of net revenues for the six months ended June 30, 2001. Sales to our direct customers comprised 49% of net revenues for the six months ended June 30, 2002, none of
which was to our private label reseller. Sales to our direct customers comprised 46% of net revenues for the six months ended June 30, 2001, of which 26% of net revenues was to our private label reseller and 20% was to our factory direct customers.
Sales of our SiGe and InGaP




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products were approximately 42% of our total net revenues for the six months ended June 30, 2002 compared to 28% for the six months ended June 30, 2001. Sales of our GaAs products were
approximately 44% of our total net revenues for the six months ended June 30, 2002 compared to 59% for the six months ended June 30, 2001.





Cost of Revenues





Cost of revenues decreased to $3.6 million for
the six months ended June 30, 2002 from $7.6 million for the six months ended June 30, 2001 primarily as a result of lower provisions for excess inventories and lower manufacturing spending as a result of cost reduction actions implemented in the
second half of 2001. In addition, in the six months ended June 30, 2002, we sold inventory products that were previously reserved of approximately $1.1 million. As the cost basis for previously reserved inventory is zero when such products are sold,
there is no cost of revenue element associated with the sale, which results in a 100% gross margin on that sale. We may sell previously reserved inventory products in future periods.





Gross Profit





Gross profit increased to $6.1 million for the six months ended June 30, 2002 from $5.5 million for the six months ended June 30, 2001. Gross margin increased to 63% for the six months ended June 30, 2002 from 42% for the six months
ended June 30, 2001. The increase in gross margin is primarily attributable to the sale of previously reserved inventory products, lower provisions for excess inventories and lower manufacturing spending as a result of cost reduction actions
implemented in the second half of 2001.





Operating Expenses





Research and Development.    Research and development expenses decreased to $3.1 million for the six months
ended June 30, 2002 from $4.5 million for the six months ended June 30, 2001. This decrease is primarily the result of salaries and salary related expenses, which reduced costs by approximately $1.0 million, and lower expenses for engineering
materials, which reduced costs by approximately $426,000.





Sales and
Marketing.    Sales and marketing expenses decreased to $2.4 million for the six months ended June 30, 2002 from $3.1 million for the six months ended June 30, 2001. This decrease is primarily the result of salaries and
salary related expenses, which reduced costs by approximately $212,000, lower commissions to outside sales representatives, which reduced costs by approximately $207,000 and lower advertising expenses, which reduced costs by approximately $219,000.





General and Administrative.    General and administrative expenses increased to $2.4
million for the six months ended June 30, 2002 from $2.2 million for the six months ended June 30, 2001. This increase is primarily attributable to higher professional fees, which added costs of approximately $241,000.





Amortization of Deferred Stock Compensation.    In connection with the grant of stock options to employees
prior to our initial public offering, we recorded deferred stock compensation within stockholders equity of approximately $681,000 in 2000 and $4.5 million in 1999, representing the difference between the deemed fair value of the common stock
for accounting purposes and the exercise price of these options at the date




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of grant. During the six months ended June 30, 2002 and 2001, we amortized $478,000 and $675,000, respectively, of this deferred stock compensation. We will amortize the remaining deferred stock
compensation over the vesting period of the related options, generally four years. The amount of deferred stock compensation expense to be recorded in future periods could decrease if options for which accrued but unvested compensation has been
recorded are forfeited, as was the case in 2001 when we reduced the amount of deferred stock compensation expense to be recorded in future periods by $434,000.





Interest and Other Income (Expense), Net





Interest and
other income (expense), net includes income from our cash and cash equivalents and available-for-sale securities, interest expense from capital lease financing obligations and borrowings under our bank line of credit and other miscellaneous items.
We had net interest and other income of $509,000 for the six months ended June 30, 2002 and $2.0 million for the six months ended June 30, 2001. The decrease in net interest and other income for the six months ended June 30, 2002 compared to June
30, 2001 is primarily attributable to proceeds received from the settlement of a trademark dispute in the six months ended June 30, 2001, a reduction in our cash and cash equivalents and available for sale securities and lower interest rates in
2002.





Provision for (Benefit from) Income Taxes





Our provision for income taxes was zero for the six months ended June 30, 2002 and our benefit from income taxes was $878,000 for the six
months ended June 30, 2001. Our provision for income taxes for the six months ended June 30, 2002 and our benefit from income taxes for the six months ended June 30, 2001 were based on our estimated tax rate for the year.





Liquidity and Capital Resources





We have financed our operations primarily through the private sale of mandatorily redeemable convertible preferred stock and from the net proceeds received upon completion
of our initial public offering in May 2000. As of June 30, 2002, we had cash and cash equivalents of $14.8 million, short-term investments of $16.0 million, long-term investments of $12.1 million and working capital of $27.5 million.





Our operating activities used cash of $2.1 million in the six months ended June 30, 2002 and used cash of $1.1 million in the
six months ended June 30, 2001. In the six months ended June 30, 2002, cash used in operating activities was primarily attributable to our net loss of $1.7 million, decreases in deferred margin on distributor inventory of $822,000, accounts payable
of $476,000, and accrued restructuring of $342,000. These were partially offset by depreciation and amortization of $1.4 million and amortization of deferred stock compensation of $478,000. In the six months ended June 30, 2001, cash used in
operating activities was primarily attributable to our net loss of $2.1 million and a decrease in deferred margin on distributor inventory of $1.9 million. These were partially offset by depreciation and amortization of $1.3 million and a decrease
in accounts receivable of $2.2 million.




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Our investing activities provided cash of $1.7 million in the six months ended
June 30, 2002 and provided cash of $16.3 million in the six months ended June 30, 2001. Our investing activities reflect purchases and sales of available-for-sale securities and fixed assets and in the six months ended June 30, 2002, our investment
in GCS.





Our financing activities provided cash of $50,000 in the six months ended June 30, 2002 and $2.4 million
in the six months ended June 30, 2001. Cash provided by financing activities reflect proceeds from employee stock plans partially offset by principal payments on capital lease obligations.





In the first quarter of 2002, we converted an outstanding loan receivable of approximately $1.4 million and invested cash of approximately $6.1 million in GCS, a privately
held semiconductor foundry partner, in exchange for 12.5 million shares of Series D-1 preferred stock valued at $0.60 per share. The impact of our investment in GCS on our cash, liquidity and capital resources amounted to $6.1 million, plus foregone
interest income that we would have received of approximately $175,000 annually.





In the third quarter of 2002, we
announced that our board of directors has authorized the repurchase of up to $4.0 million of our common stock from time to time. The number of shares to be repurchased and the timing of the repurchases will be based on several factors, including the
price per share of our common stock and general market conditions. Purchases may be made at managements discretion in the open market or in private transactions at negotiated prices. We plan to fund our repurchases from available working
capital.





Our currently anticipated operating lease and capital lease commitments and unconditional purchase
obligations over the next five years and thereafter are as follows (in thousands):





Future Minimum Payments DueTotal

< one year

1-3 years

4-5 years

> 5 yearsOperating lease commitments

$
3,043

$
1,235

$
1,451

$
357

$
Capital lease commitments

$
721

$
554

$
167

$


$






We currently anticipate that our current available cash and cash
equivalents and short-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months, although no assurance can be given in this regard. If we require additional
capital resources to grow our business, execute our operating plans, or acquire complimentary technologies or businesses at any time in the future, we may seek to sell additional equity or debt securities or secure lines of credit, which may result
in additional dilution to our stockholders.




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Industry Trends and Market Conditions





In 2001, companies throughout the worldwide telecommunication industry experienced slowdowns and delays in the build out of new wireless and wireline infrastructure. This
resulted in lower equipment production volumes by our customers and efforts to lower their component inventory levels. These actions by our customers have reduced our visibility regarding future sales and resulted in a slowdown in our shipments in
2001. However, in the first quarter of this year we experienced a significant sequential increase in sales to equipment manufacturers and in particular to Asia. Net revenues were flat in the second quarter of 2002 compared to the first quarter of
2002, which we believe is an indication that the market for our products may have stabilized.





If the economic
trends described above were to continue or worsen it would likely result in lower sales for our products. Significantly lower sales would likely lead to further provisions for excess inventories and further actions by us to reduce our operating
expenses. These actions could include, but would not be limited to, further reduction of our equipment value, further consolidation of facilities, and a further workforce reduction. Any or all of these actions could have a material adverse effect on
the results of our operations and the market price of common stock.





We do not at this time see any significant
recovery in our end markets. We anticipate that any sales growth in the immediate future will depend on the achievement of market share gains and/or the introduction of new product lines.





Risk Factors





Set forth below and elsewhere in
this quarterly report on Form 10-Q and in other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this
quarterly report on Form 10-Q.





Our stock price may be extremely volatile.





Our stock price has been highly volatile since our initial public offering. We expect that this volatility will continue in the future due to factors such as:





| |  |  | general market and economic conditions;
| | - |  | ---------------------------------------




| |  |  | actual or anticipated variations in operating results;
| | - |  | ------------------------------------------------------




| |  |  | announcements of technological innovations, new products or new services by us or by our competitors or customers;
| | - |  | ------------------------------------------------------------------------------------------------------------------




| |  |  | changes in financial estimates or recommendations by stock market analysts regarding us or our competitors;
| | - |  | -----------------------------------------------------------------------------------------------------------






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| |  |  | announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------




| |  |  | additions or departures of key personnel; and
| | - |  | ---------------------------------------------




| |  |  | future equity or debt offerings or our announcements of these offerings.
| | - |  | ------------------------------------------------------------------------




In addition, in recent years, the stock market in general, and the Nasdaq National Market and the securities of technology companies in particular, have experienced extreme
price and volume fluctuations. These fluctuations have often been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations have in the past and may in the future materially adversely affect
our stock price, regardless of our operating results.





Also, our stock price is currently trading below $5.00,
which typically reduces the number of our institutional investors and increases the number of our retail investors. This may have the effect of increased volatility in our stock price.





We may not meet quarterly financial expectations, which could cause our stock price to decline.





Our quarterly operating results have varied significantly in the past and are likely to vary significantly in the future based upon a number of factors related to our industry and the markets for our
products, over many of which we have little or no control. We operate in a highly dynamic industry and future results could be subject to significant fluctuations, particularly on a quarterly basis. These fluctuations could cause us to fail to meet
quarterly financial expectations, which could cause our stock price to decline rapidly and significantly. For example, on October 9, 2001 and March 12, 2001, we publicly announced our revised expectations of financial results for the quarters ending
September 30, 2001 and June 30, 2001, respectively and the fiscal year ending December 31, 2001. Subsequently, the trading price of our common stock declined, which had a substantial negative effect on the value of any investment in such stock.
Factors contributing to the volatility of our stock price include:





| |  |  | general economic growth or decline;
| | - |  | -----------------------------------




| |  |  | wireless and wireline industry growth generally and demand for products containing RF components specifically;
| | - |  | --------------------------------------------------------------------------------------------------------------




| |  |  | changes in customer purchasing cycles and component inventory levels;
| | - |  | ---------------------------------------------------------------------




| |  |  | the timing and success of new product and technology introductions by us or our competitors;
| | - |  | --------------------------------------------------------------------------------------------



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| |  |  | market acceptance of our products;
| | - |  | ----------------------------------




| |  |  | availability of raw materials, semiconductor wafers and manufacturing capacity or fluctuations in our manufacturing yields;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------




| |  |  | changes in selling prices for our integrated circuits due to competitive or currency exchange rate pressures;
| | - |  | -------------------------------------------------------------------------------------------------------------




| |  |  | changes in our product mix;
| | - |  | ---------------------------




| |  |  | changes in the relative percentage of products sold through distributors as compared to direct sales; and
| | - |  | ---------------------------------------------------------------------------------------------------------




| |  |  | changes in the relative percentage of new products sold compared to older products.
| | - |  | -----------------------------------------------------------------------------------




Due to the factors discussed above, investors should not rely on quarter-to-quarter comparisons of our results of operations as indicators of future performance.





Our growth primarily depends on the growth of the infrastructure for wireless and wireline communications. If this market does not
grow, or if it grows at a slow rate, demand for our products will diminish.





Our success will depend in large
part on the growth of the telecommunications industry in general and, in particular, the market for wireless and wireline infrastructure components. We cannot assure you that the market for these infrastructure products will grow at all. We have
recently observed continued softness of the wireless and wireline infrastructure markets related to a general economic slowdown, which has impacted our entire segment. There have been announcements throughout the worldwide telecommunications
industry of current and planned reductions in component inventory levels and equipment production volumes, and of delays in the build-out of new wireless and wireline infrastructure. These trends have had an adverse effect on our operations and
caused us on October 9, 2001 and March 12, 2001 to lower our previously announced expectations for our financial results in the quarters ending September 30, 2001 and June 30, 2001, respectively, and for the fiscal year ending December 31, 2001.
Subsequently, the market price of our common stock decreased.





These trends contributed to our decision in the
fourth quarter of 2001 to implement a worldwide workforce reduction and consolidation of excess facilities. This resulted in our recording of $2.7 million in restructuring charges in the fourth quarter of 2001. These same trends contributed to our
decision in the second half of 2001 to record provisions for excess inventories of $4.7 million, charges reducing the value of certain equipment of $1.6 million and recording a valuation allowance of $2.3 million against our net deferred tax assets.




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If the economic trends described above were to continue or worsen it would likely
result in lower sales for our products. Significantly lower sales would likely lead to further provisions for excess inventories and further actions by us to reduce our operating expenses. These actions could include, but would not be limited to,
further abandonment or obsolescence of equipment, further consolidation of facilities and a further workforce reduction. Any or all of these actions could have a material adverse effect on the results of our operations and the market price of our
common stock.





Fluctuations in supply and demand for semiconductor products could adversely impact our business.





The semiconductor industry has historically been characterized by wide fluctuations in supply and demand for semiconductor
products. From time to time, demand for semiconductor products has decreased, often in connection with, or in anticipation of, major additions of wafer fabrication capacity or maturing product cycles or due to general economic conditions, as is the
case currently.





These trends contributed to our decision in the fourth quarter of 2001 to implement a worldwide
workforce reduction and consolidation of excess facilities. This resulted in our recording of $2.7 million in restructuring charges in the fourth quarter of 2001. These same trends contributed to our decision in the second half of 2001 to record
provisions for excess inventories of $4.7 million, charges reducing the value of certain equipment of $1.6 million and recording a valuation allowance of $2.3 million against our net deferred tax assets.





If the economic trends described above were to worsen it would likely result in lower sales for our products. Significantly lower sales
would likely lead to further provisions for excess inventories and further actions by us to reduce our operating expenses. These actions could include, but would not be limited to, further abandonment or obsolescence of equipment, further
consolidation of facilities and a further workforce reduction. Any or all of these actions could have a material adverse effect on the results of our operations and the market price of our common stock.





The timing of the adoption of industry standards may negatively impact widespread market acceptance of our products.





The markets in which we and our customers compete are characterized by rapidly changing technology, evolving industry standards and
continuous improvements in products and services. If technologies or standards supported by us or our customers products, such as 2.5G and 3G, fail to gain widespread commercial acceptance, our business will be significantly impacted. For
example, in 2001 and 2002 the installation of 2.5G and 3G equipment occurred at a much slower rate than was initially expected. In addition, while historically the demand for wireless and wireline communications has exerted pressure on standards
bodies worldwide to adopt new standards for these products, such adoption generally only occurs following extensive investigation of, and




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deliberation over, competing technologies. The delays inherent in the standards approval process have in the past and may in the future cause the cancellation, postponement or rescheduling of the
installation of communications systems by our customers. For example, in 2001 and 2002 the delay in agreement over certain 3G standards contributed to the delay of the installation of 3G equipment worldwide.





These trends contributed to our decision in the fourth quarter of 2001 to implement a worldwide workforce reduction and consolidation of
excess facilities. This resulted in our recording of $2.7 million in restructuring charges in the fourth quarter of 2001. These same trends contributed to our decision in the second half of 2001 to record provisions for excess inventories of $4.7
million, charges reducing the value of certain equipment of $1.6 million and recording a valuation allowance of $2.3 million against our net deferred tax assets. If the economic trends described above were to continue or worsen it would likely
result in lower sales for our products. Significantly lower sales would likely lead to further provisions for excess inventories and further actions by us to reduce our operating expenses. These actions could include, but would not be limited to,
further abandonment or obsolescence of equipment, further consolidation of facilities and a further workforce reduction. Any or all of these actions could have a material adverse effect on the results of our operations and the market price of our
common stock.





Our reliance on third-party wafer fabs to manufacture our semiconductor wafers may cause a significant delay in our
ability to fill orders and limits our ability to assure product quality and to control costs.





We do not own
or operate a semiconductor fabrication facility. We currently rely on three third-party wafer fabs to manufacture substantially all of our semiconductor wafers. These fabs are TRW for GaAs, Atmel for SiGeand TriQuint Semiconductors for our discrete
devices. A majority of our products sold in the first six months of 2002 and the year ended December 31, 2001 were manufactured in GaAs by TRW and SiGe by Atmel. Atmel is currently our sole source supplier for SiGe wafers. The supply agreement with
TRW provides us with a commitment for a supply of wafers through December 31, 2003. The loss of one of our third-party wafer fabs, in particular TRW or Atmel, or any delay or reduction in wafer supply, will impact our ability to fulfill customer
orders, perhaps materially, and could damage our relationships with our customers, either of which would significantly harm our business and operating results. Because there are limited numbers of third-party wafer fabs that use the particular
process technologies we select for our products and that have sufficient capacity to meet our needs, using alternative or additional third-party wafer fabs would require an extensive qualification process that could prevent or delay product
shipments, adversely effecting our results of operations.





Nortel Networks has notified us that they are changing
their fabrication process. As a result, Nortel Networks will no longer be able to support our products. We are transferring the fabrication of the products made at Nortel Networks to GCS who has a comparable fabrication process. These products will
require minor design changes as we transition to the GCS fabrication process and we have not purchased significant quantities of wafers from GCS to date. The unsuccessful or delayed transfer of our products to GCS could result in us having an
insufficient supply of InGaP HBT wafers that meet our




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specifications in a timely manner. This would impact our ability to fulfill customer orders, perhaps materially, and could damage our relationships with our customers, either of which would
significantly harm our business and operating results.





We have recently begun introducing products that are
fabricated at RF Micro Devices (RFMD). The unsuccessful fabrication of these products by RFMD, or our inability to obtain a sufficient supply of these products in a timely manner would impact our ability to fulfill customer orders, perhaps
materially, and could damage our relationships with our customers, either of which would significantly harm our business and operating results.





Our reliance on these third-party wafer fabs involves several additional risks, including reduced control over the manufacturing costs, delivery times, reliability and quality of our components
produced from these wafers. The fabrication of semiconductor wafers is a highly complex and precise process. Minute impurities, difficulties in the fabrication process, defects in the masks used to print circuits on a wafer, wafer breakage or other
factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be nonfunctional. We expect that our customers will continue to establish demanding specifications for quality, performance and reliability that
must be met by our products. Our third-party wafer fabs may not be able to achieve and maintain acceptable production yields in the future. These risks are heightened with respect to our newer third-party wafer fabs, particularly GCS and RFMD, which
have not yet produced wafers in volume for us. To the extent our third-party wafer fabs suffer failures or defects, we could experience lost revenues, increased costs, and delays in, cancellations or rescheduling of orders or shipments, any of which
would harm our business.





In the past, we have experienced delays in product shipments from our third- party wafer
fabs, quality issues and poor manufacturing yields, which in turn delayed product shipments to our customers. We may in the future experience similar delays or other problems, such as inadequate wafer supply.





Product quality, performance and reliability problems could disrupt our business and harm our financial condition.





Our customers demand that our products meet stringent quality, performance and reliability standards. RF components such as those we
produce may contain undetected defects or flaws when first introduced or after commencement of commercial shipments. We have from time to time experienced product quality, performance or reliability problems. In addition, some of our products are
manufactured using process technologies that are relatively new and for which long-term field performance data are not available. As a result, defects or failures have in the past, and may in the future occur relating to our product quality,
performance and reliability. If these failures or defects occur or become significant, we could experience lost revenues, increased costs, including inventory write-offs, warranty expense and costs associated with customer support, delays in or
cancellations or rescheduling of orders or shipments and product returns or discounts, any of which would harm our business.




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Our $7.5 million strategic investment in GCS, a privately held semiconductor foundry partner, could
ultimately be impaired or never redeemed, which could have a material adverse impact on our results of operations.





In the first quarter of 2002, we converted an outstanding loan receivable of approximately $1.4 million and invested cash of approximately $6.1 million in GCS, a privately held semiconductor foundry partner, in exchange for 12.5
million shares of Series D-1 preferred stock valued at $0.60 per share. Our total investment of $7.5 million represented approximately 14% of the outstanding voting shares of GCS at that time. Although there was no formal supply agreement associated
with the investment in GCS, it was strategic in nature and was intended to strengthen our supply chain for InGaP and Indium Phosphide (InP) process technologies. In connection with the investment, our President and CEO joined GCS seven-member
board of directors.





We accounted for our investment in GCS under the cost method of accounting in accordance with
accounting principles generally accepted in the United States, as our investment represents less than 20% of the voting stock of GCS and we cannot exercise significant influence over GCS. The investment in GCS has been classified as a non-current
asset on our consolidated balance sheet.





On a quarterly basis, we evaluate our investment in GCS to determine if
an other than temporary decline in value has occurred. Factors that may cause an other than temporary decline in the value of our investment in GCS would include, but not be limited to, a degradation of the general business environment in which GCS
operates, the failure of GCS to achieve certain milestones or a series of operating losses in excess of GCS current business plan, or the inability of GCS to continue as a going concern. If we determine that an other than temporary decline in
value has occurred, we will write-down our investment in GCS to fair value. Such a write-down could have a material adverse impact on our consolidated results of operations in the period in which it occurs. As of June 30, 2002 our investment in GCS
had not experienced an other than temporary decline in value.





Our $7.5 million investment in GCS is also at risk
to the extent that we cannot ultimately sell our shares of Series D-1 preferred stock, for which there is currently no public market. Even if we are able to sell our Series D-1 preferred stock, the sale price may be less than the price paid by us,
which could have a material adverse effect on our results of operations.





We are in the process of outsourcing our RF production
testing function. We may not be able to outsource our RF testing function on favorable terms, or at all.





In
late 2001, we made the decision to outsource a significant portion of our RF testing function. We are currently in the process of qualifying subcontractors to test our products and expect to begin the outsourcing of our production testing operations
in the second half of 2002 or early 2003, if volumes increase. The selection and ultimate qualification of a subcontractor to test our RF components could be costly and increase our cost of revenues. In the second half of 2001, we recorded an
impairment charge of $315,000 on some of our existing test equipment as a result of a reduction in demand for our products and the decision to outsource our testing operations. As a result of the impairment charge, our existing test equipment was
recorded at our estimate of fair




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market value as of June 30, 2002. To the extent that the proceeds, if any, from the ultimate disposition of our test equipment are less than the recorded value of such equipment, we would incur a
charge to cost of revenues. Such a charge could have a material adverse effect on our gross margin and results of operations.





Our
reliance on subcontractors to production test our products could cause a delay in our ability to fulfill orders and adversely affect our results of operations.





We do not know if we will be able to negotiate a long-term contract with a subcontractor to production test our RF components at acceptable prices or volumes. Therefore, in
the future, we may be unable to obtain sufficient high quality or timely RF production testing of our products. In addition, the negotiated pricing may be more expensive than production testing our RF components internally, which could have a
material adverse effect on our gross margin and results of operations. The loss or reduction in production testing capacity at this RF testing subcontractor would significantly damage our business.





Our components require sophisticated testing techniques. If our potential subcontractor to test RF components is not successful in
adopting such techniques, we could experience increased costs, including warranty expense and costs associated with customer support, delays in or cancellations or rescheduling of orders or shipments, product returns or discounts and lost revenues,
any of which would harm our business.





Our reliance on subcontractors to package our products could cause a delay in our ability to
fulfill orders or could increase our cost of revenues.





We do not package the RF components that we sell but
rather rely on subcontractors to package our products. Packaging is the procedure of electrically bonding and encapsulating the integrated circuit into its final protective plastic or ceramic casing. We provide the wafers containing the integrated
circuits and, in some cases, packaging materials to third-party packagers. Although we currently work with five packagers, substantially all of our net revenues in 2001 and the first six months of 2002 were attributable to products packaged by three
subcontractors. Relatives of our founding stockholders own one of these packaging firms, MPI Corporation in Manila, Philippines. We do not have long-term contracts with our third-party packagers stipulating fixed prices or packaging volumes.
Therefore, in the future we may be unable to obtain sufficient high quality or timely packaging of our products. The loss or reduction in packaging capacity of any of our current packagers, particularly MPI, would significantly damage our business.
In addition, increased packaging costs will adversely affect our profitability.





The fragile nature of the
semiconductor wafers that we use in our components requires sophisticated packaging techniques and can result in low packaging yields. If our packaging subcontractors fail to achieve and maintain acceptable production yields in the future, we could
experience increased costs, including warranty expense and costs associated with customer support, delays in or cancellations or rescheduling of orders or




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shipments, product returns or discounts and lost revenues, any of which would harm our business.





We depend on two distributors for a significant portion of our sales, the loss of any one of which would limit our ability to sustain and grow our revenues.





Historically, two distributors, Avnet Electronics Marketing and Richardson Electronics Laboratories, have accounted for a significant portion of our sales. In the three
months ended June 30, 2002, sales through Richardson Electronics Laboratories represented 38% of our net revenues and sales through Avnet Electronics Marketing represented 10% of our net revenues. Our contracts with these distributors do not require
them to purchase our products and may be terminated by them at any time without penalty. If our distributors fail to successfully market and sell our products, our revenues could be materially adversely affected. The loss of either of our current
distributors and our failure to develop new and viable distribution relationships would limit our ability to sustain and grow our revenues.





We depend on Ericsson for a significant portion of our revenues. The loss of Ericsson as a customer or a decrease in purchases by Ericsson may adversely affect our revenues.





Sales to Ericsson, primarily a direct customer, have recently accounted for a significant portion of our revenues. For example, 12% of our
net revenues in the three months ended June 30, 2002 were attributable to direct sales to Ericsson and 19% of our net revenues in the three months ended March 31, 2002 were attributable to direct sales to Ericsson. We expect that we will rely on
sales to Ericsson for a significant portion of our future revenues. If we were to lose Ericsson as a customer, or if Ericsson substantially reduced its purchases from us, our business and operating results could be materially and adversely affected.





Intense competition in our industry could prevent us from increasing revenues and sustaining profitability.





The RF semiconductor industry is intensely competitive and is characterized by the following:





| |  |  | rapid technological change;
| | - |  | ---------------------------




| |  |  | rapid product obsolescence;
| | - |  | ---------------------------




| |  |  | shortages in wafer fabrication capacity;
| | - |  | ----------------------------------------




| |  |  | price erosion; and
| | - |  | ------------------



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| |  |  | unforeseen manufacturing yield problems.
| | - |  | ----------------------------------------




We compete primarily with other suppliers of high-performance RF components used in the infrastructure of communications networks such as Agilent, Alpha Industries, Anadigics, Conexant, Infineon,
M/A-COM, Minicircuits Laboratories, NEC, RF Micro Devices, TriQuint Semiconductor and WJ Communications. We also compete with communications equipment manufacturers who manufacture RF components internally such as Ericsson, Lucent, Motorola and
Nortel Networks. We expect increased competition both from existing competitors and from a number of companies that may enter the RF component market, as well as future competition from companies that may offer new or emerging technologies. In
addition, many of our current and potential competitors have significantly greater financial, technical, manufacturing and marketing resources than we have. As a result, communications equipment manufacturers may decide not to buy from us due to
their concerns about our size, financial stability or ability to interact with their logistics systems. Our failure to successfully compete in our markets would have a material adverse effect on our business, financial condition and results of
operations.





If we fail to introduce new products in a timely and cost-effective manner, our ability to sustain and increase our
revenues could suffer.





The markets for our products are characterized by frequent new product introductions,
evolving industry standards and changes in product and process technologies. Because of this, our future success will in large part depend on:





| |  |  | our ability to continue to introduce new products in a timely fashion;
| | - |  | ----------------------------------------------------------------------




| |  |  | our ability to improve our products and to adapt to new process technologies in a timely manner;
| | - |  | ------------------------------------------------------------------------------------------------




| |  |  | our ability to adapt our products to support established and emerging industry standards; and
| | - |  | ---------------------------------------------------------------------------------------------




| |  |  | market acceptance of our products.
| | - |  | ----------------------------------




We estimate that the development cycles of our products from concept to production could last more than 12 months. We have in the past experienced delays in the release of new products. We may not be
able to introduce new products in a timely and cost-effective manner, which would impair our ability to sustain and increase our revenues.





Sources for certain components and materials are limited, which could result in delays or reductions in product shipments.





The semiconductor industry from time to time is affected by limited supplies of certain key components and materials. For example, we rely on limited sources for




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certain packaging materials. If we, or our packaging subcontractors, are unable to obtain these or other materials in the required quantity and quality, we could experience delays or reductions
in product shipments, which would materially and adversely affect our profitability. Although we have not experienced any significant difficulty to date in obtaining these materials, these shortages may arise in the future. We cannot guarantee that
we would not lose potential sales if key components or materials are unavailable, and as a result, we are unable to maintain or increase our production levels.





If communications equipment manufacturers increase their internal production of RF components, our revenues would decrease and our business would be harmed.





Currently, communications equipment manufacturers obtain their RF components by either developing them internally or by buying RF components from third-party distributors
or merchant suppliers. We have historically generated a majority of our revenues through sales of standard components to these manufacturers through our distributors and direct sales force. If communications equipment manufacturers increase their
internal production of RF components and reduce purchases of RF components from third parties, our revenues would decrease and our business would be harmed.





In response to changes in the wireless and wireline infrastructure markets and the emergence of new market opportunities for our products, we recently reorganized our business. This new organizational structure may fail
to grow our business.





As a result of the telecommunication industry downturn in 2001 and changing market
conditions, effective in 2002 we reorganized our business to focus on end markets. We established three business areas. The first business area focuses on the wireless infrastructure markets. The second business area focuses on the cable and fiber
optic wireline infrastructure markets. Third, we established what we label the terminals business area. This business area was in response to a market trend where our products could be used by customers in applications such as cable television boxes
and wireless video transmitters. Each of these three reorganized business areas will require significant management attention and additional resources. Even with managements attention and additional resources, we may be unsuccessful in
operating these business areas.





Third-party wafer fabs who manufacture the semiconductor wafers for our products may compete with us
in the future.





Several third-party wafer fabs independently produce and sell RF components directly to
communications equipment manufacturers. We currently rely on certain of these third-party wafer fabs to produce the semiconductor wafers for our products. These third-party wafer fabs possess confidential information concerning our products and
product release schedules. We cannot guarantee that they would not use our confidential information to compete with us. Competition from these third-party wafer fabs may result in reduced demand for our products and could damage our relationships
with these third-party wafer fabs, thereby harming our business.




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Perceived risks relating to process technologies we may adopt in the future to manufacture our
products could cause reluctance among potential customers to purchase our products.





We may adopt new process
technologies in the future to manufacture our products. Prospective customers of these products may be reluctant to purchase these products based on perceived risks of these new technologies. These risks could include concerns related to
manufacturing costs and yields and uncertainties about the relative cost-effectiveness of products produced using these new technologies. If our products fail to achieve market acceptance, our business, financial condition and results of operations
would be materially adversely affected.





We have been named in a class action lawsuit alleging that various underwriters engaged in
improper and undisclosed activities related to the allocation of shares in our initial public offering.





In
November 2001, we, various of our officers and certain underwriters of our initial public offering of securities were named in a purported class action lawsuit filed in the United States District Court for the Southern District of New York. The
suit, Van Ryen v. Sirenza Microdevices, Inc., et al., Case No. 01-CV-10596, alleges that various underwriters engaged in improper and undisclosed activities related to the allocation of shares in our initial public offering, including obtaining
commitments from investors to purchase shares in the aftermarket at pre-arranged prices. Similar lawsuits concerning more than 300 other companies initial public offerings were filed during 2001, and this lawsuit is being coordinated with
those actions (the coordinated litigation). The Plaintiffs, who filed an amended complaint on or about April 19, 2002, bring claims for violation of several provisions of the federal securities laws and seek an unspecified amount of
damages. On or about July 1, 2002, an omnibus motion to dismiss was filed in the coordinated litigation on behalf of the issuer defendants, of which we and our named officers and directors are a part, on common pleadings issues. We believe that the
allegations against us are without merit and intend to defend the litigation vigorously. However, there can be no assurance as to the ultimate outcome of this lawsuit and an adverse outcome to this litigation could have a material adverse effect on
our consolidated balance sheet, statement of operations or cash flows. Even if we are entirely successful in defending this lawsuit, we may incur significant legal expenses and our management may expend significant time in the defense.





We may encounter difficulties managing our business in an economic downturn.





We are currently experiencing a slowdown in the economy and in the telecommunications industry in particular. Our net revenues decreased from $34.6 million in 2000 to $19.8
million in 2001 and from $13.2 million in the six months ended June 30, 2001 to $9.7 million in the six months ended June 30, 2002. As a result of this downturn, we incurred restructuring charges of $2.7 million related to a worldwide workforce
reduction and consolidation of excess facilities in the fourth quarter of 2001. These same trends contributed to our second half of 2001 decision to record provisions




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for excess inventories of $4.7 million, charges reducing the value of certain equipment of $1.6 million and recording a valuation allowance of $2.3 million against our net deferred tax assets. If
the current economic conditions continue or worsen, we may experience difficulties maintaining employee morale, retaining employees, completing research and development initiatives, maintaining relationships with our customers and vendors and
obtaining financing on favorable terms or at all. In addition, we may have to take further actions to restructure our operations, including, but not limited to, further workforce reductions, further consolidation of facilities, eliminating product
lines or disposing of certain equipment, any of which would have a material adverse effect on our results of operations.





If we lose
our key personnel or are unable to attract and retain key personnel, we may be unable to pursue business opportunities or develop our products.





We believe that our future success will depend in large part upon our continued ability to recruit, hire, retain and motivate highly skilled technical, marketing and managerial personnel, who are in
great demand. Competition for these employees, particularly RF integrated circuit design engineers, is intense. Our failure to hire additional qualified personnel in a timely manner and on reasonable terms could adversely affect our business and
profitability. In addition, from time to time we may recruit and hire employees from our customers, suppliers and distributors, which could damage our business relationship with these parties. Our success also depends on the continuing contributions
of our senior management and technical personnel, all of whom would be difficult to replace. The loss of key personnel could adversely affect our ability to execute our business strategy, which could cause our results of operations and financial
condition to suffer. We may not be successful in retaining these key personnel.





Our limited ability to protect our proprietary
information and technology may adversely affect our ability to compete.





Our future success and ability to
compete is dependent in part upon our proprietary information and technology. Although we have patented technology and current patent applications pending, we primarily rely on a combination of contractual rights and copyright, trademark and trade
secret laws and practices to establish and protect our proprietary technology. We generally enter into confidentiality agreements with our employees, consultants, resellers, wafer suppliers, customers and potential customers, and strictly limit the
disclosure and use of other proprietary information. The steps taken by us in this regard may not be adequate to prevent misappropriation of our technology. Additionally, our competitors may independently develop technologies that are substantially
equivalent or superior to our technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain or use our products or technology. In addition, the laws of some foreign countries do not
protect our proprietary rights to the same extent as do the laws of the United States.





Our products could infringe the intellectual
property rights of others, and resulting claims against us could be costly and require us to enter into disadvantageous license or royalty arrangements.




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The semiconductor industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement and the violation of intellectual property rights. Although we attempt to avoid infringing known proprietary rights of third parties in our product development efforts, we
expect that we may be subject to legal proceedings and claims for alleged infringement by us or our licensees of third-party proprietary rights, such as patents, trade secrets, trademarks or copyrights, from time to time in the ordinary course of
business. Any claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, divert managements attention and resources, or require us to enter into royalty or license
agreements which are not advantageous to us. In addition, parties making these claims may be able to obtain an injunction, which could prevent us from selling our products in the United States or abroad. We may increasingly be subject to
infringement claims as the number of our products grows.





Our reliance on foreign suppliers and manufacturers exposes us to the
economic and political risks of the countries in which they are located.





Independent third parties in other
countries package all of our products and supply some of our wafers and substantially all of the packaging materials used in the production of our components. Due to our reliance on foreign suppliers and packagers, we are subject to the risks of
conducting business outside the United States. These risks include:





| |  |  | unexpected changes in, or impositions of, legislative or regulatory requirements;
| | - |  | ---------------------------------------------------------------------------------




| |  |  | shipment delays, including delays resulting from difficulty in obtaining export licenses;
| | - |  | -----------------------------------------------------------------------------------------




| |  |  | tariffs and other trade barriers and restrictions;
| | - |  | --------------------------------------------------




| |  |  | political, social and economic instability; and
| | - |  | -----------------------------------------------




| |  |  | potential hostilities and changes in diplomatic and trade relationships.
| | - |  | ------------------------------------------------------------------------




In addition, we currently transact business with our foreign suppliers and packagers in U.S. dollars. Consequently, if the currencies of our suppliers countries were
to increase in value against the U.S. dollar, our suppliers may attempt to raise the cost of our wafers, packaging materials, and packaging services, which could have an adverse effect on our profitability.





A significant portion of our products are sold to international customers either through our distributors or directly by us, which exposes us to risks that
may adversely affect our results of operations.




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A significant portion of our direct sales and sales through our distributors were
to foreign purchasers, particularly in countries located in Asia and Europe. International direct sales approximated 93% of our total direct sales in the three months ended June 30, 2002, representing approximately 47% of our net revenues. Based on
information available from our distributors, products representing approximately 61% of our total distribution revenues, representing approximately 30% of our net revenues, were sold by our distributors to international customers in the three months
ended June 30, 2002. Demand for our products in foreign markets could decrease, which could have a materially adverse effect on our results of operations. Therefore, our future operating results may depend on several economic conditions in foreign
markets, including:





| |  |  | changes in trade policy and regulatory requirements;
| | - |  | ----------------------------------------------------




| |  |  | fluctuations in currency;
| | - |  | -------------------------




| |  |  | duties, tariffs and other trade barriers and restrictions;
| | - |  | ----------------------------------------------------------




| |  |  | trade disputes; and
| | - |  | -------------------




| |  |  | political instability.
| | - |  | ----------------------




Any future acquisitions of companies or technologies may result in distraction of our management and disruptions to our business.





We may acquire or make investments in complementary businesses, technologies, services or products if appropriate opportunities arise. From time to time, we may engage in discussions and negotiations
with companies regarding our acquiring or investing in their businesses, products, services or technologies. We may not be able to identify suitable acquisition or investment candidates in the future, or if we do identify suitable candidates, we may
not be able to make such acquisitions or investments on commercially acceptable terms or at all. If we acquire or invest in another company, we could have difficulty assimilating that companys personnel, operations, technology or products and
service offerings. In addition, the key personnel of the acquired company may decide not to work for us. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our
results of operations. Furthermore, we may incur indebtedness or issue equity securities to pay for any future acquisitions. The issuance of equity securities could be dilutive to our existing stockholders. In addition, the accounting treatment for
any acquisition transaction may result in significant goodwill, which, if impaired, will negatively affect our net income.




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Information that we may provide to investors from time to time is accurate only as of the date we
disseminate it and we undertake no obligation to update the information.





From time to time we may publicly
disseminate forward-looking information or guidance in compliance with Regulation FD promulgated by the SEC. This information or guidance represents our outlook only as of the date that we disseminated it, and we undertake no obligation to provide
updates to this information or guidance in our filings with the SEC or otherwise.





Some of our existing stockholders can exert control
over us, and they may not make decisions that reflect the interests of Sirenza Microdevices or other stockholders.





As of February 15, 2002, our officers, directors and principal stockholders (greater than 5% stockholders) together controlled approximately 61% of our outstanding common stock and our two founding stockholders controlled
approximately 46% of our outstanding common stock. As a result, these stockholders, if they act together, and our founding stockholders acting alone, will be able to exert a significant degree of influence over our management and affairs and control
matters requiring stockholder approval, including the election of all of our directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of Sirenza Microdevices
and might affect the market price of our common stock. In addition, the interests of these stockholders may not always coincide with the interests of Sirenza Microdevices or the interests of other stockholders.





Our charter and bylaws and Delaware law contain provisions that may delay or prevent a change of control.





Provisions of our charter and bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of us. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. These provisions include:





| |  |  | division of the board of directors into three separate classes;
| | - |  | ---------------------------------------------------------------




| |  |  | elimination of cumulative voting in the election of directors;
| | - |  | --------------------------------------------------------------




| |  |  | prohibitions on our stockholders from acting by written consent and calling special meetings;
| | - |  | ---------------------------------------------------------------------------------------------




| |  |  | procedures for advance notification of stockholder nominations and proposals; and
| | - |  | ---------------------------------------------------------------------------------




| |  |  | the ability of the board of directors to alter our bylaws without stockholder approval.
| | - |  | ---------------------------------------------------------------------------------------



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In addition, our board of directors has the authority to issue up to 5,000,000
shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The issuance of preferred stock, while providing
flexibility in connection with possible financings or acquisitions or other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. We are also subject to Section
203 of the Delaware General Corporation Law that, subject to exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that this stockholder
became an interested stockholder. The preceding provisions of our charter and bylaws, as well as Section 203 of the Delaware General Corporation Law, could discourage potential acquisition proposals, delay or prevent a change of control and prevent
changes in our management.





Item 3.Quantitative and Qualitative Disclosures About Market Risk





Historically, our sales
have been made to predominantly U.S.-based customers and distributors in U.S. dollars. As a result, we have not had any material exposure to factors such as changes in foreign currency exchange rates. However, we continue to and expect in future
periods to expand selling into foreign markets, including Europe and Asia. Because our sales are denominated in U.S. dollars, a strengthening of the U.S. dollar could make our products less competitive in foreign markets.





At June 30, 2002, our cash and cash equivalents consisted primarily of bank deposits, federal agency and related securities and money
market funds issued or managed by large financial institutions in the United States and Canada. We did not hold any derivative financial instruments. Our interest income and expense are sensitive to changes in the general level of interest rates. In
this regard, changes in interest rates can affect the interest earned on our cash equivalents, short-term investments and long-term investments. For example, a 1% increase or decrease in interest rates would increase or decrease our annual interest
income by approximately $283,000.





Part II
Other Information





Item 1.Legal Proceedings





In November 2001, we, various of our officers and certain
underwriters of our initial public offering of securities were named in a purported class action lawsuit filed in the United States District Court for the Southern District of New York. The suit, Van Ryen v. Sirenza Microdevices, Inc., et al., Case
No. 01-CV-10596, alleges that various underwriters engaged in improper and undisclosed activities related to the allocation of shares in our initial public offering, including obtaining commitments from investors to purchase shares in the
aftermarket at pre-arranged prices. Similar lawsuits concerning more than 300 other companies initial public offerings were filed during 2001, and this lawsuit is being coordinated with those actions (the coordinated litigation).
The Plaintiffs, who filed an amended complaint on or about April 19, 2002, bring claims for




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violation of several provisions of the federal securities laws and seek an unspecified amount of damages. On or about July 1, 2002, an omnibus motion to dismiss was filed in the coordinated
litigation on behalf of the issuer defendants, of which we and our named officers and directors are a part, on common pleadings issues. We believe that the allegations against us are without merit and intend to defend the litigation vigorously.
However, there can be no assurance as to the ultimate outcome of this lawsuit and an adverse outcome to this litigation could have a material adverse effect on our consolidated balance sheet, statement of operations or cash flows. Even if we are
entirely successful in defending this lawsuit, we may incur significant legal expenses and our management may expend significant time in the defense.





Item 2.Changes in Securities and Use of Proceeds





The effective date of our Registration
Statement filed on Form S-1 under the Securities Act of 1933 (File No. 333-31382), relating to our initial public offering of our common stock was May 24, 2000. Public trading commenced on May 25, 2000. The offering closed on May 31, 2000. The
managing underwriters of the public offering were Deutsche Banc Alex. Brown, Banc of America Securities LLC, CIBC World Markets and Robertson Stephens. In the offering (including the exercise of the underwriters overallotment option on June
16, 2000), we sold an aggregate of 4,600,000 shares of our common stock for an initial price of $12.00 per share.





The aggregate proceeds from the offering were $55.2 million. We paid expenses of approximately $5.4 million, of which approximately $3.9 million represented underwriting discounts and commissions and approximately $1.5 million
represented expenses related to the offering. Net proceeds from the offering were approximately $49.8 million. As of June 30, 2002, approximately $15.4 million of the net proceeds have been used to purchase property and equipment, make capital lease
payments and fund our operating activities and investment in GCS. The remaining $34.4 million of net proceeds have been invested in interest bearing cash equivalents, short-term investments and long-term investments.





Item 3.Defaults Upon Senior Securities





None





Item 4.Submission of Matters to a Vote of Security Holders





| | (a) |  | The Company held its Annual Meeting of Stockholders (the Annual Meeting) on May 30, 2002.
| | --- |  | -------------------------------------------------------------------------------------------




| | (b) |  | At the Annual Meeting, the stockholders elected John Bumgarner, Jr. and Casimir Skrzypczak as Class II Directors to serve for a term of three years. The terms
of office of the Class I Directors, Peter Chung and Robert Van Buskirk, and the Class III Director, John Ocampo, continued following the Annual Meeting as well.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | (c) |  | The stockholders of the Company voted on the following matters at the Annual Meeting:
| | --- |  | -------------------------------------------------------------------------------------




| | 1. |  | the election of two Class II directors to serve for terms of three years; and
| | -- |  | -----------------------------------------------------------------------------




| | 2. |  | ratification of the appointment of Ernst & Young LLP as independent auditors of the Company for the fiscal year ending December 31, 2002.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------




Votes were cast for the election of John Bumgarner, Jr. and Casimir Skrzypczak as Class II Directors as
follows:





Votes For

Votes WithheldJohn Bumgarner, Jr.

28,074,061

21,383Casimir Skrzypczak

28,075,061

20,383





The appointment of Ernst & Young LLP as auditors for fiscal
year ending December 31, 2002 was approved as follows:





27,987,070 votes for approval;


100,379 votes against;


7,995 abstentions; and


0 broker non-votes.





Item
5.Other Information





None





Item 6.Exhibits and Reports on Form 8-K





(a) Exhibits:





Exhibit Number

Description99.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002





(b) Reports on Form 8-K.





No reports on Form 8-K were filed during the three months ended June 30, 2002.




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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





SIRENZA MICRODEVICES, INC.





DATE: August 14, 2002





/s/    ROBERT VAN
BUSKIRKRobert Van Buskirk President,
Chief Executive Officer and Director


DATE: August 14, 2002





/s/    THOMAS SCANNELLThomas Scannell Vice
President, Finance and Administration, Chief Financial Officer and Assistant Treasurer




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