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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the period ended September 27, 1998
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 0-24360
SPECTRIAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0023003
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
350 West Java Drive
Sunnyvale, California 94089
(Address of principal executive offices)
Telephone Number (408) 745-5400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of September 27, 1998 there were 10,447,386 shares of the Registrant's Common
Stock outstanding.
================================================================================
<PAGE>
SPECTRIAN CORPORATION
Form 10-Q
INDEX
Page
No.
Cover Page 1
Index 2
PART I - Financial Information
ITEM 1 - Condensed consolidated financial statements
Condensed consolidated balance sheets -
September 27, 1998 and March 31, 1998 3
Condensed consolidated statements of operations -
three months and six months ended September 27, 1998 4
and September 28, 1997
Condensed consolidated statements of cash flows -
six months ended September 27, 1998 and September 28, 1997 5
Notes to condensed consolidated financial statements 6
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk
PART II - Other Information
ITEM 1 - Legal Proceedings 19
ITEM 6 - Exhibits and Reports on Form 8-K 20
Signatures 21
2
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
September 27, March 31,
1998 1998
--------- ---------
Assets
Current assets:
Cash and cash equivalents $ 21,611 $ 31,460
Short-term investments 54,739 68,128
Accounts receivable, less allowance for doubtful
accounts of $382 and $376, respectively 20,840 21,123
Inventories 19,855 15,362
Prepaid expenses and other current assets 4,651 6,202
--------- ---------
Total current assets 121,696 142,275
Property and equipment, net 33,561 32,776
--------- ---------
$ 155,257 $ 175,051
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of debt obligations $ 1,178 1,360
Accounts payable 6,256 10,456
Accrued liabilities 11,708 12,981
--------- ---------
Total current liabilities 19,142 24,797
Debt obligations, net of current portion 5,368 5,912
--------- ---------
Total liabilities 24,510 30,709
--------- ---------
Stockholders' equity:
Common stock, $0.001 par value,
20,000,000 shares authorized;
10,944,586 and 10,904,077
shares issued, respectively;
10,447,386 and 10,904,077 shares
outstanding, respectively. 10 10
Additional paid-in capital 148,201 146,827
Treasury stock, 497,000 shares of common stock held (7,418) --
Deferred compensation expense (519) (609)
Other comprehensive income 918 121
Accumulated deficit (10,445) (2,007)
--------- ---------
Total stockholders' equity 130,747 144,342
--------- ---------
$ 155,257 $ 175,051
========= =========
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
SPECTRIAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<CAPTION>
Three months ended Six months ended
----------------------------- ----------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 26,869 $ 48,242 $ 57,653 $ 94,008
-------- -------- -------- --------
Costs and expenses:
Cost of sales 20,629 34,481 48,357 66,532
Research and developement 6,549 4,139 12,503 8,380
Selling, general and administrative 4,151 3,046 7,627 6,507
-------- -------- -------- --------
31,329 41,666 68,487 81,419
-------- -------- -------- --------
Operating income (loss) (4,460) 6,576 (10,834) 12,589
Interest income, net 1,262 595 2,396 576
Other income, net -- -- -- 1,530
-------- -------- -------- --------
Income (loss) before income taxes (3,198) 7,171 (8,438) 14,695
Income taxes -- 859 -- 1,989
-------- -------- -------- --------
Net income (loss) $ (3,198) $ 6,312 $ (8,438) $ 12,706
======== ======== ======== ========
Net income (loss) per share
Basic $ (0.30) $ 0.66 $ (0.78) $ 1.42
Diluted $ (0.30) $ 0.60 $ (0.78) $ 1.30
Shares used in computing per share amounts:
Basic 10,739 9,502 10,824 8,945
Diluted 10,739 10,603 10,824 9,804
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
SPECTRIAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<CAPTION>
Six months ended
--------------------------------
September 27, September 28,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (8,438) $ 12,706
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating
activities:
Gain on sale of subsidiary -- (1,530)
Depreciation and amortization 6,323 3,483
Loss on disposal of equipment 291 --
Stock compensation expense 1,128 --
Tax benefit associated with stock options -- 1,379
Changes in operating assets and liabilities:
Accounts receivable 283 (11,445)
Inventories (4,493) (6,288)
Prepaid expenses and other assets 1,551 (2,428)
Accounts payable (4,200) 1,397
Accrued liabilities (1,273) 4,771
-------- --------
Net cash provided by (used for) operating
activities (8,828) 2,045
-------- --------
Cash flows from investing activities:
Purchase of short-term investments (33,325) (80,038)
Proceeds from sale of short-term investments 47,512 --
Purchase of property and equipment (7,400) (7,363)
Proceeds from sale of subsidiary -- 4,016
-------- --------
Net cash provided by (used for) investing
activities 6,787 (83,385)
-------- --------
Cash flows from financing activities:
Repayment of debt and capital lease obligations (726) (831)
Repurchase of common stock (7,418) --
Proceeds from sales of common stock, net 336 90,409
-------- --------
Net cash provided by (used for) financing
activities (7,808) 89,578
-------- --------
Net increase (decrease) in cash and cash
equivalents (9,849) 8,238
Cash and cash equivalents, beginning of period 31,460 6,240
======== ========
Cash and cash equivalents, end of period $ 21,611 $ 14,478
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Basis of Presentation
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles. However, certain information or
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of the management, the statements include all
adjustments (which are of a normal and recurring nature) necessary for the fair
presentation of the financial information set forth therein. These financial
statements should be read in conjunction with the Company's audited condensed
consolidated financial statements as set forth on pages F-1 through F-15 of the
Company's Annual Report on Form 10-K for fiscal year ended March 31, 1998. The
interim results presented herein are not necessarily indicative of the results
of operations that may be expected for the full fiscal year ending March 31,
1999, or any other future period.
NOTE 2: Balance Sheet Components
Balance sheet components are as follows:
September 27, March 31,
1998 1998
---------------- ----------------
(In thousands)
Inventories:
Raw materials $ 8,714 $ 7,395
Work in progress 7,650 5,538
Finished goods 3,491 2,429
------- -------
$19,855 $15,362
======= =======
Property and equipment:
Machinery and equipment $57,758 $51,091
Land, building and improvements 2,768 2,829
Furniture and fixtures 1,420 1,382
Leasehold improvements 1,870 1,633
------- -------
63,816 56,935
Less accumulated depreciation and
amortization 30,255 24,159
------- -------
$33,561 $32,776
======= =======
Accrued liabilities:
Employee compensation and benefits $ 3,320 $ 2,958
Warranty 5,427 7,326
Other accrued liabilities 2,961 2,697
------- -------
$11,708 $12,981
======= =======
6
<PAGE>
NOTE 3: Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 establishes standards of
reporting and display of comprehensive income and its components of net income
and "other comprehensive income" in a full set of general purpose financial
statements. "Other comprehensive income" refers to revenues, expenses, gains and
losses that are not included in net income but rather are recorded directly in
stockholders' equity in accordance with SFAS No. 115, Accounting for Certain
Debt and Equity Securities. SFAS No. 130 is effective for annual and interim
periods beginning after December 15, 1997 and for periods ended before that date
when presented for comparative purposes. The Company has not yet determined the
format it will use to display the information required by SFAS No. 130 in the
financial statements for the fiscal year ending March 31, 1999. Other
comprehensive income consists of unrealized gains and losses related to the
Company's available-for-sale investments.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
(that is, gains and losses) depends on the intended use of the derivative and
the resulting designation. Under SFAS No. 133, an entity that elects to apply
hedge accounting is required to establish at the inception of the hedge the
method it will use for assessing the effectiveness of the hedging derivative and
the measurement approach for determining the ineffective aspect of the hedge.
Those methods must be consistent with the entity's approach to managing risk.
The Company has not yet determined the impact of SFAS No. 133 on its financial
condition or results of operations.
NOTE 4: Short Term Investments
The Company has classified its investments in certain debt securities
as "available-for-sale." Such investments are recorded at fair market value,
with unrealized gains and losses reported as a separate component of
stockholders' equity. Interest income is recorded using an effective interest
rate, with the associated premium or discount amortized to interest income.
As of September 27, and March 31, 1998, cash equivalents and short-term
investments classified as available-for-sale securities were as follows:
September 27, March 31,
1998 1998
---------------- --------------
(In thousands)
Commercial paper $ 54,761 $ 63,341
U.S. government securities 18,527 28,158
---------------- --------------
$ 73,288 $ 91,499
================ ==============
As of September 27, and March 31, 1998 the estimated fair value of each
investment approximated the amortized cost and, therefore, there were no
significant unrealized gains or losses. At September 27, and March 31, 1998 all
securities held were due in less than one year and were classified as follows:
September 27, March 31,
1998 1998
---------------- --------------
(In thousands)
Cash equivalents $18,549 $ 23,371
Short-term investments 54,739 68,128
---------------- --------------
$73,288 $ 91,499
================ ==============
7
<PAGE>
NOTE 5: Earnings Per Share Computation
Basic earnings per share ("EPS") excludes potentially dilutive
securities and is computed by dividing net income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS includes potentially dilutive securities and is computed by
dividing net income available to common stockholders by the weighted average
number of common and dilutive common equivalent shares outstanding during the
period. Common equivalent shares include the effect of the exercise of stock
options. For the three months and six months ended September 27, 1998, common
equivalent shares were not included for the calculation of diluted EPS as they
were considered antidilutive due to the net loss the Company experienced in that
period. The Company's earnings per share for the three months and six months
ended September 28, 1997 have been restated to reflect net income (loss) on both
a basic and a diluted basis.
<TABLE>
A reconciliation of basic and diluted earnings per share calculations follows:
(In thousands except per share data)
<CAPTION>
Three months ended Three months ended
September 27, 1998 September 28, 1997
----------------------------- --------------------------
Net Per Share Net Per Share
Loss Shares Amount Income Shares Amount
----------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $(3,198) 10,739 $(0.30) $ 6,312 9,502 $0.66
Effect of dilutive securities -- -- -- -- 1,101 --
----------------------------- --------------------------
Diluted EPS $(3,198) 10,739 $(0.30) $ 6,312 10,603 $0.60
============================= ==========================
Six months ended Six months ended
September 27, 1998 September 28, 1997
----------------------------- --------------------------
Net Per Share Net Per Share
Loss Shares Amount Income Shares Amount
----------------------------- --------------------------
Basic EPS $(8,438) 10,824 $(0.78) $12,706 8,945 $1.42
Effect of dilutive securities -- -- -- -- 859 --
----------------------------- --------------------------
Diluted EPS $(8,438) 10,824 $(0.78) $12,706 9,804 $1.30
============================= ==========================
</TABLE>
NOTE 6: Legal Proceedings
Since December 23, 1997, a number of complaints have been filed against
the Company and certain of its officers in the Federal Court for the Northern
District of California that allege violations of the federal securities laws.
Similar complaints have been filed in California state court that allege
violations of California state securities laws and California common law. The
complaints have been consolidated in the federal and state courts, respectively.
The plaintiffs in both the federal and state lawsuits purport to represent a
class of persons who purchased the Company's securities during the period of
July 17, 1997 through October 23, 1997. The complaints allege that the Company
and certain of its officers misled the investing public regarding the financial
prospects of the Company. The Company believes that the allegations are
completely without merit and will vigorously defend itself.
8
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Certain statements in this "Management Discussion and Analysis of
Financial Condition and Results of Operations" are forward looking statements.
These forward looking statements include, but are not limited to: the statements
in the first paragraph of "Overview" regarding outsourcing and in the second
paragraph of "Overview" regarding customer orders and the impact of currency
fluctuations on future revenues; the statements under "Revenues" regarding
future revenue growth; the statements in the last paragraph under "Liquidity and
Capital Resources" regarding the anticipated spending for capital additions in
fiscal 1999 and beyond, and the sufficiency of the Company's available resources
to meet working capital and capital expenditure requirement; and the statements
in "Factors Affecting Future Operating Results." The forward looking statements
contained herein are based on current expectations and entail various risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward looking statements, including those risks and
uncertainties set forth below under "Factors Affecting Future Operating
Results."
Overview
The Company designs, manufactures and markets highly linear single
carrier and multicarrier radio frequency ("RF") power amplifiers that support a
broad range of worldwide analog and digital wireless transmissions standards,
including AMPS, TDMA, CDMA and GSM. The Company, founded in 1984 to perform
design and engineering services, first entered the commercial amplifier market
in 1988 and shipped its first cellular power amplifiers in 1990. The Company's
revenues are now derived primarily from sales to a limited number of OEMs in the
wireless infrastructure equipment market, in particular Northern Telecom Limited
("Northern Telecom"). Prior to the third quarter of fiscal 1998, the Company
pursued a strategy of vertical integration in both its design and manufacturing
processes. During the third quarter of fiscal 1998 the Company began outsourcing
some of its higher volume printed circuit board sub-assemblies on a turnkey
basis. During the second quarter of fiscal 1999, the Company also made a
decision to outsource its higher volume single channel power amplifiers on a
turnkey basis from an offshore manufacturer and the Company anticipates that the
first outsourced amplifier units will be shipped in the third quarter of fiscal
1999. The Company anticipates that this change in manufacturing strategy will
eventually have a favorable effect on its variable versus fixed manufacturing
cost ratio. However, there can be no guarantee that the shift to offshore
turnkey manufacturing will have a favorable effect on the Company's gross
margins. In fact, the Company continues to operate its own 4 inch wafer
fabrication facility and inherent in that facility is a high level of fixed
costs. As a result, the Company is still dependent upon substantial revenue to
achieve profitability. In the first and second quarters of fiscal 1999, fourth
quarter of fiscal 1998, first quarter of fiscal 1997 and third quarter of fiscal
1996, product orders fell sharply resulting in substantial losses in those
quarters. There can be no assurance that the Company will not experience such
fluctuations in the future. For example, the significant reduction in product
revenue the Company experienced in the first and second quarters of fiscal 1999
and the fourth quarter of fiscal 1998 reflects the impact of fluctuations in
demand with a cost structure that is relatively fixed in the short term from the
softening demand in the TDMA and GSM markets and delays in build-out of the
Korean PCS systems due to the unstable Asian financial markets and general
economic conditions in Korea and other Asian countries. Based on the above
factors, the Company anticipates lower product revenues over the next two to
three quarters as compared to the first three quarters of fiscal 1998 and the
Company anticipates that revenues for fiscal 1999 will likely be lower than
revenues for fiscal 1998.
During the six months ended September 27, 1998, Northern Telecom,
QUALCOMM Incorporated ("QUALCOMM"), Nortel Matra Communications ("Nortel
Matra"), an affiliate of Northern Telecom, and LG Information and Communications
Limited ("LGIC") accounted for approximately 66%, 11%, 11% and 10% of revenues,
respectively. During fiscal 1998, Northern Telecom, Nortel Matra and LGIC
accounted for approximately 57%, 22% and 14% of revenues, respectively. The
Company's business, financial condition and results of operations
9
<PAGE>
have been materially adversely affected in the past by anticipated orders
failing to materialize and by deferrals or cancellations of orders as a result
of changes in OEM requirements. If the Company were to lose Northern Telecom or
any other major OEM customer, or if orders by Northern Telecom or any other
major OEM customer were to otherwise materially decrease either in unit quantity
or in price, the Company's business, financial condition and results of
operations would be materially adversely affected. In addition, the recent
financial market turmoil and economic downturn in Korea may have a material
adverse effect on the Company's sales of its products to LGIC, an OEM based in
Korea. In addition, because the Company's products are priced in U.S. dollars,
the currency instability in the Korean and other Asian financial markets may
have the effect of making the Company's products more expensive to LGIC than
those of other manufacturers whose products are priced in one of the affected
Asian currencies, and, therefore, LGIC may reduce future purchases of the
Company's products.
The Company's vertical integration strategy in its semiconductor
operations entails a number of risks, including a high level of fixed and
variable costs, the management of complex processes, dependence on a single
source of supply and a strict regulatory environment. During periods of low
demand, high fixed wafer fabrication costs are likely to have a material adverse
effect on the Company's operations. In addition, the Company's strategy of
frequently introducing and rapidly expanding the manufacture of new products to
meet evolving OEM customer and wireless service provider needs has caused the
Company to experience high materials and manufacturing costs, including high
scrap and material waste, significant material obsolescence, labor
inefficiencies, high overtime hours, inefficient material procurement and an
inability to realize economies of scale.
The market for the Company's products is becoming increasingly
competitive. The Company sells some of its power amplifier products in South
Korea, as well as directly to cellular service providers, where its competitors
are already established as suppliers. In addition, the Company competes with at
least one amplifier manufacturer for some of the product business received from
Northern Telecom. This competition has resulted in, and will continue to result
in, reduced average selling prices for the Company's products, which accordingly
will negatively impact gross margins.
Results of Operations
<TABLE>
The following table sets forth for the periods indicated certain
statement of operations data of the Company expressed as a percentage of total
revenues and gross margin on sales.
<CAPTION>
Three months ended Six months ended
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
----------------------- --------------------------
Costs and expenses:
Cost of sales 76.8 71.5 83.9 70.8
Research and development 24.4 8.6 21.7 8.9
Selling, general and administrative 15.4 6.3 13.2 6.9
----------------------- --------------------------
Total costs and expenses 116.6 86.4 118.8 86.6
----------------------- --------------------------
Operating income (loss) (16.6) 13.6 (18.8) 13.4
----------------------- --------------------------
Interest income (expense), net 4.7 1.3 4.2 0.6
Other income -- -- -- 1.6
----------------------- --------------------------
Income (loss) before income taxes (11.9) 14.9 (14.6) 15.6
----------------------- --------------------------
Income taxes -- 1.8 -- 2.1
----------------------- --------------------------
Net income (loss) (11.9)% 13.1% (14.6)% 13.5%
======================= ==========================
Gross margin on sales 23.2% 28.5% 16.1% 29.2%
</TABLE>
Revenues. The Company's revenues decreased by 44% to $26.9 million for
the three months ended September 27, 1998 from $48.2 million for the three
months ended September 28, 1997. The decrease in revenues for
10
<PAGE>
the three months ended September 27, 1998 primarily reflects a decrease in
demand for the Company's GSM and TDMA products. The Company's revenues decreased
by 39% to $57.7 million for the six months ended September 27, 1998 from $94.0
million for the six months ended September 28, 1997, again reflecting decreased
demand for GSM and TDMA products as well as the Company's Korean CDMA PCS
products.
Cost of Sales. Cost of sales consists primarily of raw materials, RF
semiconductor fabrication costs, amplifier assembly and test costs (including
turnkey assembly services), overhead and warranty costs. The Company's cost of
sales decreased by 40% to $20.6 million for the three months ended September 27,
1998 from $34.5 million for the three months ended September 28, 1997. The
Company's cost of sales decreased by 27% to $48.4 million for the six months
ended September 27, 1998 from $66.5 million for the six months ended September
28, 1997.
Gross margin on sales was 23.2% for the three months ended September
27, 1998 as compared to 28.5% for the three months ended September 28, 1997.
Gross margin on sales was 16.1% for the six months ended September 27, 1998 as
compared to 29.2% for the six months ended September 28, 1997. The decline in
gross margin for the three months and six months ended September 27, 1998
primarily reflect insufficient absorption of fixed costs at the lower shipment
volume levels as well as declining average sales prices.
Research and Development. Research and development ("R&D") expenses
include the cost of designing, developing or reducing the manufacturing cost of
amplifiers and RF semiconductors. The Company's R&D expenses increased by 58% to
$6.5 million in the three months ended September 27, 1998 from $4.1 million in
the three months ended September 28, 1997. The Company's R&D expenses increased
by 49% to $12.5 million in the six months ended September 27, 1998 from $8.4
million in the six months ended September 28, 1997. The increase in R&D spending
in the three months ended September 27, 1998 reflects higher R&D headcount with
its associated expenses and increased investment in semiconductor R&D
activities. R&D expenses as a percentage of revenues increased to 24.4% in the
three months ended September 27, 1998 from 8.6% for the three months ended
September 28, 1997, reflecting substantially lower revenue levels and higher
absolute dollar spending in the three months ended September 27, 1998. R&D
expenses as a percentage of revenues increased to 21.7% in the six months ended
September 27, 1998 from 8.9% for the six months ended September 28, 1997, also
reflecting substantially lower revenue levels and higher absolute dollar
spending in the six months ended September 27, 1998.
Selling, General and Administrative. Selling, general and
administrative ("SG&A") expenses include compensation and benefits for sales,
marketing, senior management and administrative personnel, commissions paid to
independent sales representatives, professional fees, information systems costs
and other expenses. The Company's SG&A expenses increased by 36.3% to $4.2
million for the three months ended September 27, 1998 from $3.0 million for the
three months ended September 28, 1997. The growth in SG&A spending for the three
months ended September 27, 1998 was primarily related to increases in
depreciation expense and support costs related to upgrading the Company's
internal information systems. The Company's SG&A expenses increased to $7.6
million for the six months ended September 27, 1998 from $6.5 million for the
six months ended September 28, 1997. SG&A expenses as a percentage of revenues
increased to 15.4% for the three months ended September 27, 1998 from 6.3% for
the three months ended September 28, 1997 and increased to 13.2% for the six
months ended September 27, 1998 from 6.9% for the six months ended September 28,
1997. The increase of SG&A expenses as a percentage of sales was a result of
substantially lower revenue levels as well as higher absolute dollar spending
versus the same periods of a year ago.
Interest Income (Expense), net. Interest income, net for the three
months ended September 27, 1998 was $1.3 million compared to net interest income
of $595,000 for the three months ended September 28, 1997. Interest income
increased to $2.4 million for the six months ended September 27, 1998 from
$576,000 for the six months ended September 28, 1997. The increase in net
interest income in both the three and six month periods was the result of
interest income earned on substantially higher cash balances and short-term
investments reflecting primarily the investment of the proceeds of the Company's
August 1997 public offering.
Other Income, net. Other income of $1.5 million for the six months
ended September 28, 1997 represented the net gain realized from the cash sale of
the Company's wholly owned subsidiary, AMT, to the management group and
employees of AMT in April 1997. No other expense or other income was recorded
during the six months ended September 27, 1998.
11
<PAGE>
Income Taxes. Due to the losses incurred in the first and second
quarters of fiscal 1999, the Company did not record an income tax expense for
the six months ended September 27, 1998.
Factors Affecting Future Operating Results
Customer Concentration. The wireless infrastructure equipment market is
dominated by a small number of large original equipment manufacturers ("OEMs"),
including Alcatel Network Systems, Inc., LM Ericsson Telephone Company
("Ericsson"), Hyundai Electronics Industries Co., Ltd., LGIC, Lucent
Technologies, Inc. ("Lucent"), Motorola Corporation ("Motorola"), NEC America,
Inc., Northern Telecom, Nortel Matra, Nokia OY ("Nokia"), QUALCOMM, Samsung
Electronics Co., Ltd., and Siemens AG ("Siemens"). The Company's revenues are
derived primarily from sales to a limited number of these OEMs. During the three
months ended September 27, 1998, Northern Telecom, LGIC and Nortel Matra
accounted for approximately 66%, 13% and 11% of the Company's revenues,
respectively. During the six months ended September 28, 1997, Northern Telecom,
QUALCOMM, Nortel Matra and LGIC accounted for 66%, 11%, 11% and 10% of revenues,
respectively. Furthermore, a substantial portion of revenues from these
customers in the six months ended September 27, 1998 resulted from sales of a
limited number of the Company's products. The Company's top five customers
accounted for 99% of its sales for the six months ended September 27, 1998. The
Company, Northern Telecom and Nortel Matra have an agreement, renegotiated
annually, pursuant to which Northern Telecom and Nortel Matra, a company in
which Northern Telecom has an equity investment, commit to purchase a certain
volume of their annual power amplifier requirements for specified prices from
the Company. The renewal of the Company's agreement with Northern Telecom and
Nortel Matra for calendar year 1999 is being negotiated during the Company's
third fiscal quarter of 1999. The results of these negotiations could result in
lower RF amplifier volume commitments and reduced pricing starting with the
Company's fourth fiscal quarter of 1999. There can be no assurance that Northern
Telecom and Nortel Matra will continue to enter into contracts with the Company
in the future or otherwise agree to purchase the same or similar levels of their
power amplifier requirements from the Company or purchase their power amplifier
requirements at the same or similar pricing. Any reduction in the level of
purchases of the Company's amplifiers by Northern Telecom and Nortel Matra, or
any material reduction in pricing without significant offsets, would have a
material adverse effect on the Company's business, financial condition and
results of operations. Further, if the Company were to lose Northern Telecom or
any other major OEM customer, or if orders by Northern Telecom or any other
major OEM customer were to otherwise materially decrease, the Company's
business, financial condition and results of operations would be materially
adversely affected. In addition, the recent financial market turmoil and
economic downturn in Korea may have a material adverse effect on the Company's
sales of its products to LGIC, an OEM based in Korea. Due to the Company's
products being priced in U.S. dollars, the currency instability in the Korean
and other Asian financial markets may have the effect of making the Company's
products more expensive to LGIC than those of other manufacturers whose products
are priced in one of the affected Asian currencies, and, therefore, LGIC may
reduce future purchases of the Company's products. In addition, wireless
infrastructure equipment OEMs have come under increasing price pressure from
wireless service providers, which in turn has resulted in downward pricing
pressure on the Company's products. The Company expects to incur increasing
pricing pressures from Northern Telecom and other major OEM customers in future
periods which will result in declining average sales prices for the Company's
products.
Fluctuations in Operating Results. The Company's quarterly and annual
results have in the past been, and will continue to be, subject to significant
fluctuations due to a number of factors, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. In particular, the Company's results of operations are likely to
vary due to the timing, cancellation, delay or rescheduling of OEM customer
orders and shipments; the timing of announcements or introductions of new
products by the Company, its competitors or their respective OEM customers; the
acceptance of such products by wireless equipment OEMs and their customers;
relative variations in manufacturing efficiencies, yields and costs; competitive
factors such as the pricing, availability, and demand for competing
amplification products; changes in average sales prices and product mix;
variations in operating expenses; changes in manufacturing capacity and
variations in the utilization of this capacity; shortages of key supplies; the
long sales cycles associated with the Company's customer specific products; the
timing and level of product and process development costs; and changes in
inventory levels; and the relative strength or weakness of international
financial markets. Anticipated orders from the Company's OEM customers have in
the past failed to materialize and delivery schedules have been deferred or
canceled as a result of
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changes in OEM customer requirements and the Company expects this pattern to
continue as customer requirements continue to change and industry standards
continue to evolve. There can be no assurance that the Company will not
experience demand fluctuations in the future, and, in fact, the Company has
experienced reductions in product revenues in both the fourth quarter of fiscal
1998 and the first and second quarters of fiscal 1999. The Company anticipates
continued lower product revenues over the next two to three quarters when
compared to the first three quarters of fiscal 1998 as a result of softening
demand in the TDMA and GSM markets and delays in Korean PCS demand due to
general economic conditions in Korea and other Asian countries. The Company
establishes its expenditure levels for product development and other operating
expenses based on its expected revenues, and expenses are relatively fixed in
the short term. As a result, variations in timing of revenues can cause
significant variations in quarterly results of operations. There can be no
assurance that the Company will be profitable on a quarter to quarter basis in
the future. The Company believes that period to period comparisons of its
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance. Due to the foregoing factors, it is
likely that in some future quarter or quarters the Company's revenues or
operating results will not meet the expectations of public stock market analysts
or investors. In such event, the market price of the Company's Common Stock
would be materially adversely affected.
Internal Amplifier Design and Production Capabilities of OEMs. The
Company believes that a majority of the present worldwide production of power
amplifiers is captive within the manufacturing operations of wireless equipment
OEMs, many of which have chosen not to purchase amplifiers from outside
suppliers. The Company also believes that those OEMs that purchase from third
party amplifier vendors are sometimes reluctant to switch once committed to a
particular merchant vendor. Consequently, the Company may have only limited
opportunities to increase revenues by replacing internal OEM amplifier
production or displacing other merchant amplifier suppliers. Moreover, given the
limited opportunities for merchant RF amplifier suppliers, any decision by an
OEM to employ a second source merchant supplier for a product currently
purchased from a merchant supplier may reduce the existing merchant supplier's
ability to maintain a given level of product sales to such OEM or, possibly, to
retain the OEM as a customer due to price competition from the second source
merchant supplier. There can be no assurance that the Company's major OEM
customers will continue to rely, or increase their reliance, on the Company as
an external source of supply for their power amplifiers, or that other wireless
equipment OEMs will become customers of the Company. If the major wireless
infrastructure equipment suppliers do not purchase or continue to purchase their
power amplifiers from merchant suppliers, the Company's business, results of
operations and financial condition will be materially adversely affected. For
example, the failure of the Company to reach an agreement with Northern Telecom
and Nortel Matra that provides for similar levels of purchases could have a
material adverse effect on the Company,
Rapid Technological Change; Evolving Industry Standards; Dependence on
New Products. The markets in which the Company and its OEM customers compete are
characterized by rapidly changing technology, evolving industry standards and
continuous improvements in products and services. In particular, because the
Company's strategy of rapidly bringing to market products customized for
numerous and evolving RF modulation standards requires developing and achieving
volume production of a large number of distinct products, the Company's ability
to rapidly design and produce individual products for which there is significant
OEM customer demand will be a critical determinant of the Company's future
success. For example, softening of demand in the TDMA and GSM markets or failure
of another modulation standard in which the Company has invested substantial
development resources may have a material adverse effect on the Company's
business, financial condition and results of operations. No assurance can be
given that the Company's product development efforts will be successful, that
its new products will meet customer requirements and be accepted or that its OEM
customers' product offerings will achieve customer acceptance. If a significant
number of development projects do not result in substantial volume production or
if technologies or standards supported by the Company's or its customers'
products become obsolete or fail to gain widespread commercial acceptance, the
Company's business may be materially adversely affected.
Risks Associated with Internal Wafer and Device Fabrication. The
Company's operation of its wafer and device fabrication facilities entails a
number of risks, including a high level of fixed and variable costs, the
management of complex processes, dependence on a single source of supply and a
strict regulatory environment. During periods of low demand, high fixed wafer
fabrication costs are likely to have a material adverse effect on the Company's
business, financial condition and results of operations. The design and
fabrication of RF semiconductors is a complex and precise process. Such
manufacturing is sensitive to a wide variety of factors, including variations
and impurities in the raw materials, quality control of the packages,
difficulties in the
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fabrication process, performance of the manufacturing equipment, defects in the
masks used to print circuits on a wafer and the level of contaminants in the
manufacturing environment. As a result of these and other factors, semiconductor
manufacturing yields from time to time in the past have suffered, and there can
be no assurance that the Company will be able to achieve acceptable production
yields in the future. In addition, the Company's wafer and device fabrication
facility represents a single point of failure in its manufacturing process that
would be costly and time consuming to replace if its operation were interrupted.
The interruption of wafer fabrication operations or the loss of employees
dedicated to the wafer and device fabrication facilities could have a material
adverse effect on the Company's business, financial condition and results of
operations. Any failure to maintain acceptable wafer and device production
levels will have a material adverse effect on the Company's business, financial
condition and results of operations.
Product Quality, Performance and Reliability. The Company expects that
its customers will continue to establish demanding specifications for quality,
performance and reliability that must be met by the Company's products. RF
semiconductors as complex as those offered by the Company often encounter
development delays and may contain undetected defects or failures when first
introduced or after commencement of commercial shipments. The Company has from
time to time in the past experienced product quality, performance or reliability
problems. In addition, multicarrier power amplifiers have a higher probability
of malfunction than single carrier power amplifiers because of their greater
complexity. There can be no assurance that defects or failures will not occur in
the future relating to the Company's product quality, performance and
reliability that may have a material adverse effect on the Company's business,
financial condition and results of operations.
Sole or Limited Sources of Materials and Services. The Company
currently procures from single sources certain components and services for its
products including cast housings, printed circuit boards, specialized RF
components and specialized subassemblies. The Company purchases these components
and services on a purchase order basis. The Company does not carry significant
inventories of these components and does not have any long-term supply contracts
with its sole source vendors. Furthermore, the Company intends to begin
outsourcing of some of its higher volume power amplifiers at an offshore
independent subcontractor's facility during the third fiscal quarter of 1999.
The Company's reliance on its existing sole sources and its migration to an
outsource turnkey manufacturing strategy entails certain risks, including
reduced control over the price, timely delivery, reliability and quality of the
components. If the Company were to change any of its sole source vendors or its
turnkey subcontractor, the Company would be required to requalify the components
or amplifiers with new vendors or subcontractors, respectively. Any inability of
the Company to obtain timely deliveries of its components or its amplifiers of
acceptable quality in required quantities or a significant increase in the
prices of components for which the Company does not have alternative sources
could materially and adversely affect the Company's business, financial
condition and results of operations. The Company has occasionally experienced
difficulties in obtaining these components, and no assurance can be given that
shortages will not occur in the future.
Declining Average Sales Prices. The Company has experienced, and
expects to continue to experience, declining average sales prices for its
products. Wireless infrastructure equipment manufacturers have come under
increasing price pressure from wireless service providers, which in turn has
resulted in downward pricing pressure on the Company's products. In addition,
competition among merchant suppliers has increased the downward pricing pressure
on the Company's products. Since wireless infrastructure equipment manufacturers
frequently negotiate supply arrangements far in advance of delivery dates, the
Company often must commit to price reductions for its products before it is
aware of how, or if, cost reductions can be obtained. To offset declining
average sales prices, the Company believes that it must achieve manufacturing
cost reductions. If the Company is unable to achieve such cost reductions, the
Company's gross margins will decline, and such decline will have a material
adverse effect on the Company's business, financial condition and results of
operations.
Risks of International Sales. Sales outside of the United States were
88%, 81% and 95% of revenues for the three months ended September 27, 1998, the
six months ended September 27, 1998 and fiscal 1998, respectively. The Company
expects that international sales will continue to account for a significant
percentage of the Company's total revenues for the foreseeable future. These
sales involve a number of inherent risks, including imposition of government
controls, currency exchange fluctuations, potential insolvency of international
distributors and representatives or customers, reduced protection for
intellectual property rights in some countries, impact of recessionary
environments in economies outside the United States, political instability and
generally longer receivables collection periods, as well as tariffs and other
trade barriers. In addition, because substantially all of the
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Company's foreign sales are denominated in U.S. dollars, increases in the value
of the dollar relative to the local currency would increase the price of the
Company's products in foreign markets and make the Company's products relatively
more expensive and less price competitive than competitors' products that are
priced in local currencies. There can be no assurance that these factors will
not have a material adverse effect on the Company's future international sales
and, consequently, on the Company's business, financial condition and results of
operations. The Company anticipates that the recent turmoil in foreign financial
markets and the recent deterioration of the underlying economic conditions in
certain foreign countries will continue to have an impact on its sales to
customers located in or whose projects are based in those countries due to the
impact of currency fluctuations on the relative price of the Company's products
and restrictions on government spending imposed by the IMF on those countries
receiving the IMF's assistance. In addition, customers in those countries may
face reduced access to working capital to fund component purchases, such as the
Company's products, due to higher interest rates, reduced bank lending due to
contractions in the money supply or the deterioration in the customer's or its
bank's financial condition or the inability to access local equity financing. A
substantial majority of the Company's products are sold to OEMs who incorporate
the Company's products into systems sold and installed to end-user customers.
These OEMs are not required by contract and do not typically provide the Company
with information regarding the location and identity of their end-user
customers, and, therefore, the Company is not able to determine what portion of
its product sales have been or future orders will be incorporated into OEM sales
to end-users in those Asian countries currently experiencing financial market
turmoil and/or deterioration of economic conditions. Furthermore, a large
portion of the Company's existing customers and potential new customers are
servicing new markets in developing countries that the Company's customers
expect will deploy wireless communication networks as an alternative to the
construction of a wireline infrastructure. If such countries decline to
construct wireless communication systems, or construction of such systems is
delayed for any reason, including business and economic conditions and changes
in economic stability due to factors such as increased inflation and political
turmoil, such delays could have a material adverse effect on the Company's
business, results of operations and financial condition.
Market for the Company's Products Is Highly Competitive. The wireless
communications equipment industry is extremely competitive and is characterized
by rapid technological change, new product development and product obsolescence,
evolving industry standards and significant price erosion over the life of a
product. The ability of the Company to compete successfully and sustain
profitability depends in part upon the rates at which wireless equipment OEMs
incorporate the Company's products into their systems and the Company captures
market share from other merchant suppliers. The Company's major OEM customers,
including Northern Telecom, Nortel Matra, LGIC and QUALCOMM, continuously
evaluate whether to manufacture their own amplification products or purchase
them from outside sources. There can be no assurance that these OEM customers
will incorporate the Company's products into their systems or that in general
they will continue to rely, or expand their reliance, on external sources of
supply for their power amplifiers. These customers and other large manufacturers
of wireless communications equipment could also elect to enter the merchant
market and compete directly with the Company, and at least one OEM, NEC, has
already done so. Such increased competition could materially adversely affect
the Company's business, financial condition and results of operations.
The Company's principal competitors in the market for wireless
amplification products provided by merchant suppliers currently include AML
Communications, Amplidyne, M/A--COM (a subsidiary of AMP), Microwave Power
Devices, NEC and Powerwave Technologies. No assurance can be given that the
Company's competitors will not develop new technologies or enhancements to
existing products or introduce new products that will offer superior price or
performance features compared to the Company's products.
Uncertain Protection of Intellectual Property. The Company's ability to
compete successfully and achieve future revenue growth will depend, in part, on
its ability to protect its proprietary technology and operate without infringing
the rights of others. The Company has a policy of seeking patents on inventions
resulting from its ongoing research and development activities. The Company has
been awarded twenty United States patents, and has twenty-six United States
patent applications pending, including six that have been allowed but not yet
formally issued. The Company also has been awarded four foreign patents and has
twelve foreign patent applications pending. There can be no assurance that the
Company's pending patent applications will be allowed or that the issued or
pending patents will not be challenged or circumvented by competitors.
Notwithstanding the Company's active pursuit of patent protection, the Company
believes that the success of its business depends more on the collective value
of its patents, specifications, computer aided design and modeling tools,
technical processes and employee expertise. The Company generally enters into
confidentiality and nondisclosure agreements with its
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employees, suppliers, OEM customers, and potential customers and limits access
to and distribution of its proprietary technology. However, there can be no
assurance that such measures will provide adequate protection for the Company's
trade secrets or other proprietary information, or that the Company's trade
secrets or proprietary technology will not otherwise become known or be
independently developed by competitors. The failure of the Company to protect
its proprietary technology could have a material adverse effect on its business,
financial condition and results of operations.
Risk of Third Party Claims of Infringement. The communications
equipment industry is characterized by vigorous protection and pursuit of
intellectual property rights or positions, which have resulted in significant
and often protracted and expensive litigation. Although there is currently no
pending intellectual property litigation against the Company, the Company or its
suppliers may from time to time be notified of claims that the Company may be
infringing patents or other intellectual property rights owned by third parties.
If it is necessary or desirable, the Company may seek licenses under such
patents or other intellectual property rights. However, there can be no
assurance that such licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain a license from
a third party for technology used by the Company or otherwise secure rights to
use such technology could cause the Company to incur substantial liabilities, to
suspend the manufacture of products or expend significant resources to develop
noninfringing technology. There can be no assurance that the Company would be
successful in such development or that such licenses would be available on
reasonable terms, if at all. In the event that any third party makes a
successful claim against the Company or its customers and either a license is
not made available to the Company on commercially reasonable terms or a "design
around" is not practicable, the Company's business, financial condition and
results of operations would be materially adversely affected. Furthermore, the
Company may initiate claims or litigation against third parties for infringement
of the Company's proprietary rights or to establish the validity of the
Company's proprietary rights. Litigation by or against the Company could result
in significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not such litigation results in a
favorable determination for the Company. In the event of an adverse result in
any such litigation, the Company could be required to pay substantial damages,
indemnify its customers, cease the manufacture, use and sale of infringing
products, expend significant resources to develop noninfringing technology,
discontinue the use of certain processes or obtain licenses to the infringing
technology.
Government Regulation of Communications Industry. Radio frequency
transmissions and emissions, and certain equipment used in connection therewith,
are regulated in the United States, Canada and throughout the rest of the world.
Regulatory approvals generally must be obtained by the Company in connection
with the manufacture and sale of its products, and by wireless service providers
to operate the Company's products. The United States Federal Communications
Commission (the "FCC") and regulatory authorities abroad constantly review RF
emission issues and promulgate standards based on such reviews. If more
stringent RF emission regulations are adopted, the Company and its OEM customers
may be required to alter the manner in which radio signals are transmitted or
otherwise alter the equipment transmitting such signals, which could materially
adversely affect the Company's products and markets. The enactment by federal,
state, local or international governments of new laws or regulations or a change
in the interpretation of existing regulations could also materially adversely
affect the market for the Company's products. Although recent deregulation of
international communications industries along with recent radio frequency
spectrum allocations made by the FCC have increased the potential demand for the
Company's products by providing users of those products with opportunities to
establish new wireless personal communications services, there can be no
assurance that the trend toward deregulation and current regulatory developments
favorable to the promotion of new and expanded personal communications services
will continue or that other future regulatory changes will have a positive
impact on the Company. The increasing demand for wireless communications has
exerted pressure on regulatory bodies worldwide to adopt new standards for such
products, generally following extensive investigation of and deliberation over
competing technologies. The delays inherent in this governmental approval
process have in the past caused, and may in the future cause, the cancellation,
postponement or rescheduling of the installation of communications systems by
the Company's OEM customers. These delays have had in the past, and in the
future may have, a material adverse effect on the sale of products by the
Company to such OEM customers.
Environmental Regulations. The Company is subject to a variety of
local, state and federal governmental regulations relating to the storage,
discharge, handling, emission, generation, manufacture and disposal of toxic or
other hazardous substances used to manufacture the Company's products. The
Company believes that it is currently
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in compliance in all material respects with such regulations and that it has
obtained all necessary environmental permits to conduct its business.
Nevertheless, the failure to comply with current or future regulations could
result in the imposition of substantial fines on the Company, suspension of
production, alteration of its manufacturing processes or cessation of
operations. Compliance with such regulations could require the Company to
acquire expensive remediation equipment or to incur substantial expenses. Any
failure by the Company to control the use, disposal, removal or storage of, or
to adequately restrict the discharge of, or assist in the cleanup of, hazardous
or toxic substances, could subject the Company to significant liabilities,
including joint and several liability under certain statutes. The imposition of
such liabilities could materially adversely affect the Company's business,
financial condition and results of operations.
Year 2000 Compliance. Many installed computer programs were written
using a two digit date field rather than a four digit date field to define the
applicable year. Such computer programs utilizing a two digit date field may
recognize a date using "00" as the year 1900 rather than the year 2000 (the
"Year 2000 Issue"). The Year 2000 Issue could potentially result in a system
failure or miscalculations causing disruptions of operations, including among
other things, a temporary inability to process transactions, send invoices or
engage in other similar normal business activities. The Company identified the
Year 2000 Issue in certain of its internal operating systems and installed a new
enterprise wide computer software system in July 1998 that is Year 2000
compliant and which the Company believes will increase operational and financial
efficiencies and information analysis. The cost of this project, as it relates
to the Year 2000 Issue, did not have a material effect on the operations of the
Company and is being funded through operating cash flows and investment income
from the Company's liquid assets. The Company has launched a Year 2000 project
and assigned a team to assess the Year 2000 Issue. This team is in the process
of conducting inventories on the balance of the Company's internally used
software programs and imbedded systems, and will prepare and conduct surveys of
its customers, suppliers and other business partners for Year 2000 compliance.
The Company anticipates that this effort will be completed by January 1999. The
Company is not aware of any material exposures related to the Year 2000 Issue
but can not conclusively rule out any material effects on the Company's
operations or any potential loss of revenues related to the Year 2000 issue
until the assessment project has been completed.
Dependence on Key Personnel. The Company's ability to manage any future
growth effectively will require attracting, training, motivating, managing and
retaining new employees successfully as well as retaining the continued service
of its key technical, marketing and management personnel. Although the Company
has employment contracts with several of its executive officers, these
agreements do not obligate such individuals to remain in the employment of the
Company. The Company does not maintain key person life insurance on any of its
key technical personnel. The competition for such personnel is intense, and the
loss of key employees could have a material adverse effect on the Company.
Volatility of Stock Price. The market price of the shares of Common
Stock has been, and is likely to continue to be, highly volatile, and is
affected significantly by factors such as fluctuations in the Company's
operating results, announcements of technological innovations, new customer
contracts or new products by the Company or its competitors, announcements by
the Company's customers regarding their business or prospects, changes in
analysts' expectations, governmental regulatory action, developments with
respect to patents or proprietary rights, general market conditions and other
factors. In addition, the stock market has from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. The market price of the Company's Common
Stock fluctuated substantially during fiscal 1998, from a low of $10.75 on April
1, 1997 to a high of $66.375 on October 1, 1997. As of September 27, 1998, the
last reported sale price of the Common Stock as reported on the Nasdaq National
Market was $12.875.
Pending Litigation. Since December 23, 1997, a number of complaints
have been filed against the Company and certain of its officers in the Federal
Court for the Northern District of California that allege violations of the
federal securities laws. Similar complaints have been filed in California state
court that allege violations of California state securities laws and California
common law. The complaints have been consolidated in the federal and state
courts, respectively. The plaintiffs in both the federal and state lawsuits
purport to represent a class of persons who purchased the Company's securities
during the period of July 17, 1997 through October 23, 1997. The complaints
allege that the Company and certain of its officers misled the investing public
regarding the financial prospects of the Company. The Company believes that the
allegations are completely without merit and will vigorously defend itself.
Certain provisions of the Company's Certificate of Incorporation and
indemnification agreements between the
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Company and its officers require the Company to advance to such officers ongoing
legal expenses of defending the suits and may require the Company to indemnify
them against judgments rendered on certain claims. The Company expects to incur
significant legal expenses on its behalf and on behalf of such officers in
connection with this litigation. In addition, defending this litigation has
resulted, and will likely continue to result, in the diversion of management's
attention from the day to day operations of the Company's business. Although the
Company does not believe that it or any of its officers has engaged in any
wrongdoing, there can be no assurance that this stockholder litigation will be
resolved in the Company's favor. An adverse result, settlement or prolonged
litigation could have a material adverse effect on the Company's business,
financial condition or results of operations.
Shareholder Rights Plan; Issuance of Preferred Stock. The Board of
Directors of the Company adopted a Shareholder Rights Plan in October 1996 (the
"Rights Plan"). Pursuant to the Rights Plan, the Board declared a dividend of
one Preferred Stock Purchase Right per share of Common Stock (the "Rights") and
each such Right has an exercise price of $126.00. The Rights become exercisable
upon the occurrence of certain events, including the announcement of a tender
offer or exchange offer for the Company's Common Stock or the acquisition of a
specified percentage of the Company's Common Stock by a third party. The
exercise of the Rights could have the effect of delaying, deferring or
preventing a change in control of the Company, including, without limitation,
discouraging a proxy contest or making more difficult the acquisition of a
substantial block of the Company's Common Stock. These provisions could also
limit the price that investors might be willing to pay in the future for shares
of the Company's Common Stock. The Board of Directors has the authority to issue
up to 5,000,000 shares of undesignated Preferred Stock and to determine the
powers, preferences and rights and the qualifications, limitations or
restrictions granted to or imposed upon any wholly unissued shares of
undesignated Preferred Stock and to fix the number of shares constituting any
series and the designation of such series, without any further vote or action by
the Company's stockholders. For example, in connection with the Company's
Shareholder Rights Plan, the Board of Directors designated 20,000 shares of
Preferred Stock as Series A Participating Preferred Stock although none of such
shares have been issued. The Preferred Stock could be issued with voting,
liquidation, dividend and other rights superior to those of the holders of
Common Stock. The issuance of Preferred Stock under certain circumstances could
have the effect of delaying, deferring or preventing a change in control of the
Company.
Liquidity and Capital Resources
The Company has financed its growth through its initial public offering
in August 1994, a public equity offering in August 1997, private sales of equity
securities, capital equipment leases, bank lines of credit and cash flows from
operations. Cash used by operations was $8.8 million for the six months ended
September 27, 1998 while cash provided by operations in the corresponding period
of fiscal 1998 was $2.0 million. Cash flow from operations for the six months
ended September 27, 1998 was negatively impacted by the reduced level and timing
of shipments and slower collections from the Company's international customers.
As of September 27, 1998, the Company had working capital of $102.6
million including $76.4 million in cash, cash equivalents and short-term
investments. In addition, the Company has a revolving line of credit of $10.0
million with a bank secured by the majority of the Company's assets. Under the
terms of the master agreement governing this credit instrument, the Company is
required to maintain certain minimum working capital, net worth, profitability
and other specific financial ratios. As of September 27, 1998, the Company was
in compliance with all of these financial covenants with the exception of the
profitability covenant. The Company has received a waiver from the bank with
respect to this financial covenant default. There were no borrowings outstanding
against this line of credit as of September 27, 1998.
In April 1998, the Company announced a repurchase program (the "1998
Repurchase Program") pursuant to which it may acquire up to one million shares
of Common Stock in open market purchases. During the six months ended September
27, 1998, the Company repurchased a total of 497,200 shares on the open market
for a total of $7.4 million.
In January 1997, the Company borrowed $6.0 million under a term loan
secured by certain capital equipment. The loan, which expires in January 2002,
requires the payment of monthly principal plus interest and is subject to
certain minimum working capital, net worth and other specific financial ratios.
The Company was in compliance with
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these covenants as of September 27, 1998. In March 1997, the Company also
secured a $3.2 million real estate loan, which expires in April 2007, for the
purchase of a light industrial building for its future facilities expansion.
Additions to property and equipment were $7.4 million for both the six
months ended September 27, 1998 and the six months ended September 28, 1997.
Purchases of equipment and other capital assets for the six months ended
September 27, 1998 included the purchase of new management information systems,
manufacturing test equipment to support new products and engineering test
equipment to support various research and development projects.
The Company anticipates spending approximately $10 million over the
next twelve months for capital additions primarily to complete its information
systems infrastructure upgrades, set up automated test stations for new products
and and upgrade its engineering test equipment as required for new development
projects. Based on the Company's current working capital position and the
available line of credit the Company expects to renew, the Company believes that
sufficient resources will be available to meet the Company's cash requirements
for at least the next twelve months. Cash requirements for periods beyond the
next twelve months depend on the Company's profitability, timing and level of
capital expenditures, working capital requirements and rate of growth.
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk
The Company does not engage in any foreign currency hedging
transactions and therefore, does not believe it is subject to exchange rate
risk. In compliance with the Company's cash investment policy, the Company
limits its cash investments in terms of type of financial instrument,
concentration limit, credit quality and marketability with the highest priority
being preservation of principal. The Company does not consider itself exposed
with respect to any material market risk.
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
Since December 23, 1997, a number of complaints have been filed against
the Company and certain of its officers in the Federal Court for the Northern
District of California that allege violations of the federal securities laws.
Similar complaints have been filed in California state court that allege
violations of California state securities laws and California common law. The
complaints have been consolidated in the federal and state courts, respectively.
The plaintiffs in both the federal and state lawsuits purport to represent a
class of persons who purchased the Company's securities during the period of
July 17, 1997 through October 23, 1997. The complaints allege that the Company
and certain of its officers misled the investing public regarding the financial
prospects of the Company. The Company believes that the allegations are
completely without merit and will vigorously defend itself.
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ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
20
<PAGE>
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.
Dated: November 5, 1998
SPECTRIAN CORPORATION
(Registrant)
/S/ BRUCE R. WRIGHT
-----------------------------------------------------
Bruce R. Wright
Executive Vice President, Finance and Administration,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
INDEX TO EXHIBITS
Exhibits Sequentially
-------- Numbered Page
-------------
27.1 Financial Data Schedule 22
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM CONDENSED CONSOLIDATED BALANCE SHEETS, CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
RESTATED
</LEGEND>
<CIK> 0000925054
<NAME> SPECTRIAN CORP /DE/
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> JUN-29-1998
<PERIOD-END> SEP-27-1998
<CASH> 21,611
<SECURITIES> 60,285
<RECEIVABLES> 21,222
<ALLOWANCES> 382
<INVENTORY> 19,855
<CURRENT-ASSETS> 121,696
<PP&E> 63,816
<DEPRECIATION> 30,255
<TOTAL-ASSETS> 155,257
<CURRENT-LIABILITIES> 19,142
<BONDS> 5,368
<COMMON> 141,192
0
0
<OTHER-SE> (10,445)
<TOTAL-LIABILITY-AND-EQUITY> 155,257
<SALES> 26,869
<TOTAL-REVENUES> 26,869
<CGS> 20,629
<TOTAL-COSTS> 20,629
<OTHER-EXPENSES> 10,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,262)
<INCOME-PRETAX> (3,198)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,198)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,198)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
