================================================================================
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 June 28, 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 June 28, 1998 there were 10,922,056 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 - Consolidated financial statements
Consolidated balance sheets -
June 28, 1998 and March 31, 1998 3
Consolidated statements of operations -
three months ended June 28, 1998 and June 28, 1997 4
Consolidated statements of cash flows -
three months ended June 28, 1998 and June 28, 1997 5
Notes to consolidated financial statements 6
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - Other Information
ITEM 1 - Legal Proceedings 18
ITEM 4 - Submission of Matters to a Vote of Security Holders 19
ITEM 6 - Exhibits and Reports on Form 8-K 19
Signatures 20
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 28, March 31,
Assets 1998 1998
--------- ---------
(unaudited)
Current assets:
Cash and cash equivalents $ 22,758 $ 31,460
Short-term investments 60,285 68,128
Accounts receivable, less allowance for doubtful
accounts of $379 and $376, respectively 27,316 21,123
Inventories 17,430 15,362
Prepaid expenses and other current assets 2,941 6,202
--------- ---------
Total current assets 130,730 142,275
Property and equipment, net 34,436 32,776
--------- ---------
$ 165,166 $ 175,051
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of debt obligations $ 1,383 $ 1,360
Accounts payable 6,581 10,456
Accrued liabilities 11,635 12,981
--------- ---------
Total current liabilities 19,599 24,797
Debt obligations, net of current portion 5,636 5,912
--------- ---------
Total liabilities 25,235 30,709
--------- ---------
Stockholders' equity:
Common stock, $0.001 par value, 20,000,000 shares
authorized; 10,922,056 and 10,904,077 shares
issued and outstanding, respectively 11 10
Additional paid-in capital 146,954 146,827
Deferred compensation expense -- (609)
Other comprehensive income 213 121
Accumulated deficit (7,247) (2,007)
--------- ---------
Total stockholders' equity 139,931 144,342
--------- ---------
$ 165,166 $ 175,051
========= =========
See accompanying notes to consolidated financial statements.
3
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
Three months ended
June 28,
----------------------
1998 1997
-------- --------
Revenues $ 30,784 $ 45,766
Costs and expenses:
Cost of product sales 27,729 32,051
Research and development 5,954 4,241
Selling, general and administrative 3,476 3,461
-------- --------
37,159 39,753
-------- --------
Operating income (loss) (6,375) 6,013
Interest income (expense), net 1,135 (19)
Other income, net -- 1,530
-------- --------
Income (loss) before income taxes (5,240) 7,524
Income taxes -- 1,129
-------- --------
Net income (loss) $ (5,240) $ 6,395
======== ========
Net income (loss) per share
Basic $ (0.48) $ 0.77
Diluted $ (0.48) $ 0.72
Shares used in computing per share amounts:
Basic 10,917 8,301
Diluted 10,917 8,917
See accompanying notes to consolidated financial statements.
4
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three months ended
June 28,
----------------------
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) $(5,240) $ 6,395
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 2,846 2,088
Stock compensation expense 583 --
Tax benefit associated with stock options -- 1,129
Changes in operating assets and liabilities:
Accounts receivable (6,193) (7,167)
Inventories (2,068) (7,178)
Prepaid expenses and other assets 3,261 (77)
Accounts payable (3,875) 7,762
Accrued liabilities (1,346) 2,940
------- -------
Net cash provided by (used for)
operating activities (12,032) 4,362
------- -------
Cash flows from investing activities:
Purchase of short-term investments (17,062) --
Proceeds from sale of short-term investments 24,997 --
Purchase of property and equipment (4,506) (3,516)
Proceeds from sale of subsidiary -- 4,016
------- -------
Net cash provided by investing activities 3,429 500
------- -------
Cash flows from financing activities:
Repayment of debt and capital lease obligations (253) (418)
Proceeds from sales of common stock, net 154 1,141
------- -------
Net cash provided by (used for)
financing activities (99) 723
------- -------
Net increase (decrease) in cash and cash
equivalents (8,702) 5,585
Cash and cash equivalents,
beginning of period 31,460 6,240
------- -------
Cash and cash equivalents,
end of period $22,758 $11,825
======= =======
See accompanying notes to consolidated financial statements.
5
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARY
NOTES TO 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 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:
June 28, March 31,
1998 1998
----------- ----------
(In thousands)
Inventories:
Raw materials $9,138 $7,395
Work in progress 5,829 5,538
Finished goods 2,463 2,429
----------- ----------
$17,430 $15,362
=========== ==========
Property and equipment:
Machinery and equipment $55,506 $51,091
Land, building and improvements 2,772 2,829
Furniture and fixtures 1,420 1,382
Leasehold improvements 1,743 1,633
----------- ----------
61,441 56,935
Less accumulated depreciation and
amortization 27,005 24,159
----------- ----------
$34,436 $32,776
=========== ==========
Accrued liabilities:
Employee compensation and benefits $ 2,234 $ 2,958
Warranty 6,346 7,326
Other accrued liabilities 3,055 2,697
----------- ----------
$11,635 $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 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 June 28 and March 31, 1998, cash equivalents and short-term
investments classified as available-for-sale securities were as follows:
June 28, March 31,
1998 1998
------------ -----------
(In thousands)
Commercial paper $ 61,073 $ 63,341
U.S. government securities 23,225 28,158
------------ -----------
$ 84,298 $ 91,499
============ ===========
As of June 28 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 June 28, and March 31, 1998 all
securities held were due in less than one year and were classified as follows
(in thousands):
June 28, March 31,
1998 1998
------------ -----------
(In thousands)
Cash equivalents $ 24,013 $ 23,371
Short-term investments 60,285 68,128
------------ -----------
$ 84,298 $ 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 ended June 28, 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 ended June 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:
<CAPTION>
Three Months Ended Three Months Ended
June 28, 1998 June 28, 1997
---------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands except per share data) Net Per Share Net Per Share
Loss Shares Amount Income Shares Amount
---------------------------------- -----------------------------
Basic EPS $(5,240) 10,917 $(0.48) $6,395 8,301 $0.77
Effect of dilutive securities
--- --- --- --- 616 ---
--------------------------------- ------------------------------
Diluted EPS $(5,240) 10,917 $(0.48) $6,395 8,917 $0.72
================================= ==============================
</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"). The Company pursues a strategy of vertical integration in
its design and manufacturing processes, including operating its own 4 inch wafer
fabrication facility. As a result, the Company has a higher level of fixed costs
and is dependent upon substantial revenue to achieve profitability. In the first
quarter 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
quarter 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 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. The Company also
anticipates lower product revenues over the next two to three quarters as a
result of such factors and anticipates that revenues for fiscal 1999 may not
equal, and will not exceed, revenues for fiscal 1998. Since the third quarter of
fiscal 1998, the Company has outsourced some of its higher volume printed
circuit board sub-assemblies on a turnkey basis. It is the Company's intention
to continue using an outsourcing strategy wherever it makes economic sense to do
so.
During the three months ended June 28, 1998, Northern Telecom, QUALCOMM
Incorporated ("QUALCOMM") and Nortel Matra Communications ("Nortel Matra")
accounted for approximately 66%, 14% and 12% of revenues, respectively. During
fiscal 1998, Northern Telecom, Nortel Matra and LG Information and
Communications Limited ("LGIC") accounted for approximately 57%, 22% and 14% of
revenues, respectively. The Company's business, financial condition and results
of operations 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, because a majority of the Company's products ordered by LGIC to date
relate to the build-out of the Korean PCS system. In addition, because the
9
<PAGE>
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 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 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 business 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
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.
Three Months Ended
June 28,
1998 1997
---- ----
Revenues 100.0% 100.0%
Costs and expenses:
Cost of product sales 90.1 70.0
Research and development 19.3 9.3
Selling, general and administrative 11.3 7.6
------------ -------------
Total costs and expenses 120.7 86.9
Operating income (loss) (20.7) 13.1
Interest income (expense), net 3.7 --
Other income -- 3.3
------------ -------------
Income (loss) before income taxes (17.0) 16.4
Income taxes -- 2.4
------------ -------------
Net income (loss) (17.0)% 14.0%
============ =============
Gross margin on sales 9.9% 30.0%
Revenues. The Company's revenues decreased by 32.7% to $30.8 million
for the three months ended June 28, 1998 from $45.8 million for the three months
ended June 28, 1997. The decrease in revenues for the three months ended June
28, 1998 reflects a decrease in demand for the Company's GSM, TDMA and Korean
PCS CDMA 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 13.5% to $27.7 million for the three months ended June 28,
1998 from $32.1 million for the three months ended June 28, 1997. Included in
the cost of sales for the three months ended June 28, 1998 were costs associated
with restructuring operations, discontinuing older products and supporting
warranties on newer products. Gross margin on sales was 9.9% for the three
months ended June 28, 1998 as compared to 30.0% for the three months
10
<PAGE>
ended June 28, 1997. The decline in gross margin for the quarter ended June 28,
1998 reflects insufficient absorption of overhead infrastructure 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 40.4%
to $6.0 million in the three months ended June 28, 1998 from $4.2 million in the
three months ended June 28, 1997. The increase in R&D spending in the three
months ended June 28, 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 19.3% in the three months ended June
28, 1998 from 9.3% for the three months ended June 28, 1997, reflecting
relatively lower revenue levels and higher absolute dollar spending in the three
months ended June 28, 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 and other expenses. The
Company's SG&A expenses remained constant at $3.5 million for the three months
ended June 28, 1998 as compared to the three months ended June 28, 1997.
Increases in SG&A compensation and other related expenses due to higher
headcount levels and support costs related to upgrading the Company's
information systems were offset by lower outside commissions paid for Korean
sales for the three months ended June 28, 1998. SG&A expenses as a percentage of
revenues increased to 11.3% for the three months ended June 28, 1998 from 7.6%
for the three months ended June 28, 1997. The increase of SG&A expenses as a
percentage of sales was a result of the lower revenue levels in the three months
ended June 30, 1998 versus the same period of a year ago.
Interest Income (Expense), net. Interest income, net for the three
months ended June 28, 1998 was $1.1 million compared to net interest expense of
$19,000 for the three months ended June 28, 1997. The increase in net interest
income 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 was recorded in the
three months ended June 28, 1997 representing the net gain realized from the
cash sale of the Company's wholly owned subsidiary, AMT, to the management group
and employees of AMT. No other expense or other income was recorded during the
three months ended June 28, 1998,
Income Taxes. Due to the loss incurred in the first quarter of fiscal
1999, the Company did not record an income tax expense for the three months
ended June 28, 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 LM Ericsson Telephone Company ("Ericsson"), Lucent Technologies, Inc.
("Lucent"), Motorola Corporation ("Motorola"), Northern Telecom, Nortel Matra,
Nokia OY ("Nokia") 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 June 28, 1998, Northern Telecom, QUALCOMM and Nortel Matra
accounted for approximately 66%, 14% and 12% of the Company's revenues,
respectively. Furthermore, a substantial portion of revenues from these
customers in the three months ended June 28, 1998 resulted from sales of a
limited number of the Company's products. The Company's top five customers
accounted for 98% of its sales for the three months ended June 28, 1998. During
the three months ended June 28, 1997, Northern Telecom, Nortel Matra and LGIC
accounted for 55%, 27% and 18% of revenues, respectively. 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
1998 was finalized in October 1997. Based on lower RF amplifier volume
commitments and reduced pricing contained in this agreement and other factors,
the Company expects that fiscal 1999 revenue will decline from revenue levels
realized in fiscal 1998. There can be no assurance that Northern Telecom and
Nortel Matra will enter into a contract 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
11
<PAGE>
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, because a majority of the Company's products ordered by LGIC to
date relate to the build-out of the Korean PCS system. 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. 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 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 quarter of fiscal 1999. The Company
anticipates continued lower product revenues over the next two to three quarters
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 reluctant to switch once committed to a particular
merchant vendor. Consequently, the Company has 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
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<PAGE>
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.
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 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. Although the Company is currently identifying
potential alternative sources of these components, its reliance on sole sources
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, the Company would be required to
requalify the components with each new vendor. Any inability
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<PAGE>
of the Company to obtain timely deliveries of components 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
75%, 88% and 95% of revenues for the three months ended June 28, 1998, the three
months ended June 28, 1997 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 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 Asian financial
markets and the recent deterioration of the underlying economic conditions in
certain Asian 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
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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, Hewlett-Packard Wireless Infrastructure Division,
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 17 United States patents, and has 26 United States patent
applications pending, including eight that had been allowed but not yet formally
issued. The Company also has been awarded four foreign patents and has ten
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 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 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.
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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 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 has identified
the Year 2000 Issue in certain of its internal operating systems and has
installed as of July 1998 a new computer software system 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, does 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 not completed an audit of its
remaining internal systems or products with respect to the Year 2000 Issue.
Management of Growth; Dependence on Key Personnel. The growth in the
Company's business has placed, and is expected to continue to place, a
significant strain on the Company's personnel, management and other resources.
The Company's ability to manage any future growth effectively will require it to
attract, train, motivate, manage and retain new employees successfully, to
integrate new employees into its overall operations and in particular, its
manufacturing operations, to retain the continued service of its key technical,
marketing and management personnel, and to continue to improve its operational,
financial and management information systems. 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
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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 recently 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 June 28, 1998, the last
reported sale price of the Common Stock as reported on the Nasdaq National
Market was $15.4375.
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 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
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<PAGE>
from operations. Cash used by operations was $12.0 million for the three months
ended June 28, 1998 while cash provided by operations in the corresponding
period of fiscal 1998 was $4.4 million. Cash flow from operations for the
quarter ended June 28, 1998 was negatively impacted by the reduced level and
timing of shipments and slower collections from the Company's international
customers.
As of June 28, 1998, the Company had working capital of $111.1 million
including $83.0 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 June 28, 1998, the Company was in compliance
with all of these financial covenants. There were no borrowings outstanding
against this line of credit as of June 28, 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. To date, no shares have been
repurchased under the 1998 Repurchase Program.
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 these covenants as of June 28, 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 $4.5 million and $3.5 million
for the three months ended June 28, 1998 and June 28, 1997, respectively.
Purchases of equipment and other capital assets for the three months ended June
28, 1998 included the purchase of new corporate management information systems
software, manufacturing test and production equipment required to support new
products and test equipment to support various research and development
projects.
The Company anticipates spending approximately $18 million over the
next twelve months for capital additions primarily to upgrade information
systems infrastructure, set up production lines for new products and procure
test equipment for 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.
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 4: Submission of Matters to a Vote of Security Holders
On June 26, 1998, the Company held its Annual Meeting of Stockholders
for which it solicited votes by proxy pursuant to proxy solicitation materials
first distributed on or about May 28, 1998. The following is a brief description
of the matters voted on at the meeting and a statement of the number of votes
cast for and against and the number of abstentions.
1. Election of Garrett A. Garrettson, James A. Cole, Martin Cooper,
Charles D. Kissner, Robert Wilson and Eric A. Young as directors of the
Company until the next Annual Meeting of Stockholders or until their
successors are elected.
NOMINEE IN FAVOR WITHHELD
------- -------- --------
Garrett A. Garrettson 9,916,125 111,417
James A. Cole 9,896,653 130,889
Charles D. Kissner 9,911,307 116,235
Eric A.Young 9,914,127 113,415
Robert C. Wilson 9,913,077 114,465
Martin Cooper 9,914,178 113,364
2. The amendment of the Certificate of Incorporation of the Company to
provide that the Company not be governed by the Delaware anti-takeover
statute (Section 203 of the Delaware General Corporation Law):
FOR: 4,511,662 AGAINST: 1,043,046 ABSTAIN: 80,520 NON-VOTES: 4,392,314
As an amendment of the certificate of incorporation requires the
approval of a majority of the outstanding capital stock of the Company,
this proposal failed to obtain the number of votes necessary for its
adoption.
3. The adoption of (i) the 1998 Employee Stock Purchase Plan, (ii) the
reservation of 250,000 shares of Common Stock for sale thereunder and
(iii) an annual increase in the number of shares of Common Stock by the
lesser of 300,000 shares or 2% of outstanding shares of Common Stock:
FOR: 7,153,206 AGAINST: 2,827,835 ABSTAIN: 46,501 NON-VOTES: -0-
4. The ratification of the appointment of KPMG Peat Marwick LLP as
independent accountants of the Company for the fiscal year ending March
31, 1999:
FOR: 9,984,485 AGAINST: 12,062 ABSTAIN: 30,995 NON-VOTES: -0-
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits
10.38 Lease Agreement between Registrant and Ellington Development Inc.
dated April 13, 1998
27.1 Financial Data Schedule
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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.
Dated: August 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
Sequentially
Exhibits Numbered Pages
- -------- --------------
10.38 Lease Agreement between Resistrant and Ellington 21
Development Inc. dated April 13, 1998
27.1 Financial Date Schedule 32
20
CONTRACT TO LEASE
This lease made and entered into this 13th day of April, 1998 by and between
Ellington Development Incorporated with a principal place of business at 3908
North 24th Street; City of Quincy; County of Adams; State of Illinois
hereinafter called LESSOR and Spectrian Corporation with a principal place of
business at 350 West Java Drive; City of Sunnyvale; County of Santa Clara; State
of California hereinafter called the LESSEE.
WITNESSETH
WHEREAS LESSOR is the owner of a building known as 300 Maine Street located on
the Southeast corner of Third and Maine Streets, Quincy, Illinois;
WHEREAS LESSEE desires to lease a portion of this building from LESSOR:
NOW THEREFORE in consideration of the rental herein reserved and of the
covenants and conditions hereinafter contained, it is mutually agreed as
follows:
1. Premises - LESSOR hereby leases and demises to LESSEE and LESSEE does hereby
take and accept from LESSOR a portion of 300 Maine described as Suite One and
further described hereinbelow to wit:
The North Two Thousand Seven Hundred Fifty square feet (2,750 sq. ft.)
area (50' x 55') of the Lower Level
as more fully described in Exhibits A and B attached hereto and made a part
hereof hereinafter called the "Premises" TO HAVE AND TO HOLD THE SAME, with
appurtenances, unto the said LESSEE for and during the term and at the rental
hereinafter set forth.
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2. Term - The Original Term of this Lease will be for one (1) year commencing at
the opening of business April 1, 1998 and terminating at the close of business
March 31, 1999 (the expiration date).
3. Option to Renew - LESSOR hereby grants LESSEE one (1) option to renew this
Lease for an additional term of one year commencing at the expiration of the
Original Term upon the same terms and conditions provided herein other than for
an adjustment of rent as set forth herein below. Such renewal option shall be
exercised in writing, delivered to the LESSOR sixty (60) days prior to
expiration of the Original Term or Renewal Term.
4. Rent
a. Original - LESSEE agrees to pay to LESSOR as rental for the demised Premises
during the Original Term of the Lease annually the sum of Thirteen Thousand
Seven Hundred Fifty Dollars ($13,750.00) lawful money of the United State,
payable in twelve (12) equal monthly installments of One Thousand One Hundred
Forty-Five Dollars and Eighty-Three Cents ($1,145.83) in advance on the first
day of each month without demand. Rental payments will be considered delinquent
if not received by LESSOR by the Tenth day of the month and a 5% late charge
shall be added to the monthly rental amount due.
b. Option for the First Renewal Term - LESSEE agrees to pay to LESSOR as rental
for the demised Premises during the First Renewal Term of the Lease annually an
amount equal to the rent paid by LESSEE for the last year of the Original Term
increased by the percentage increase, if any, in the Consumer Price Index, U.S.
City
22
<PAGE>
Average, Rent Component from the value of such Index for the month of April,
1998, to the value of such Index for the month of March, 1999. Said sum shall be
payable in lawful money of the United States in advance on the first day of each
month without demand.
5. Use - LESSEE shall have the right to occupy and use the Premises for any
lawful purpose within the zoning regulations of the area. No packages, trash or
rubbish, either shipping or receiving, shall be placed or stored in the Entrance
Foyer areas or halls. LESSEE shall have the right to paint a sign identifying
the business name on the interior entrance door or interior window of the
Premises. LESSEE shall be solely responsible for maintaining in good condition
its sign and shall remove it and repair any damage caused by such removal on or
before the Expiration Date of the Original Term or Renewal Term, as applicable.
A directory sign is available on the exterior of the building for placement of a
sign provided by LESSEE. The sign must match the existing signs. Also, a
directory is located at the Main Floor elevator with a listing of building
occupants.
6. Ingress and Egress - LESSOR warrants that access to the Premises shall at all
times be available by concrete or asphalt drive, and a concrete parking lot
shall be available for the building LESSEES' customer parking. Employees of the
building LESSEES' shall utilize municipal parking lots. Delivery trucks shall
park in the spaces at the alley at the south end of the building and will not
enter the main customer parking area.
7. Repairs and Maintenance
23
<PAGE>
a. LESSEE - LESSEE shall make necessary repairs due to normal usage of interior
and interior equipment such as plumbing fixtures, lighting fixtures, electrical
outlets, and the heating & air conditioning unit maintenance. LESSEE shall
maintain and restore the Premises to the condition of the building when LESSEE
commenced occupancy, and all alterations, additions, or improvements made to or
put upon the Premises shall become the property of the LESSOR and shall remain
upon and be surrendered with the Premises as a part thereof. Notwithstanding
anything aforesaid, LESSEE shall have the right to install and remove from time
to time and at the end or earlier termination of this Lease, LESSEE's trade
fixtures and equipment and business fixtures and equipment, to include, without
limitation, lighting fixtures, office partitions, and furniture. LESSEE shall
promptly repair any damage to the Premises caused by the removal by LESSEE of
any of LESSEE's property therefrom and this covenant shall survive the
expiration or termination of this Lease.
b. LESSOR - The LESSOR shall maintain and repair the exterior of the building,
its structure, roof, the entrance foyer, elevator, parking lot, landscaping and
utility pipes, wire and lines on the Premises to the point in each case where
LESSEE begins its own use of such utility or service.
8. LESSOR's Right of Access - LESSOR, its agents, servants and employees shall
have the right to enter the Premises during business hours, with reasonable
frequency, and upon reasonable notice for the purpose of inspecting the same to
ascertain whether
24
<PAGE>
LESSEE is performing the covenants of this Lease, and during business hours or
otherwise in the event of need, under special arrangements with LESSEE for the
purpose of making required repairs, alterations, improvements or additions.
LESSOR shall be allowed to take all material into and upon the Premises that may
be required therefore without the same constituting an eviction of LESSEE in
whole or in part, and, except as otherwise provided, the rent reserved shall in
no way abate while said repairs are being made by reason of reasonable loss or
interruption of the business of LESSEE because of the execution of any such
work. LESSOR agrees to cause as little inconvenience as possible to LESSEE in
connection therewith. During the sixty (60) days preceding the expiration of
this Lease, LESSEE shall permit LESSOR or LESSOR's agents to show the Premises
to prospective tenants with reasonable frequency during business hours on
reasonable notice and to place and keep in one or more conspicuous places upon
the exterior of the Premises, not interfering with LESSEE's use of the Premises,
a notice in the usual form "To Let" and a notice in the usual form "For Sale",
which notices LESSEE shall permit to remain thereon without molestation.
9. Destruction by Fire or Other Causes, Insurance - LESSOR shall provide and
maintain adequate insurance on the Premises against loss or damage by fire,
lightning, tornado or other casualty. LESSEE shall provide all insurance
covering its contents and personalty separately. In the event of damage to or
destruction of the Premises or a portion thereof by fire, or other cause so that
25
<PAGE>
the Premises cannot in the fair estimate of either party be restored within
sixty (60) days, either party may terminate this Lease by written notice given
thirty (30) days after the event; thereafter neither LESSOR or LESSEE can have
any further rights, duties or obligations under this Lease and rents and other
sums payable by LESSEE for the remainder of the term shall wholly abate. If the
Premises can be restored in sixty (60) working days, LESSOR will undertake
immediately the repair and reconstruction of the Premises at LESSOR's expense
and will complete such work with due and reasonable diligence. During the period
commencing with the date the damage occurred and ending with completion of the
requisite repairs or reconstruction, the rent payable hereunder shall abate and
the obligation of the LESSEE to pay the same shall cease to the extent and in
proportion to the area rendered untenantable by the damage or by the work or
restoration or repair.
10. Liability Insurance - LESSEE shall at all times during the term of this
Lease carry public liability insurance covering the LESSEE's operations, which
insurance shall adequately insure against liability for personal injury or death
and property damage. Current Certificates of Insurance showing evidence of
insurance coverage shall be provided to LESSOR. LESSEE shall indemnify and hold
harmless LESSOR from and against all claims, actions, demands, judgements,
damages, liabilities and expenses suffered by LESSOR including reasonable
attorneys' fees, for death of or bodily injury to any person or for loss of,
damage to or destruction of any property arising on account of any action or
failure to act by
26
<PAGE>
LESSEE in connection with LESSEE's use of the Premises.
11. Utilities, Taxes - LESSEE shall supply heat for the Premises to maintain an
interior temperature of 34*. LESSEE shall at its own expense pay all charges for
gas, electricity and telephone utilities and services used in connection with
the Premises during the term of this Lease. LESSOR agrees that all such
utilities (including both storm and sanitary sewers) shall be available to the
Premises at the commencement date. LESSOR further covenants and agrees to
provide potable water to the Premises for use by LESSEE and its employees. In
addition, LESSOR shall pay all real estate taxes levied on the Premises.
12. Eminent Domain - If the whole or any part of the Premises shall be taken by
lawful authority for any public or quasi-public use or purpose this Lease shall,
as to the part taken, terminate on the date title shall be acquired, and the
rent reserved shall abate fairly and in proportion to the part so taken and
shall entirely abate if the entire Premises are so taken. In all cases of a
partial taking of the Premises (except a minor street widening not injurious to
the use of the Premises by LESSEE) LESSEE may, at its election, by delivering
written notice to that effect to LESSOR, terminate this Lease and vacate the
Premises, and in that event, the liability of LESSEE for performance of the
Lease shall terminate and come to an end and all rents shall abate.
13. Quiet Enjoyment - LESSOR covenants and agrees that LESSEE shall have the
quiet and peaceful enjoyment and exclusive possession of the Premises during the
term of this Lease.
27
<PAGE>
14. Covenants - The parties agree that the promises of each to the other
contained herein constitute covenants and conditions to the performance of the
other, and that a breach of one or more of such covenants and conditions shall
constitute a breach of the Lease.
15. Surrender - LESSEE shall quit and surrender the Premises at the expiration
of the term in as good order and condition as they were when LESSEE commenced to
occupancy, ordinary wear and tear, damage by fire, acts of God or other casualty
and repair and replacement obligations defaulted by LESSOR excepted.
16. Notices - Any notice given pursuant to this Lease shall be valid only if
given in writing, and shall be deemed sufficiently given if given by hand
delivery, or by registered or certified mail with sufficient postage attached.
Notices to LESSOR shall be sufficient if given or addressed to the person and
place to or at which payment of rent last preceding the time for notice had been
made and received or to:
Ellington Development Inc.
3908 North 24th Street
Quincy, Illinois 62301
Notices to LESSEE shall be sufficient if given or addressed to:
Spectrian Corporation
350 West Java Drive
Sunnyvale, California 94089
The date of any notice provided for in this Lease shall be the date of deposit
in the U.S. mails with sufficient postage if given by registered or certified
mail, or the date of actual delivery to the above address of the party to be
notified if otherwise given. The person and place to which notice may be given
may be changed from
28
<PAGE>
time to time by written notice to the other, effective five (5) days after
delivery of such notice.
17. Successors - Covenants and rights herein shall apply to, be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns.
18. Headings - Paragraph headings are used herein for identification only and
shall not in any way affect the interpretation of this Lease.
19. Integration - This Lease states the entire agreement between the parties and
replaces all prior and contemporaneous agreements documents and representations
with respect to the subject matter hereof. No alteration, modification,
termination, waiver or release, in whole or in part, shall be effective unless
in writing, signed by a duly authorized representative of each of the parties
hereto or their successors or assigns.
20. Third Party Rights - Nothing in this Lease shall be interpreted as
conferring any rights on any party other than the parties hereto.
IN WITNESS WHEREOF, The parties have hereunto set their hands this 13th day of
April, 1998
ELLINGTON DEVELOPMENT INC.
Attest: /s/ Sheila Morgan /s/ Ray C. Shortridge
------------------------ ----------------------------
Sheila Morgan, Secretary Ray C. Shortridge, President
SPECTRIAN CORPORATION
Attest: /s/ Bruce R. Wright /s/ Bruce R. Wright
------------------------ ----------------------------
Secretary Chief Financial Officer
29
<PAGE>
EXHIBIT A
300 MAINE
General Building Specifications
60' x 190' building structure of all steel, flexicore and concrete as follows:
Roof: 24 ga. galvalume standing seam panels insulated with 8"T
fiberglass insulation.
Mansard Fascia: 26 ga. Midnight Bronze painted steel panels.
Exterior Walls: Brick with steel studs, Thermax board backing and
6"T fiberglass insulation between studs.
Windows and Doors: - Exterior windows of 1" insulated glass.
- Exterior and unit entrance doors of 1/4" glass.
- All framing of bronze aluminum framing.
Interior of exterior walls, unit walls and restroom walls: Wall construction of
steel stud, 5/8" firecode drywall, taped and painted with two coats of
latex eggshell paint.
Ceilings: Ceiling height to be 8'. Ceilings to be 2 x 2 suspended
ceilings with white grid.
Floor covering: Entrance corridor to be tiled.
Electric: Electric meter for each leased unit located in Electrical Room.
Lighting provided by 2 x 4 layin fixtures with one switch and duplex outlets.
Telephone hookup available at the Electrical Room.
Heating/Air-Conditioning: Separate heating/cooling systems for each unit.
The second floor will be supplied by roof mounted electric heat pumps.
The main floor and lower level will be supplied by roof split system heat
pumps with the outdoor condensing unit on the roof, the air handling
portion within the suite.
Plumbing: Water provided by city water. 6" sanitary sewer hooked to city sewer.
Public restroom located next to the elevator on the Lower Level.
Leased Premises Suite One Specifications
Carpentry: Interior walls constructed per Exhibit B, painted with two (2)
coats of paint. Suspended ceiling in front 1,370 sq. ft. only.
Plumbing: Restroom to include one (1) water closet. One (1) sink, utility
sink and water heater provided.
Electrical: Lighting provided by 2 x 4 layin fixtures with switches
and duplex outlets installed in the front 1,370 sq. ft. Two tube,
8' fluorescent strip fixtures installed in the 1,380 sq. ft. rear area
Floor Covering: Carpet installed in the front 1,370 sq. ft. office area.
Vinyl tile installed in the rear 1,380 sq. ft. rear area.
Heating/Air Conditioning: Heating and air conditioning provided by electric
roof top air conditioners with thermostats.
30
<PAGE>
[Graphic of floor plan]
Exhibit B
31
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS, CONSOLIDATED STATEMENTS OF OPERATIONS AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000925054
<NAME> SPECTRIAN CORP /DE/
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-28-1998
<CASH> 22,758
<SECURITIES> 60,285
<RECEIVABLES> 27,695
<ALLOWANCES> 379
<INVENTORY> 17,430
<CURRENT-ASSETS> 130,731
<PP&E> 61,441
<DEPRECIATION> 27,005
<TOTAL-ASSETS> 165,166
<CURRENT-LIABILITIES> 19,599
<BONDS> 5,636
0
0
<COMMON> 147,178
<OTHER-SE> (7,247)
<TOTAL-LIABILITY-AND-EQUITY> 165,166
<SALES> 30,784
<TOTAL-REVENUES> 30,784
<CGS> 27,729
<TOTAL-COSTS> 27,729
<OTHER-EXPENSES> 9,430
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,135)
<INCOME-PRETAX> (5,240)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,240)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,240)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
