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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 June 27, 1999
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 27, 1999 there were 10,229,613 shares of the Registrant's Common
Stock outstanding.
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<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 -
June 27, 1999 and March 31, 1999 3
Condensed consolidated statements of operations and other
comprehensive income - three months ended June 27, 1999
and June 28, 1998 4
Condensed consolidated statements of cash flows -
three months ended June 27, 1999 and June 28, 1998 5
Notes to condensed consolidated financial statements 6
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
ITEM 3 - Quantitative and Qualitative Disclosures about
Market Risk 20
PART II - Other Information
ITEM 1 - Legal Proceedings 21
ITEM 4 - Submission of Matters to a Vote of Security Holders 22
ITEM 6 - Exhibits and Reports on Form 8-K 22
Signatures 23
2
<PAGE>
<TABLE>
SPECTRIAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<CAPTION>
June 27, March 31,
1999 1999
--------- ---------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 19,986 $ 26,254
Short-term investments 35,805 36,417
Accounts receivable, less allowance for doubtful
accounts of $391and $388, respectively 17,368 12,983
Inventories 20,493 20,826
Prepaid expenses and other current assets 3,303 3,464
--------- ---------
Total current assets 96,955 99,944
Property and equipment, net 25,873 28,468
--------- ---------
Total assets $ 122,828 $ 128,412
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of debt obligations $ 1,479 $ 1,603
Accounts payable 8,614 8,058
Accrued liabilities 13,909 17,884
--------- ---------
Total current liabilities 24,002 27,545
Debt obligations, net of current portion 4,747 4,899
--------- ---------
Total liabilities 28,749 32,444
--------- ---------
Stockholders' equity:
Common stock, $0.001 par value, 20,000,000 shares authorized;
11,229,613 and 11,102,333 shares issued, respectively;
10,229,613 and 10,102,333 shares outstanding, respectively 11 10
Additional paid-in capital 150,860 149,588
Treasury stock, 1,000,000 shares of common stock held (14,789) (14,789)
Accumulated other comprehensive income (loss) (403) 137
Accumulated deficit (41,600) (38,978)
--------- ---------
Total stockholders' equity 94,079 95,968
--------- ---------
Total liabilities and stockholders' equity $ 122,828 $ 128,412
========= =========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
Three months ended
----------------------
June 27, June 28,
1999 1998
-------- --------
(Unaudited)
Revenues $ 31,484 $ 30,784
Costs and expenses:
Cost of product sales 25,892 27,729
Research and development 4,877 5,954
Selling, general and administrative 4,294 3,476
-------- --------
35,063 37,159
-------- --------
Operating loss (3,579) (6,375)
Interest income, net 989 1,135
-------- --------
Loss before income taxes (2,590) (5,240)
Income taxes 32 --
-------- --------
Net loss (2,622) (5,240)
Other comprehensive income (loss):
Unrealized gain (loss) on short-term
investments (493) 108
Reclassification adjustment (47) (16)
-------- --------
Comprehensive loss $ (3,162) $ (5,148)
======== ========
Basic and diluted net loss per share $ (0.26) $ (0.48)
Shares used in computing per share amounts 10,176 10,917
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
SPECTRIAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Three months ended
----------------------------
June 27, June 28,
1999 1998
-------- --------
Cash flows from operating activities: (Unaudited)
<S> <C> <C>
Net loss $ (2,622) $ (5,240)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 3,373 2,846
Equipment retirements, net 65 --
Stock compensation expense 219 583
Changes in operating assets and liabilities:
Accounts receivable (4,385) (6,193)
Inventories 333 (2,068)
Prepaid expenses and other assets 161 3,261
Accounts payable 556 (3,875)
Accrued liabilities (3,975) (1,346)
-------- --------
Net cash used for operating activities (6,275) (12,032)
-------- --------
Cash flows from investing activities:
Proceeds of shortterm investments, net 72 7,935
Proceeds from sales of property and equipment 42 --
Purchases of property and equipment, net (884) (4,506)
-------- --------
Net cash provided by (used for) investing activities (770) 3,429
-------- --------
Cash flows from financing activities:
Repayment of debt and capital lease obligations (276) (253)
Proceeds from sales of common stock, net 1,053 154
-------- --------
Net cash provided by (used for) financing activities 777 (99)
-------- --------
Net decrease in cash and cash equivalents (6,268) (8,702)
Cash and cash equivalents, beginning of period 26,254 31,460
-------- --------
Cash and cash equivalents, end of period $ 19,986 $ 22,758
======== ========
<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 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, 1999. 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, 2000,
or any other future period.
NOTE 2: Balance Sheet Components
Balance sheet components are as follows:
June 27, March 31,
1999 1999
------- -------
(In thousands) (Unaudited)
Inventories:
Raw materials $ 7,769 $ 9,100
Work in progress 5,987 5,701
Finished goods 6,737 6,025
------- -------
$20,493 $20,826
======= =======
Property and equipment:
Machinery and equipment $58,553 $58,322
Land, building and improvements 2,722 2,736
Leasehold improvements 2,000 1,957
------- -------
63,275 63,015
Less accumulated depreciation and
amortization 37,402 34,547
------- -------
$25,873 $28,468
======= =======
Accrued liabilities:
Employee compensation and benefits $ 3,257 $ 4,672
Warranty 8,400 9,473
Other accrued liabilities 2,252 3,739
------- -------
$13,909 $17,884
======= =======
6
<PAGE>
NOTE 3: Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments 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
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 does not
currently engage in hedging activities. The Company will adopt SFAS No. 133 in
its fiscal year 2001.
NOTE 4: Short-Term Investments
The Company considers all liquid investments with an original maturity
of three months or less to be cash equivalents. The cash equivalents consisted
of commercial paper and U.S. government securities as of June 27, 1999.
The Company has classified its investments in certain debt securities
as "available-for-sale, and records such investments at fair market value, with
unrealized gains and losses reported as a separate component of stockholders'
equity. Realized gains and losses are determined using the specific
identification method. Interest income is recorded using an effective interest
rate, with the associated premium or discount amortized to interest income.
<TABLE>
As of June 27, 1999 and March 31, 1999, short-term investments
classified as available-for-sale securities were as follows (unaudited):
<CAPTION>
Amortized Unrealized Fair
As of June 27, 1999 Cost Gain (Loss) Value
------------------- -------- ------------ --------
(In thousands)
<S> <C> <C> <C>
Government bonds & notes $ 14,292 $ (100) $ 14,192
Corporate bonds & notes 40,393 (303) 40,090
-------- -------- --------
54,685 (403) 54,282
Less amounts classified as cash equivalents 18,478 (1) 18,477
-------- -------- --------
$ 36,207 $ (402) $ 35,805
======== ======== ========
Contractual maturity dates, 1 to 5 years $ 35,805
========
Amortized Unrealized Fair
As of March 31, 1999 Cost Gain (Loss) Value
-------------------- -------- ------------ --------
(In thousands)
Government bonds & notes $ 8,973 $ 81 $ 9,054
Corporate bonds & notes 48,936 56 48,992
-------- -------- --------
57,909 137 58,046
Less amounts classified as cash equivalents 21,629 -- 21,629
-------- -------- --------
$ 36,280 $ 137 $ 36,417
======== ======== ========
Contractual maturity dates, 1 to 5 years $ 36,417
========
</TABLE>
7
<PAGE>
NOTE 5: Per Share Computation
Basic net income per share is computed by dividing net income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted net income per share is computed using the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares include the effect of
stock options. For the three months ended June 27, 1999 and June 28, 1998,
common equivalent shares of 157,335 and 229,955, respectively, were not included
for the calculation of diluted net loss per share as they were considered
antidilutive.
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.
NOTE 7: Segment Information
Under the management approach, the Company has broken down its business
into two operations based upon product type, Amplifier Products and
Semiconductor Products. The Semiconductor Products operation derives virtually
all of its revenues from sales to the Amplifier operation. The Company allocates
operating expenses to these segments but does not allocate interest income and
expense. Corporate expenses are allocated to the operating segments based on
predetermined annual allocation methods. Inter-segment elimination is made in
the consolidation of the two product segments in the Company's financial
statements. Inventories and property and equipment are reported upon by
operation. No other assets and liabilities are reported separately.
The Company operated and reported its financial information as one
vertical integrated unit in fiscal 1999. Not until the commencement of fiscal
2000 did the Company measure performance by Amplifier and Semiconductor
segments. Given this, it is not practicable to report comparative information
for the prior periods as it was not available.
8
<PAGE>
June 27, 1999 (In thousands):
Semi-
Amplifier conductor Other* Total
--------- --------- ------ -----
Revenue, external $ 31,471 $ 13 $ -- $ 31,484
Revenue, inter-segment -- 4,223 (4,223) --
Amortization & depreciation 1,372 628 1,373 3,373
Pre-tax income (loss) (4,034) (272) 1,684 (2,622)
Inventories 14,713 5,780 -- 20,493
Property & equipment, net 6,955 4,856 14,062 25,873
* Data in the other column included corporate elimination of inter-segment
revenue, expenses, pre-tax income and assets that were not allocated to the
operating sements.
June 28, 1998 (In thousands):
Total
--------
Revenue $ 30,784
Amortization & depreciation 2,846
Pre-tax income (loss) (5,240)
Inventories 17,430
Property & equipment, net 34,436
Revenue from unaffiliated customers by geographic region were as
follows:
Three months Fiscal year
ended ended
June 27, 1999 March 31, 1999
------------- --------------
Canada 54% 57%
United States 8% 16%
Europe 24% 13%
Korea 14% 14%
------------ ------------
Total 100% 100%
============ ============
9
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Certain statements in this "Management's 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 second paragraph of "Overview" regarding outsourcing and in the fourth
paragraph regarding the impact on the Company of a loss of a major OEM customer
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" concerning renewal of the revolving line
of credit and statements regarding the anticipated spending for capital
additions for the remainder of fiscal 2000 and the sufficiency of the Company's
available resources to meet working capital and capital expenditure
requirements; 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.
Overview
The Company designs, manufactures and markets highly linear single
carrier and multicarrier power amplifiers that support a broad range of
worldwide analog and digital wireless transmissions standards, including AMPS,
TDMA, CDMA, TACS 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 Networks ("Nortel").
During fiscal 1999, the Company transitioned the assembly of its higher volume
amplifier products to a contract manufacturer but continues to operate its own 4
inch wafer fabrication facility and manufacture certain of its low-volume
products. As a result of its wafer fabrication facility and other manufacturing
infrastructure, the Company has a higher level of fixed costs and is dependent
upon substantial revenue to achieve profitability. In fiscal 1999, the fourth
quarter of fiscal 1998 and the first quarter of fiscal 1997, product orders fell
sharply resulting in substantial losses in those fiscal periods. There can be no
assurance that the Company will not experience such fluctuation in the future.
During fiscal 1999, the Company utilized a contract manufacturer to
produce its high volume amplifier products on a turnkey basis but continues to
assemble, test, package and ship its lower volume amplifier products at its
manufacturing facilities located in Sunnyvale, California. The reasons for
utilizing a contract manufacturer were to decrease the Company's manufacturing
overhead and costs of its products, increase flexibility to respond to
fluctuations in product demand and to leverage the strengths of the contract's
manufacturer focus on high volume, high quality manufacturing. The transitioning
costs of manufacturing activities to the contract manufacturer in fiscal 1999
were higher than the savings from costs of products, which adversely affected
the Company's gross margin for fiscal 1999. The Company does not expect that it
will achieve significant cost savings, if any, from outsourcing certain of its
manufacturing activities until late in fiscal 2000.
The development and pilot production of the Company's latest cellular
multicarrier product platform was completed in fiscal 1999. It is anticipated
that this product family will move into full production during fiscal 2000.
During the three months ended June 27, 1999, Nortel and LG Information
& Communications ("LGIC") accounted for approximately 83% and 12% of revenues,
respectively. For the three months ended June 28, 1998, Nortel and Qualcomm Inc.
("QUALCOMM") accounted for approximately 78% 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 Nortel or any other major OEM
customer, or if orders by Nortel 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
10
<PAGE>
financial market turmoil and an 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. Furthermore, 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, for this and other reasons LGIC may reduce future purchases of the
Company's products.
The Company's semiconductor 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 began selling 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 Nortel. 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 27, June 28,
1999 1998
----- -----
(Unaudited)
Revenue 100.0% 100.0%
----- -----
Cost and expenses:
Cost of product sales 82.2 90.1
Research and development 15.5 19.3
Selling, general and administrative 13.6 11.3
----- -----
Total costs and expenses 111.3 120.7
----- -----
Operating loss (11.3) (20.7)
Interest income, net 3.1 3.7
----- -----
Loss before income taxes (8.2) (17.0)
Income taxes 0.1 --
----- -----
Net loss (8.3%) (17.0%)
===== =====
Gross margin on sales 17.8% 9.9%
Revenues. The Company's revenues increased 2% to $31.5 million for the
three months ended June 27, 1999 from $30.8 million for the three months ended
June 28, 1998. The increase in revenue was primarily due to higher demands for
HPA and GSM 2G combined with new products, WLL and MCPA. This was partially
offset by softening demand for TDMA products.
Cost of Sales. Cost of Sales consists primarily of turnkey amplifier
costs for the Company's higher volume products, internal amplifier assembly and
test costs for its lower volume products and new products, raw materials,
11
<PAGE>
RF semiconductor fabrication costs, overhead and warranty costs. The Company's
cost of sales decreased by 7% to $25.9 million for the three months ended June
27, 1999 from $27.7 million for the three months ended June 28, 1998. Gross
margin on sales was 18% for the three months ended June 27, 1999 as compared to
10% for the three months ended June 28, 1998. The increase in gross margin
reflects reduced operations spending and product cost reduction initiatives
being aggressively pursued to improve margins in the face of declining 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 decreased by 18% to
$4.9 million in the three months ended June 27, 1999 from $6.0 million in the
three months ended June 28, 1998. The decrease in R&D expenses reflects reduced
expensed materials costs due to the completion of and rolling out the new MCPA
products in fiscal 2000.
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 increased by 24% to $4.3 million for the three months
ended June 27, 1999 as compared to the three months ended June 28, 1998.
Increases in SG&A expenses are principally due to added maintenance and supports
for the new ERP system.
Interest Income (Expense), Net. Interest income, net for the three
months ended June 27, 1999 was $1.0 million compared to $1.1 million for the
three months ended June 28, 1998. The decrease in net interest income was the
result of interest income earned on substantially lower cash balances.
Income Taxes. Due to the losses incurred in the first quarter of fiscal
2000, the Company did not record an income tax expense except the minimum state
income tax expense for the three months ended June 27, 1999.
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 $6.3 million for the three months ended
June 27, 1999 compared to cash used by operations for the three months ended
June 28, 1998 of $12.0 million. The decline in cash used by operations in the
three months ended June 27, 1999 was principally a result of an increase in
Accounts Receivable in line with revenue growth and reductions in accrued
liabilities.
As of June 27, 1999, the Company had working capital of $73.0 million
including $55.8 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.
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 27, 1999. 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 then
projected future facilities expansion.
Additions to property and equipment were net of $0.9 million and $4.5
million for the three months ended June 27, 1999 and June 28, 1998,
respectively. Capital additions for the three months ended June 27, 1999
included 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 $10 million over the
next twelve months for capital additions primarily to support manufacturing test
requirements, development projects and facilities expansion. Based on the
Company's current working capital position, the cash flows the Company expects
to generate from the remainder of fiscal 2000 operations 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
12
<PAGE>
months. Cash requirements for future periods will depend on the Company's
profitability, timing and level of capital expenditures, working capital
requirements and rate of growth.
Factors Affecting Future Operating Results
Customer Concentration; Dependence on Nortel. The wireless
infrastructure equipment market is dominated by a small number of large original
equipment manufacturers ("OEMs"), including Ericsson, Lucent, Motorola, Nortel
and Siemens AG. The Company's revenues are derived primarily from sales to a
limited number of these OEMs, in particular, Nortel. During the three months
ended June 27, 1999, Nortel, Nortel Matra, and LGIC accounted for approximately
59%, 24% and 13% of revenues, respectively. During the three months ended June
28, 1998, Nortel, QUALCOMM, and Nortel Matra accounted for approximately 66%,
14% and 12% of revenues, respectively. Furthermore, a substantial portion of
revenues from Nortel in fiscal 1999, fiscal 1998 and fiscal 1997 resulted from
sales of a limited number of the Company's products. 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.
The Company and Nortel have an agreement, renegotiated annually, pursuant to
which Nortel commits to purchase a certain volume of its annual power amplifier
requirements for specified prices from the Company. There can be no assurance
that Nortel will continue to enter into contracts with the Company in the future
or otherwise agree to purchase the same or similar levels of its power amplifier
requirements from the Company or purchase its power amplifier requirements at
the same or similar pricing. Any reduction in the level of purchases of the
Company's amplifiers by Nortel, 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 Nortel or any other major OEM customer, or if orders by Nortel 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 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 Nortel and other
major OEM customers in future periods, which could 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; changes in inventory
levels; and, most recently, 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. Reduced demand for wireless
infrastructure equipment in fiscal 1999 and the latter part of fiscal 1998,
caused significant fluctuations in the Company's product sales during that
period of time as a result of softening demand in the TDMA, GSM and CDMA PCS
markets. There can be no assurance that the Company will not experience such
fluctuations in the future, and, in fact, the Company experienced a significant
reduction in product revenue in fiscal 1999. The Company does not believe that
demand for its products will return to fiscal 1998 levels during fiscal 2000, if
at all, or that the Company will have
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the revenue levels and growth it experienced in fiscal 1998 during fiscal 2000,
if at all. 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 all 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 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 Company's
failure to reach an agreement with Nortel 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, continued softening of demand in the TDMA, GSM or PCS
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, including the
Company's new multicarrier products, 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
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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 turnkey amplifier assemblies, subassemblies, cast housings,
printed circuit boards and specialized RF components. The Company purchases
these products, components and services on a purchase order basis, 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 began outsourcing assembly of some of its higher volume power amplifiers
to a contract manufacturer during the third quarter of fiscal 1999. The Company
issues non-cancelable purchase orders to the contract manufacturer 60 days in
advance for requested deliverable. The Company's reliance on sole sources for
certain components and its migration to an outsourced, turnkey manufacturing
strategy entail 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 contract manufacturers, the Company
would be required to requalify the components with each new vendor or contract
manufacturer, respectively. Any inability of the Company to obtain timely
deliveries of components or assembled 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
some 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
92%, 75% and 84% for the three months ended June 27, 1999, the three months
ended June 28, 1998 and fiscal 1999, 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, the 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,
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consequently, on the Company's business, financial condition and results of
operations. The Company anticipates that the current turmoil in Asian financial
markets and the deterioration of the underlying economic conditions in certain
Asian countries may 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 International Monetary Fund (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, financial condition and results of operations.
Reliance upon Growth of Wireless Services. Sales of power amplifiers to
wireless infrastructure equipment suppliers have in the past accounted, and are
expected in the future to account, for substantially all of the Company's
product sales. Demand for wireless infrastructure equipment is driven by demand
for wireless service. Although demand for power amplifiers has grown in recent
years, if demand for wireless services fails to increase or increases more
slowly than the Company or its OEM customers currently anticipate, the Company's
business, financial condition and results of operations would be materially and
adversely affected.
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 Nortel, 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, 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 29 United States patents, and has 18 United States patent
applications pending, including 5 that have been allowed but not yet formally
issued. The Company also has been awarded 4 foreign patents and has 15 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
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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.
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 deregulation of
international communications industries along with 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.
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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 liabilities under certain
statutes. The imposition of such liabilities could materially adversely affect
the Company's business, financial condition and results of operations.
Management of Growth; Dependence on Key Personnel. 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 life insurance on any of its key technical personnel. During
the three months ended June 27, 1999, the Executive Vice President, Finance and
Administration, Chief Financial Officer and Secretary resigned. The Company has
contracted with an executive recruiting firm to search for qualified candidates.
In the interim, the Company has elected Henry C. Montgomery, an experienced
financial professional, as its Executive Vice President, Finance and
Administration, Chief Financial Officer and Secretary. The competition for such
personnel is intense. The Company has experienced loss of key employees and such
losses 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 has
fluctuated significantly in the past. During fiscal 1998, the market price
fluctuated from a low of $10.75 to a high of $66.375. During fiscal 1999, the
market price of the Company's Common Stock fluctuated from a low of $8 to a high
of $20.675. On August 6, 1999, the last reported sale price of the Common Stock
as reported on the NASDAQ National Market was $11.375.
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
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litigation could have a material adverse effect on the Company's business,
financial condition and 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.
Year 2000 Readiness
Many installed computer programs were written using a two-digit date
field rather than four digit fields to define the applicable year. Such computer
programs utilizing a two digit date fields 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 in 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 taken steps to address the Year 2000 Issue in the
following three areas: 1) the Company's internal systems, 2) the Company's
products and 3) the Company's suppliers. All networks, desktops, application
servers and operating systems have been found compliant and/or remediation is
complete. With respect to business applications software, the Company installed
a new enterprise wide computer software system in July 1998 that has been tested
and is Year 2000 compliant. The Company also initiated a project in September
1998 to assess the extent of the Year 2000 Issue in the remaining business
systems and in the embedded systems used its product development and
manufacturing operations. The remaining business systems have been assessed and
remediation is ninety-nine percent complete. Until very recently the Company's
products did not contain embedded systems to which Year 2000 compliance would be
necessary. The Company's latest multicarrier product does include date stamp
functionality and has been determined to be Year 2000 compliant. All of the new
products are being manufactured using only hardware, software, or firmware that
is currently Year 2000 compliant. In addition, certain of the materials and
supplies critical to production and delivery of the Company's products are
furnished by a limited number of suppliers, and in some cases a sole supplier.
Surveys have been sent to all suppliers. Key suppliers to the Company and its
contract manufacturer, GSS/Array Technology, have been identified and are being
targeted for follow-up audit and development of contingency plans as
appropriate. At this time, the Company estimates that the costs of the Year 2000
Issue assessment and required remedial work will be less than $350,000 in total.
Any necessary remedial work is planned to be completed by the end of September
1999.
The Company believes that failure to adequately complete all remedial
work necessary to resolve the Year 2000 Issue could have a material impact on
operating expenses, but that the effect on revenues would not be material. The
most likely effect of failures related to the Year 2000 Issue would be:
1) Business systems--Overtime work required of Company employees and
the temporary use of outside resources, to repair failed software and process
transactions manually until repairs are completed.
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2) Embedded systems--Overtime work required of Company employees to
shift work from machines and processes with failures to machines that continue
to operate properly, and the temporary use of outside resources to repair failed
machines and processes. Also, there could be delays in product delivery where a
product is dependent on a single production line.
3) Company products--Overtime work required of Company employees to
deliver corrections to any new or existing products.
4) Contract Manufacturer--Spectrian will reactivate its Sunnyvale
production facility to bridge the shortfall in the event the contract
manufacturer cannot produce and deliver products. A predefined quantity of
buffer stock will offset the Sunnyvale facility's ramp up period.
The Company believes these failures to be unlikely. Periodic updates
regarding the Year 2000 status are provided to both the Company's executive
staff and the Audit Committee of the Board of Directors. The Company also
recognizes the need for contingency planning, and expects to have such plans in
place by September 1999. These plans could include stockpiling of components or
semi-finished products to avoid product shipment delays.
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk
The Company develops products in the United States and market its
products in North America, Europe and the Asia-Pacific region. Thus, the
financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. As all
sales are currently made in U.S. dollars, a strengthening of the dollar could
make the Company's products less competitive in foreign markets.
The Company's exposure to market rate risk for changes in interest
rates relate primarily to its investment portfolio. The Company does not hold
derivative financial instruments in its investment portfolio. The Company places
its investments with high quality institutions and limits the amount of credit
exposure to any one issuer. The Company is averse to principal loss and ensures
the safety and preservation of its invested funds by limiting default, market
and reinvestment risk. The Company classifies its short-term investments as
"fixed-rate" if the rate of return on such instruments remains fixed over their
term. These "fixed-rate" investments include fixed-rate U.S. government
securities and corporate obligations with contractual maturity dates ranging
from 1 to 5 years. The table below presents the amounts and related weighted
interest rates of our short-term investments at June 27,1999 and March 31, 1999.
June 27, March 31,
1999 1999
------- -------
Average fixed interest rate 6.3% 6.6%
Amortized cost $36,207 $36,280
Fair value $35,805 $36,417
------- -------
Contractual maturity dates 1 to 5 years $35,805 $36,417
------- -------
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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 July 15, 1999, 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 June 15, 1999. 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 W. Shaner and Robert C. Wilson 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 8,538,576 606,879
James A. Cole 8,543,196 602,259
Martin Cooper 8,542,296 603,159
Charles D. Kissner 8,549,296 596,159
Robert W. Shaner 8,501,920 643,535
Robert C. Wilson 8,550,096 595,359
2. The amendment of the 1994 Director Option Plan to increase the number
of shares of Common Stock reserved for issuance thereunder by 60,000
shares:
FOR: 7,676,843 AGAINST: 1,295,520 ABSTAIN: 173,092 NON-VOTES: -0-
3. The amendment of the 1992 Stock Plan to increase the number of shares
of Common Stock reserved for issuance thereunder by 450,000:
FOR: 5,623,769 AGAINST: 3,349,621 ABSTAIN: 172,065 NON-VOTES: -0-
4. The ratification of the appointment of KPMG LLP as independent
accountants of the Company for the fiscal year ending March 31, 2000:
FOR: 9,109,218 AGAINST: 26,010 ABSTAIN: 10,227 NON-VOTES: -0-
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
22
<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: August 10, 1999
SPECTRIAN CORPORATION
(Registrant)
/S/ HENRY C. MONTGOMERY
--------------------------------------------
Henry C. Montgomery
Executive Vice President, Finance and
Administration, Chief Financial Officer and
Secretary (Principal Financial and
Accounting Officer)
INDEX TO EXHIBITS
Sequentially
Exhibits Numbered Page
-------- -------------
27.1 Financial Data Schedule 24
23
<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-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-27-1999
<CASH> 19,986
<SECURITIES> 35,805
<RECEIVABLES> 17,759
<ALLOWANCES> 391
<INVENTORY> 20,493
<CURRENT-ASSETS> 96,955
<PP&E> 63,275
<DEPRECIATION> 37,402
<TOTAL-ASSETS> 122,828
<CURRENT-LIABILITIES> 24,002
<BONDS> 4,747
0
0
<COMMON> 136,082
<OTHER-SE> (42,003)
<TOTAL-LIABILITY-AND-EQUITY> 165,166
<SALES> 31,484
<TOTAL-REVENUES> 31,484
<CGS> 25,892
<TOTAL-COSTS> 25,892
<OTHER-EXPENSES> 9,171
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (989)
<INCOME-PRETAX> (2,590)
<INCOME-TAX> 32
<INCOME-CONTINUING> (2,622)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,622)
<EPS-BASIC> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
