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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 December 27, 1998
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number: 0-24360
SPECTRIAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0023003
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
350 West Java Drive
Sunnyvale, California 94089
(Address of principal executive offices)
Telephone Number (408) 745-5400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of December 27, 1998 there were 10,343,433 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 -
December 27, 1998 and March 31, 1998 3
Condensed consolidated statements of operations -
three months and nine months ended December 27, 1998 4
and December 28, 1997
Condensed consolidated statements of cash flows -
nine months ended December 27, 1998 and December 28, 1997 5
Notes to condensed consolidated financial statements 6
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
ITEM 3 - Quantitative and Qualitative Disclosures about
Market Risk
PART II - Other Information
ITEM 1 - Legal Proceedings 20
ITEM 6 - Exhibits and Reports on Form 8-K 21
Signatures 22
2
<PAGE>
<TABLE>
SPECTRIAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
<CAPTION>
December 27, March 31,
1998 1998
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 21,364 $ 31,460
Short-term investments 49,593 68,128
Accounts receivable, less allowance for doubtful
accounts of $385 and $376, respectively 19,008 21,123
Inventories 16,503 15,362
Prepaid expenses and other current assets 4,793 6,202
------------- -------------
Total current assets 111,261 142,275
Property and equipment, net 31,529 32,776
------------- -------------
$ 142,790 $ 175,051
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of debt obligations $ 1,553 $ 1,360
Accounts payable 8,241 10,456
Accrued liabilities 9,309 12,981
------------- -------------
Total current liabilities 19,103 24,797
Debt obligations, net of current portion 5,020 5,912
------------- -------------
Total liabilities 24,123 30,709
------------- -------------
Stockholders' equity:
Common stock, $0.001 par value, 20,000,000 shares authorized;
11,019,333 and 10,904,077 shares issued, respectively;
10,343,433 and 10,904,077 shares outstanding, respectively. 10 10
Additional paid-in capital 148,844 146,827
Treasury stock, 675,900 shares of common stock (9,709) --
Deferred compensation expense -- (609)
Accumulated other comprehensive income 261 121
Accumulated deficit (20,739) (2,007)
------------- -------------
Total stockholders' equity 118,667 144,342
------------- -------------
$ 142,790 $ 175,051
============= =============
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
SPECTRIAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<CAPTION>
Three months ended Nine months ended
---------------------------- ----------------------------
December 27, December 28, December 27, December 28,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 20,723 $ 47,158 $ 78,376 $ 141,165
------------- ------------- ------------- ---------------
Costs and expenses:
Cost of sales 21,374 33,702 69,731 100,233
Research and development 7,242 5,074 19,745 13,455
Selling, general and administrative 3,263 3,429 10,890 9,936
------------- ------------- ------------- ---------------
31,879 42,205 100,366 123,624
------------- ------------- ------------- ---------------
Operating income (loss) (11,156) 4,953 (21,990) 17,541
Interest income, net 862 1,429 3,258 2,006
Other income, net -- -- -- 1,530
------------- ------------- ------------- ---------------
Income (loss) before income taxes (10,294) 6,382 (18,732) 21,077
Income taxes -- -- -- 1,988
------------- ------------- ------------- ---------------
Net income (loss) $ (10,294) $ 6,382 $ (18,732) $ 19,089
============= ============= ============= ===============
Net income (loss) per share
Basic $ (0.98) $ 0.59 $ (1.75) $ 2.00
Diluted $ (0.98) $ 0.56 $ (1.75) $ 1.83
Shares used in computing per share amounts:
Basic 10,466 10,744 10,702 9,531
Diluted 10,466 11,491 10,702 10,423
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
SPECTRIAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<CAPTION>
Nine months ended
---------------------------------
December 27, December 28,
1998 1997
---- -----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (18,732) $ 19,089
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 10,020 6,913
Loss on disposal of equipment 739 --
Stock compensation expense 1,647 --
Tax benefit associated with stock options -- 1,378
Changes in operating assets and liabilities:
Accounts receivable 2,115 (19,281)
Inventories (1,141) (4,405)
Prepaid expenses and other assets 1,409 760
Accounts payable (2,215) 5,796
Accrued liabilities (3,672) 3,704
-------------- --------------
Net cash provided by (used for) operating activities (9,830) 12,424
-------------- --------------
Cash flows from investing activities:
Purchase of short-term investments (57,630) (102,843)
Proceeds from sale of short-term investments 76,306 5,048
Purchase of property and equipment (9,535) (11,639)
Proceeds from sale of subsidiary -- 4,016
-------------- --------------
Net cash provided by (used for) investing activities 9,141 (105,418)
-------------- --------------
Cash flows from financing activities:
Repayment of debt and capital lease obligations (698) (1,264)
Repurchase of common stock (9,709) --
Proceeds from issuances of common stock, net 1,000 90,735
-------------- --------------
Net cash provided by (used for) financing activities (9,407) 89,471
-------------- --------------
Net decrease in cash and cash equivalents (10,096) (3,523)
Cash and cash equivalents, beginning of period 31,460 6,240
============== ==============
Cash and cash equivalents, end of period $ 21,364 $ 2,717
============== ==============
<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 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:
December 27, March 31,
1998 1998
---------------- ----------------
(In thousands)
Inventories:
Raw materials $ 7,709 $ 7,395
Work in progress 6,764 5,538
Finished goods 2,030 2,429
---------------- ----------------
$16,503 $15,362
================ ================
Property and equipment
Machinery and equipment $57,942 $51,091
Land, building and improvements 2,750 2,829
Furniture and fixtures 1,420 1,382
Leasehold improvements 1,873 1,633
---------------- ----------------
63,985 56,935
Less accumulated depreciation and
amortization 32,456 24,159
---------------- ----------------
$31,529 $32,776
================ ================
Accrued liabilities:
Employee compensation and benefits $ 2,737 $ 2,958
Warranty 4,681 7,326
Other accrued liabilities 1,891 2,697
---------------- ----------------
$ 9,309 $12,981
================ ================
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 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 component of other comprehensive
income. Interest income is recorded using an effective interest rate, with the
associated premium or discount amortized to interest income.
As of December 27, and March 31, 1998, cash equivalents and short-term
investments classified as available-for-sale securities were as follows:
December 27, March 31,
1998 1998
---------------- --------------
(In thousands)
Commercial paper $ 55,389 $ 63,341
U.S. government securities 12,124 28,158
---------------- --------------
$ 67,513 $ 91,499
================ ==============
As of December 27, and March 31, 1998 the estimated fair value of each
investment approximated the amortized cost and, therefore, there were no
significant unrealized gains or losses. At December 27, and March 31, 1998 all
securities held were due in less than one year and were classified as follows:
December 27, March 31,
1998 1998
---------------- --------------
(In thousands)
Cash equivalents $ 17,921 $ 23,371
Short-term investments 47,592 68,128
---------------- --------------
$ 67,513 $ 91,499
================ ==============
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. For the three months and nine months ended December 27, 1998, common
equivalent shares were not included for the calculation of diluted EPS as they
were considered antidilutive due to the net loss the Company experienced in
those periods.
7
<PAGE>
<TABLE>
A reconciliation of basic and diluted earnings per share calculations follows:
(In thousands except per share data)
<CAPTION>
Three months ended Three months ended
December 27, 1998 December 28, 1997
---------------------------------- ----------------------------------
Net Per Share Net Per Share
Loss Shares Amount Income Shares Amount
----------- ---------- ----------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Basic $(10,294) 10,466 $(0.98) $ 6,382 10,744 $ 0.59
Effect of dilutive securities -- -- -- -- 747 --
----------- ---------- ----------- ------------ --------- ------------
Diluted $(10,294) 10,466 $(0.98) $ 6,382 11,491 $ 0.56
=========== ========== =========== =========== ========= ============
Nine months ended Nine months ended
December 27, 1998 December 28, 1997
---------------------------------- ----------------------------------
Net Per Share Net Per Share
Loss Shares Amount Income Shares Amount
----------- ---------- ----------- ------------ --------- ------------
Basic $(18,732) 10,702 $(1.75) $ 19,089 9,531 $ 2.00
Effect of dilutive securities -- -- -- -- 892 --
----------- ---------- ----------- ------------ --------- ------------
Diluted $(18,732) 10,702 $(1.75) $ 19,089 10,423 $ 1.83
=========== ========== =========== =========== ========= ============
</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 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, 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 original
equipment manufacturers ("OEMs") in the wireless infrastructure equipment
market, in particular Northern Telecom Limited ("Northern Telecom"). Prior to
the third quarter of fiscal 1998, the Company pursued a strategy of vertical
integration in both its design and manufacturing processes. During the third
quarter of fiscal 1998 the Company began outsourcing some of its higher volume
printed circuit board sub-assemblies on a turnkey basis. During the second
quarter of fiscal 1999, the Company made a decision to outsource its higher
volume single channel power amplifiers on a turnkey basis from an offshore
manufacturer and shipped its first outsourced amplifier units in the third
quarter of fiscal 1999. The Company anticipates that this change in
manufacturing strategy will eventually have a favorable effect on its variable
versus fixed manufacturing cost ratio. However, there can be no guarantee that
the shift to offshore turnkey manufacturing will have a favorable effect on the
Company's gross margins. Even if the Company successfully outsources some of its
manufacturing operations, the Company will continue to operate its own 4-inch
wafer fabrication facility and will incur a high level of fixed costs connected
to that facility. As a result, the Company will continue to depend upon
substantial manufacturing volume to generate sufficient revenue to achieve
profitability. In the first three quarters of fiscal 1999 and the fourth quarter
of fiscal 1998, 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 three quarters of fiscal
1999 and the fourth quarter of fiscal 1998 reflects the impact of fluctuations
in demand due to the softening demand in the TDMA and GSM markets and delays in
build-out of the Korean PCS systems due to the unstable Asian financial markets
and general economic conditions in Korea and other countries. Based on these
factors, the Company anticipates lower product revenues over the next two to
three quarters as compared to the average revenues realized during the first
three quarters of fiscal 1998 and the Company anticipates that revenues for
fiscal 1999 and possibly fiscal 2000 will be lower than revenues for fiscal
1998.
During the nine months ended December 27, 1998, Northern Telecom,
Nortel Matra Communications ("Nortel Matra"), an affiliate of Northern Telecom,
QUALCOMM Incorporated ("QUALCOMM"), and LG Information and Communications
Limited ("LGIC") accounted for approximately 64%, 13%, 10% and 10% of revenues,
respectively. During fiscal 1998, Northern Telecom, Nortel Matra and LGIC
accounted for approximately 57%, 22% and 14% of revenues, respectively. The
Company's business, financial condition and results of operations
9
<PAGE>
have been materially adversely affected in the past by anticipated orders
failing to materialize and by deferrals or cancellations of orders as a result
of changes in OEM requirements. If the Company were to lose Northern Telecom or
any other major OEM customer, or if orders by Northern Telecom or any other
major OEM customer were to otherwise materially decrease either in unit quantity
or in price, the Company's business, financial condition and results of
operations would be materially adversely affected. In addition, the recent
financial market turmoil and economic downturn in Korea may have a material
adverse effect on the Company's sales of its products to LGIC, an OEM based in
Korea. In addition, because the Company's products are priced in U.S. dollars,
the currency instability in the Korean and other 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 currencies,
and, therefore, LGIC or other OEMs may reduce future purchases of the Company's
products.
The Company's vertical integration strategy in its semiconductor
operations entails a number of risks, including a high level of fixed and
variable costs, the management of complex processes, dependence on a single
source of supply and a strict regulatory environment. During periods of low
demand, high fixed wafer fabrication costs are likely to have a material adverse
effect on the Company's operations. In addition, the Company's strategy of
frequently introducing and rapidly expanding the manufacture of new products to
meet evolving OEM customer and wireless service provider needs has caused the
Company to experience high materials and manufacturing costs, including high
scrap and material waste, significant material obsolescence, labor
inefficiencies, inefficient material procurement and an inability to realize
economies of scale.
The market for the Company's products is becoming increasingly
competitive. The Company sells some of its power amplifier products in South
Korea, as well as directly to cellular service providers in other countries,
where its competitors are already established as suppliers. In addition, the
Company competes with at least one other independent amplifier manufacturer for
some of the product business received from Northern Telecom. This competition
has resulted in, and will continue to result in, reduced average selling prices
for the Company's products, which accordingly will negatively impact gross
margins.
Results of Operations
<TABLE>
The following table sets forth for the periods indicated certain
statement of operations data of the Company expressed as a percentage of total
revenues and gross margin on sales.
<CAPTION>
Three months ended Nine months ended
December 27, December 28, December 27, December 28,
1998 1997 1998 1997
---- ---- ---- ----
Revenues 100.0% 100.0% 100.0% 100.0%
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Costs and expenses:
Cost of sales 103.1 71.5 89.0 71.0
Research and development 34.9 10.8 25.2 9.5
Selling, general and administrative 15.8 7.2 13.9 7.0
----------------------------- -----------------------------
Total costs and expenses 153.8 89.5 128.1 87.5
----------------------------- -----------------------------
Operating income (loss) (53.8) 10.5 (28.1) 12.5
----------------------------- -----------------------------
Interest income, net 4.1 3.0 4.2 1.4
Other income -- -- -- 1.0
----------------------------- -----------------------------
Income (loss) before income taxes (49.7) 13.5 (23.9) 14.9
Income taxes -- -- -- 1.4
----------------------------- -----------------------------
Net income (loss) (49.7)% 13.5% (23.9)% 13.5%
============================= =============================
Gross margin on sales (3.1)% 28.5% 11.0 % 29.0%
</TABLE>
Revenues. The Company's revenues decreased by 56% to $20.7 million for
the three months ended December 27, 1998 from $47.2 million for the three months
ended December 28, 1997. The Company's revenues decreased by
10
<PAGE>
44% to $78.4 million for the nine months ended December 27, 1998 from $141.2
million for the nine months ended December 28, 1997. The decrease in revenues
for both the three months and nine months ended December 27, 1998 when compared
with the same periods of a year ago reflects decreased demand for GSM, TDMA and
Korean CDMA PCS products.
Cost of Sales. Cost of sales consists primarily of raw materials, RF
semiconductor fabrication costs, amplifier assembly and test costs (including
turnkey assembly services), overhead and warranty costs. The Company's cost of
sales decreased by 37% to $21.4 million for the three months ended December 27,
1998 from $33.7 million for the three months ended December 28, 1997. The
Company's cost of sales decreased by 30% to $69.7 million for the nine months
ended December 27, 1998 from $100.2 million for the nine months ended December
28, 1997.
A gross margin loss on sales of 3.1% was incurred for the three months
ended December 27, 1998 as compared to a gross margin profit of 28.5% for the
three months ended December 28, 1997. Gross margin profit on sales was 11.0% for
the nine months ended December 27, 1998 as compared to 29.0% for the nine months
ended December 28, 1997. The decline in gross margin for the three months and
nine months ended December 27, 1998 primarily reflect insufficient absorption of
fixed costs at the lower shipment volume levels and 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 43% to
$7.2 million in the three months ended December 27, 1998 from $5.1 million in
the three months ended December 28, 1997. The Company's R&D expenses increased
by 46% to $19.7 million in the nine months ended December 27, 1998 from $13.5
million in the nine months ended December 28, 1997. The increase in R&D spending
in the three months ended December 27, 1998 reflects higher R&D headcount with
its associated expenses, material expenditures for the prototype phase of
several new products and increased investment in semiconductor R&D activities.
R&D expenses as a percentage of revenues increased to 34.9% in the three months
ended December 27, 1998 from 10.8% for the three months ended December 28, 1997,
reflecting substantially lower revenue levels and higher absolute dollar
spending in the three months ended December 27, 1998. R&D expenses as a
percentage of revenues increased to 25.2% in the nine months ended December 27,
1998 from 9.5% for the nine months ended December 28, 1997, also reflecting
substantially lower revenue levels and higher absolute dollar spending in the
nine months ended December 27, 1998.
Selling, General and Administrative. Selling, general and
administrative ("SG&A") expenses include compensation and benefits for sales,
marketing, senior management and administrative personnel, commissions paid to
independent sales representatives, professional fees, information systems costs
and other expenses. The Company's SG&A expenses decreased by 4.8% to $3.3
million for the three months ended December 27, 1998 from $3.4 million for the
three months ended December 28, 1997. The decline in SG&A spending for the three
months ended December 27, 1998 was the result of lower outside commissions
earned on lower product revenues and was partially offset by increases in
depreciation expense and support costs related to upgrading the Company's
internal information systems. The Company's SG&A expenses increased to $10.9
million for the nine months ended December 27, 1998 from $9.9 million for the
nine months ended December 28, 1997. SG&A expenses as a percentage of revenues
increased to 15.7% for the three months ended December 27, 1998 from 7.2% for
the three months ended December 28, 1997 and increased to 13.9% for the nine
months ended December 27, 1998 from 7.0% for the nine months ended December 28,
1997. The increase of SG&A expenses as a percentage of sales was primarily due
to substantially lower revenue levels when compared to the same periods of a
year ago.
Interest Income, net. Interest income, net for the three months ended
December 27, 1998 was $862,000 compared to net interest income of $1.4 million
for the three months ended December 28, 1997. The decrease in net interest
income for the three months ended December 27, 1998 from the same period of a
year ago was the result of lower interest earned due to lower cash balances.
Interest income increased to $3.3 million for the nine months ended December 27,
1998 from $2.0 million for the nine months ended December 28, 1997. The increase
in net interest income for the nine months ended December 27, 1998 was
attributable to interest income earned on substantially higher cash balances and
short-term investments as the result of the investment of the proceeds of the
Company's August 1997 public offering.
11
<PAGE>
Other Income, net. Other income of $1.5 million for the nine months
ended December 28, 1997 represented the net gain realized from the cash sale of
the Company's wholly owned subsidiary, AMT, to the management group and
employees of AMT in April 1997. No other expense or other income was recorded
during the nine months ended December 27, 1998.
Income Taxes. Due to the losses incurred in the first three quarters of
fiscal 1999, the Company did not record an income tax expense for the nine
months ended December 27, 1998.
Factors Affecting Future Operating Results
Customer Concentration. The wireless infrastructure equipment market is
dominated by a small number of large original equipment manufacturers ("OEMs"),
including Alcatel Network Systems, Inc., LM Ericsson Telephone Company
("Ericsson"), Hyundai Electronics Industries Co., Ltd., LGIC, Lucent
Technologies, Inc. ("Lucent"), Motorola Corporation ("Motorola"), NEC America,
Inc. ("NEC"), Northern Telecom, Nortel Matra, Nokia OY ("Nokia"), QUALCOMM,
Samsung Electronics Co., Ltd., and Siemens AG ("Siemens"). The Company's
revenues are derived primarily from sales to a limited number of these OEMs.
During the three months ended December 27, 1998, Northern Telecom, Nortel Matra
and LGIC accounted for approximately 60%, 17% and 10% of the Company's revenues,
respectively. During the nine months ended December 27, 1998, Northern Telecom,
Nortel Matra, QUALCOMM and LGIC accounted for 64%, 13%, 10% and 10% of revenues,
respectively. Furthermore, a substantial portion of revenues from these
customers in the three and nine months ended December 27, 1998 resulted from
sales of a limited number of the Company's products. The Company's top five
customers accounted for 97% of its sales for the nine months ended December 27,
1998. The Company, Northern Telecom and Nortel Matra have an agreement,
renegotiated annually, pursuant to which Northern Telecom and Nortel Matra, a
company in which Northern Telecom has an equity investment, commit to purchase a
certain volume of their annual power amplifier requirements for specified prices
from the Company. There can be no assurance that Northern Telecom and Nortel
Matra will continue to enter into contracts with the Company in the future or
otherwise agree to purchase the same or similar levels of their power amplifier
requirements from the Company or purchase their power amplifier requirements at
the same or similar pricing. Any reduction in the level of purchases of the
Company's amplifiers by Northern Telecom and Nortel Matra, or any material
reduction in pricing without significant offsets, would have a material adverse
effect on the Company's business, financial condition and results of operations.
Further, if the Company were to lose Northern Telecom or any other major OEM
customer, or if orders by Northern Telecom or any other major OEM customer were
to otherwise materially decrease, the Company's business, financial condition
and results of operations would be materially adversely affected. In addition,
the recent financial market turmoil and economic downturn in Korea may have a
material adverse effect on the Company's sales of its products to LGIC, an OEM
based in Korea. Due to the Company's products being priced in U.S. dollars, the
currency instability in Korean and other 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 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
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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 three quarters of fiscal
1999. The Company anticipates lower product revenues over the next two to three
quarters when compared to the average revenue realized during the first three
quarters of fiscal 1998 as a result of softening demand in the TDMA and GSM
markets and delays in Korean PCS demand due to general economic conditions in
Korea and other Asian countries. Although the Company recently began to
outsource certain of its manufacturing operations, the Company still operates
its own 4-inch wafer fabrication facility which contributes a significant amount
of fixed costs to its ongoing operating expense levels. The Company establishes
its expenditure levels for product development and other operating expenses
based on its expected revenues, and these expenses are relatively fixed in the
short term. As a result, variations in timing of revenues can cause significant
variations in quarterly results of operations. There can be no assurance that
the Company will be profitable on a quarter to quarter basis in the future. The
Company believes that period to period comparisons of its financial results are
not necessarily meaningful and should not be relied upon as an indication of
future performance. Due to the foregoing factors, it is likely that in some
future quarter or quarters the Company's revenues or operating results will not
meet the expectations of public stock market analysts or investors. In such
event, the market price of the Company's Common Stock would be materially
adversely affected.
Internal Amplifier Design and Production Capabilities of OEMs. The
Company believes that a majority of the present worldwide production of power
amplifiers is captive within the manufacturing operations of wireless equipment
OEMs, many of which have chosen not to purchase amplifiers from outside
suppliers. The Company also believes that those OEMs that purchase from third
party amplifier vendors are sometimes reluctant to switch once committed to a
particular merchant vendor. Consequently, the Company may have only limited
opportunities to increase revenues by replacing internal OEM amplifier
production or displacing other merchant amplifier suppliers. Moreover, given the
limited opportunities for merchant RF amplifier suppliers, any decision by an
OEM to employ a second source merchant supplier for a product currently
purchased from a merchant supplier may reduce the existing merchant supplier's
ability to maintain a given level of product sales to such OEM or, possibly, to
retain the OEM as a customer due to price competition from the second source
merchant supplier. There can be no assurance that the Company's major OEM
customers will continue to rely, or increase their reliance, on the Company as
an external source of supply for their power amplifiers, or that other wireless
equipment OEMs will become customers of the Company. If the major wireless
infrastructure equipment suppliers do not purchase or continue to purchase their
power amplifiers from merchant suppliers, the Company's business, results of
operations and financial condition will be materially adversely affected. For
example, the failure of the Company to reach an agreement with Northern Telecom
and Nortel Matra that provides for similar levels of purchases could have a
material adverse effect on the Company.
Rapid Technological Change; Evolving Industry Standards; Dependence on
New Products. The markets in which the Company and its OEM customers compete are
characterized by rapidly changing technology, evolving industry standards and
continuous improvements in products and services. In particular, because the
Company's strategy of rapidly bringing to market products customized for
numerous and evolving RF modulation standards requires developing and achieving
volume production of a large number of distinct products, the Company's ability
to rapidly design and produce individual products for which there is significant
OEM customer demand will be a critical determinant of the Company's future
success. For example, softening of demand in the TDMA and GSM markets or failure
of another modulation standard in which the Company has invested substantial
development resources may have a material adverse effect on the Company's
business, financial condition and results of operations. No assurance can be
given that the Company's product development efforts will be successful, that
its new products will meet customer requirements and be accepted or that its OEM
customers' product offerings will achieve customer acceptance. If a significant
number of development projects do not result in substantial volume production or
if technologies or standards supported by the Company's or its customers'
products become obsolete or fail to gain widespread commercial acceptance, the
Company's business may be materially adversely affected.
Risks Associated with Internal Wafer and Device Fabrication. The
Company's operation of its wafer and device fabrication facilities entails a
number of risks, including a high level of fixed and variable costs, the
management of complex processes, dependence on a single source of supply and a
strict regulatory environment. During periods of low demand, high fixed wafer
fabrication costs are likely to have a material adverse effect on
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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 and from time to time has repaired or replaced products that
malfunction due to previously undetected defects or that do not meet customers'
expectations for performance although the product is within specifications. 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. Moreover, the Company's use of contract manufacturers
to produce certain of its products may increase the difficulty of controlling
the quality of the Company's products.
Sole or Limited Sources of Materials and Services. The Company
currently procures from single sources certain components and services for its
products including cast housings, printed circuit boards, specialized RF
components and specialized subassemblies. The Company purchases these components
and services on a purchase order basis. The Company does not carry significant
inventories of these components and does not have any long-term supply contracts
with its sole source vendors. Furthermore, the Company began outsourcing some of
its higher volume power amplifiers at an offshore independent subcontractor's
facility during the third fiscal quarter of 1999. The Company's reliance on its
existing sole sources and its migration to an outsource turnkey manufacturing
strategy entails certain risks, including reduced control over the price, timely
delivery, reliability and quality of the components. If the Company were to
change any of its sole source vendors or its turnkey subcontractors, the Company
would be required to requalify the components or amplifiers with new vendors or
subcontractors, respectively. Any inability of the Company to obtain timely
deliveries of its components or its amplifiers of acceptable quality in required
quantities or a significant increase in the prices of components for which the
Company does not have alternative sources could materially and adversely affect
the Company's business, financial condition and results of operations. The
Company has occasionally experienced difficulties in obtaining these components,
and no assurance can be given that shortages will not occur in the future. In
addition, there is no assurance that the Company will be able to retain turnkey
subcontractors on a cost effective basis.
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.
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Risks of International Sales. Sales outside of the United States were
91%, 88% and 95% of revenues for the three months ended December 27, 1998, the
nine months ended December 27, 1998 and fiscal 1998, respectively. The Company
expects that international sales will continue to account for a significant
percentage of the Company's total revenues for the foreseeable future. These
sales involve a number of inherent risks, including imposition of government
controls, currency exchange fluctuations, potential insolvency of international
distributors and representatives or customers, reduced protection for
intellectual property rights in some countries, impact of recessionary
environments in economies outside the United States, political instability and
generally longer receivables collection periods, as well as tariffs and other
trade barriers. In addition, because substantially all of the Company's foreign
sales are denominated in U.S. dollars, increases in the value of the dollar
relative to the local currency would increase the price of the Company's
products in foreign markets and make the Company's products relatively more
expensive and less price competitive than competitors' products that are priced
in local currencies. There can be no assurance that these factors will not have
a material adverse effect on the Company's future international sales and,
consequently, on the Company's business, financial condition and results of
operations. The Company anticipates that the recent turmoil in foreign financial
markets and the recent deterioration of the underlying economic conditions in
certain foreign countries will continue to have an impact on its sales to
customers located in or whose projects are based in those countries due to the
impact of currency fluctuations on the relative price of the Company's products
and restrictions on government spending imposed by the International Monetary
Fund ("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 countries
currently experiencing financial market turmoil and/or deterioration of economic
conditions. Furthermore, a large portion of the Company's existing customers and
potential new customers are servicing new markets in developing countries that
the Company's customers expect will deploy wireless communication networks as an
alternative to the construction of a wireline infrastructure. If such countries
decline to construct wireless communication systems, or construction of such
systems is delayed for any reason, including business and economic conditions
and changes in economic stability due to factors such as increased inflation and
political turmoil, such delays could have a material adverse effect on the
Company's business, results of operations and financial condition.
Market for the Company's Products Is Highly Competitive. The wireless
communications equipment industry is extremely competitive and is characterized
by rapid technological change, new product development and product obsolescence,
evolving industry standards and significant price erosion over the life of a
product. The ability of the Company to compete successfully and sustain
profitability depends in part upon the rates at which wireless equipment OEMs
incorporate the Company's products into their systems and the Company captures
market share from other merchant suppliers. The Company's major OEM customers,
including Northern Telecom, Nortel Matra, LGIC and QUALCOMM, continuously
evaluate whether to manufacture their own amplification products or purchase
them from outside sources. There can be no assurance that these OEM customers
will incorporate the Company's products into their systems or that in general
they will continue to rely, or expand their reliance, on external sources of
supply for their power amplifiers. These customers and other large manufacturers
of wireless communications equipment could also elect to enter the merchant
market and compete directly with the Company, and at least one OEM, NEC, has
already done so. Such increased competition could materially adversely affect
the Company's business, financial condition and results of operations.
The Company's principal competitors in the market for wireless
amplification products provided by merchant suppliers currently include AML
Communications, Amplidyne, 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
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infringing the rights of others. The Company has a policy of seeking patents on
inventions resulting from its ongoing research and development activities. The
Company has been awarded twenty-four United States patents, and has twenty-three
United States patent applications pending, including one that has been allowed
but not yet formally issued. The Company also has been awarded four foreign
patents and has sixteen 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 such licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain a license from
a third party for technology used by the Company or otherwise secure rights to
use such technology could cause the Company to incur substantial liabilities, to
suspend the manufacture of products or expend significant resources to develop
noninfringing technology. There can be no assurance that the Company would be
successful in such development or that such licenses would be available on
reasonable terms, if at all. In the event that any third party makes a
successful claim against the Company or its customers and either a license is
not made available to the Company on commercially reasonable terms or a "design
around" is not practicable, the Company's business, financial condition and
results of operations would be materially adversely affected. Furthermore, the
Company may initiate claims or litigation against third parties for infringement
of the Company's proprietary rights or to establish the validity of the
Company's proprietary rights. Litigation by or against the Company could result
in significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not such litigation results in a
favorable determination for the Company. In the event of an adverse result in
any such litigation, the Company could be required to pay substantial damages,
indemnify its customers, cease the manufacture, use and sale of infringing
products, expend significant resources to develop noninfringing technology,
discontinue the use of certain processes or obtain licenses to the infringing
technology.
Government Regulation of Communications Industry. Radio frequency
transmissions and emissions, and certain equipment used in connection therewith,
are regulated in the United States, Canada and throughout the rest of the world.
Regulatory approvals generally must be obtained by the Company in connection
with the manufacture and sale of its products, and by wireless service providers
to operate the Company's products. The United States Federal Communications
Commission (the "FCC") and regulatory authorities abroad constantly review RF
emission issues and promulgate standards based on such reviews. If more
stringent RF emission regulations are adopted, the Company and its OEM customers
may be required to alter the manner in which radio signals are transmitted or
otherwise alter the equipment transmitting such signals, which could materially
adversely affect the Company's products and markets. The enactment by federal,
state, local or international governments of new laws or regulations or a change
in the interpretation of existing regulations could also materially adversely
affect the market for the Company's products. Although recent deregulation of
international communications industries along with recent radio frequency
spectrum allocations made by the FCC have increased the potential demand for the
Company's products by providing users of those products with opportunities to
establish new wireless personal communications services, there can be no
assurance that the trend toward deregulation and current regulatory developments
favorable to the promotion of new and expanded personal communications services
will continue or that other future regulatory changes will have a positive
impact on the Company. The increasing demand for wireless communications has
exerted pressure on regulatory bodies worldwide to adopt new standards for such
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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 is currently taking 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. The Company installed a new enterprise
wide computer software system in July 1998 that is Year 2000 compliant and which
the Company believes will increase operational and financial efficiencies and
information analysis. The 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 in its product development and manufacturing
operations. Until very recently the Company's products did not contain embedded
systems to which Year 2000 compliance would be necessary. With the release of
some of the Company's latest products this situation has changed and
date-dependency may exist. However, 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. Part of the Company's
Year 2000 Issue assessment project will identify key suppliers and assess their
Year 2000 vulnerability and readiness. At this time, the Company estimates that
the costs of the Year 2000 Issue assessment and required remedial work will be
less than $400,000 in total. Completion of the assessment is planned for
February 1999 and 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.
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 processors. 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.
The Company believes these failures to be unlikely, and has made no estimate of
the potential costs, but plans to do so during February 1999. Periodic updates
regarding the Year 2000 status are provided to both the Company's
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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
Dependence on Key Personnel. The Company's ability to manage any future
growth effectively will require attracting, training, motivating, managing and
retaining new employees successfully as well as retaining the continued service
of its key technical, marketing and management personnel. Although the Company
has employment contracts with several of its executive officers, these
agreements do not obligate such individuals to remain in the employment of the
Company. The Company does not maintain key person life insurance on any of its
key technical personnel. The competition for such personnel is intense, and the
loss of key employees could have a material adverse effect on the Company.
Volatility of Stock Price. The market price of the shares of Common
Stock has been, and is likely to continue to be, highly volatile, and is
affected significantly by factors such as fluctuations in the Company's
operating results, announcements of technological innovations, new customer
contracts or new products by the Company or its competitors, announcements by
the Company's customers regarding their business or prospects, changes in
analysts' expectations, governmental regulatory action, developments with
respect to patents or proprietary rights, general market conditions and other
factors. In addition, the stock market has from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. The market price of the Company's Common
Stock fluctuated substantially during fiscal 1998, from a low of $10.75 on April
1, 1997 to a high of $66.375 on October 1, 1997. During the first nine months of
fiscal 1999, the Company's stock fluctuated from a high of $19.00 in April 1998
to a low of $8.00 in October 1998. As of December 27, 1998, the last reported
sale price of the Common Stock as reported on the Nasdaq National Market was
$13.875.
Pending Litigation. Since December 23, 1997, a number of complaints
have been filed against the Company and certain of its officers in the Federal
Court for the Northern District of California that allege violations of the
federal securities laws. Similar complaints have been filed in California state
court that allege violations of California state securities laws and California
common law. The complaints have been consolidated in the federal and state
courts, respectively. The plaintiffs in both the federal and state lawsuits
purport to represent a class of persons who purchased the Company's securities
during the period of July 17, 1997 through October 23, 1997. The complaints
allege that the Company and certain of its officers misled the investing public
regarding the financial prospects of the Company. The Company believes that the
allegations are completely without merit and will vigorously defend itself.
Certain provisions of the Company's Certificate of Incorporation and
indemnification agreements between the 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
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the Company's stockholders. For example, in connection with the Company's
Shareholder Rights Plan, the Board of Directors designated 20,000 shares of
Preferred Stock as Series A Participating Preferred Stock although none of such
shares have been issued. The Preferred Stock could be issued with voting,
liquidation, dividend and other rights superior to those of the holders of
Common Stock. The issuance of Preferred Stock under certain circumstances could
have the effect of delaying, deferring or preventing a change in control of the
Company.
Liquidity and Capital Resources
The Company has financed its growth through its initial public offering
in August 1994, a public equity offering in August 1997, private sales of equity
securities, capital equipment leases, bank lines of credit and cash flows from
operations. Cash used by operations was $9.8 million for the nine months ended
December 27, 1998 while cash provided by operations in the corresponding period
of fiscal 1998 was $12.4 million. Cash flow from operations for the nine months
ended December 27, 1998 was negatively impacted by the reduced level and timing
of shipments and slower collections from the Company's international customers.
As of December 27, 1998, the Company had working capital of $92.2
million including $71.0 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 December 27, 1998, the Company was in
compliance with all of these financial covenants. There were no borrowings
outstanding against this line of credit as of December 27, 1998.
In April 1998, the Company announced a repurchase program (the "1998
Repurchase Program") pursuant to which it may acquire up to one million shares
of Common Stock in open market purchases. During the nine months ended December
27, 1998, the Company repurchased a total of 675,900 shares on the open market
for a total of $9.7 million.
In January 1997, the Company borrowed $6.0 million under a term loan
secured by certain capital equipment. The loan, which expires in January 2002,
requires the payment of monthly principal plus interest and is subject to
certain minimum working capital, net worth and other specific financial ratios.
The Company was in compliance with these covenants as of December 27, 1998. In
March 1997, the Company also secured a $3.2 million real estate loan, which
expires in April 2007, for the purchase of a light industrial building.
Additions to property and equipment were $9.5 million for the nine
months ended December 27, 1998 as compared to $11.6 million for the nine months
ended December 28, 1997. Purchases of equipment and other capital assets for the
nine months ended December 27, 1998 included the purchase of new management
information systems, manufacturing test equipment to support new products and
engineering test equipment to support various research and development projects.
The Company anticipates spending approximately $10 million over the
next twelve months for capital additions primarily to complete its information
systems infrastructure upgrades, set up automated test stations for new products
and upgrade its engineering test equipment as required for new development
projects. Based on the Company's current working capital position and the
available line of credit the Company expects to renew, the Company believes that
sufficient resources will be available to meet the Company's cash requirements
for at least the next twelve months. Cash requirements for periods beyond the
next twelve months depend on the Company's profitability, timing and level of
capital expenditures, working capital requirements and rate of growth.
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk
The Company does not engage in any foreign currency hedging
transactions and therefore, does not believe it is subject to exchange rate
risk. In compliance with the Company's cash investment policy, the Company
limits its cash investments in terms of type of financial instrument,
concentration limit, credit quality and marketability with the highest priority
being preservation of principal. The Company does not consider itself exposed
with respect to any material market risk.
19
<PAGE>
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.
20
<PAGE>
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
21
<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: February 9, 1999
SPECTRIAN CORPORATION
(Registrant)
/S/ BRUCE R. WRIGHT
-----------------------------------------------------
Bruce R. Wright
Executive Vice President, Finance and Administration,
Chief Financial Officer and Secretary
Principal Financial and Accounting Officer)
INDEX TO EXHIBITS
Exhibits Sequentially
Numbered Page
27.1 Financial Data Schedule 23
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEETS, CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000925054
<NAME> SPECTRIAN CORP /DE/
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> SEP-28-1998
<PERIOD-END> DEC-27-1998
<CASH> 21,364
<SECURITIES> 49,593
<RECEIVABLES> 19,008
<ALLOWANCES> 385
<INVENTORY> 16,503
<CURRENT-ASSETS> 111,261
<PP&E> 63,985
<DEPRECIATION> 32,456
<TOTAL-ASSETS> 142,790
<CURRENT-LIABILITIES> 19,103
<BONDS> 5,020
0
0
<COMMON> 139,145
<OTHER-SE> (20,478)
<TOTAL-LIABILITY-AND-EQUITY> 142,790
<SALES> 20,723
<TOTAL-REVENUES> 20,723
<CGS> 31,879
<TOTAL-COSTS> 31,879
<OTHER-EXPENSES> 10,505
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (862)
<INCOME-PRETAX> (10,294)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,294)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,294)
<EPS-PRIMARY> (0.98)
<EPS-DILUTED> (0.98)
</TABLE>
