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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended March 31, 1999
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____________ to
_____________
Commission file number 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 No.)
350 West Java Drive, Sunnyvale, California 94089
(Address of principal executive offices) (Zip Code)
(408) 745-5400
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Series A Participating Preferred Stock, $.001 par value
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not con-tained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing sale price of the Common Stock on June
1, 1999 as reported on the Nasdaq National Market, was approximately
$85,818,107. Shares of Common Stock held by each executive officer and director
and by each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of June 1, 1999, registrant had outstanding 10,217,578 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this
Annual Report on Form 10-K portions of its Proxy Statement for the 1999 Annual
Meeting of Stockholders to be held July 15, 1999.
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K, the exhibits hereto and the
information incorporated by reference herein contain "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act") and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and such forward looking statements
involve risks and uncertainties. When used in this Report, the words "expects,"
"anticipates" and "estimates" and similar expressions are intended to identify
forward looking statements. Such statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include those discussed below and those
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" or incorporated by reference herein. Spectrian
Corporation undertakes no obligation to publicly release any revisions to these
forward looking statements to reflect events or circumstances after the date
this Report is filed with the Securities and Exchange Commission or to reflect
the occurrence of unanticipated events.
Spectrian Corporation (the "Company" or "Spectrian") designs,
manufactures and markets highly linear radio frequency ("RF") power amplifiers
that address the needs of wireless infrastructure original equipment
manufacturers ("OEMs") and their service provider customers. The Company's
amplifiers have been deployed in wireless networks in over 35 countries
worldwide. Spectrian's amplifiers deliver high linearity, can be
cost-effectively produced in volume and support multiple transmission standards.
These attributes enable service providers to improve spectrum efficiency
resulting in reduced cost per subscriber, to rapidly deploy new services and to
offer enhanced quality and reliability of service.
Industry Background
The market for cellular, personal communications services ("PCS") and
wireless local loop ("WLL") communications services (collectively known as
"wireless" services) has grown significantly during the past decade, fueled by
decreasing prices for wireless handsets, a more favorable regulatory
environment, increasing competition among service providers and a greater
availability of services and RF spectrum. In addition, several developing
countries are installing wireless telephone networks as an alternative to
installing, expanding or upgrading traditional wireline networks. Emerging
bidirectional wireless data applications have the potential to further expand
the market for wireless communications by allowing service providers to increase
revenue generating traffic on their networks. The Strategis Group estimates that
the number of wireless subscribers worldwide will grow from 288 million in 1998
to 720 million in 2003.
The growth in wireless communications has required, and will continue
to require, substantial investment by service providers in infrastructure
equipment. The Yankee Group estimates that spending by wireless service
providers on infrastructure equipment was approximately $27 billion in 1998 and
will rise to approximately $73 billion in 2003. A typical wireless
communications system comprises a geographic region containing a number of
cells, each of which contains a cell site (or "base station"), which are
networked to form a service provider's coverage area. Each base station houses
the equipment that receives incoming telephone calls from the switching office
of the local wireline telephone company and broadcasts calls to the wireless
users within the cell. A base station contains a fixed number of RF channels; in
a single carrier system, each separate channel requires a separate transceiver,
single channel power amplifier and tunable cavity filter, along with an antenna
to transmit the outgoing signal to the wireless telephone user. Most existing
wireless systems use single channel power amplifiers. The power amplifier
receives a relatively weak signal from the transceiver and significantly boosts
the power of that signal so that it can be broadcast throughout the cell, which
typically covers a geographic area up to five miles in radius. The RF power
levels necessary to transmit the signal over the required range must be achieved
without distorting the modulation characteristics of the signal.
Traditional cellular systems are capable of carrying only one call per
channel of spectrum and are based on analog technology. This limitation combined
with the continuing growth of the wireless communications market has resulted in
the crowding of transmissions within the available RF spectrum.
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Because the radio frequencies assigned to transmissions are fixed, service
providers are seeking new methods to use the RF spectrum more efficiently to
increase capacity. Analog systems are being supplanted by digital systems, which
convert voice transmissions into bits of electronic information and thereby use
the finite RF spectrum allocated to wireless transmissions to serve growing
demand. Three dominant digital transmission modulation formats have emerged for
cellular and PCS networks that are known as Time Division Multiple Access
("TDMA"), Code Division Multiple Access ("CDMA") and Global System for Mobile
Communication ("GSM"). These transmission modulation formats allow a digital
network to have a call capacity of three to eight times the number of voice
conversations as an analog network. Existing analog cellular networks are in the
process of upgrading to digital that operate at frequencies between 800 MHZ and
1000 MHZ, and new digital cellular networks are being constructed around the
world as new licenses are being awarded. In addition to the growth in digital
cellular networks, 1998 continued to be a year of growth for new digital PCS
networks. PCS networks may be more desirable to wireless service providers than
analog networks, because such networks also allow a higher volume of calls in a
given RF spectrum than analog cellular networks. PCS networks operate in the
1800 MHZ to 2000 MHZ frequency range but typically have a smaller coverage area
per base station than their digital cellular counterparts. Thus PCS networks
need two to three times as many base stations (and power amplifiers) as digital
cellular networks. The implementation of these digital and PCS networks has
resulted in an increased demand for network infrastructure equipment.
Wireless carriers are also increasing system capacity by implementing
dynamic channel allocation, which allows the service provider to automatically
move available unused channels from less active base stations to busier adjacent
base stations as the demand load moves, such as during commuter rush hours.
Systems with dynamic channel allocation require multicarrier power amplifiers,
which can simultaneously broadcast signals using multiple transmission standards
over a variable number of channels. The need to increase system capacity,
combined with the development of multicarrier power amplifiers, has also
encouraged wireless carriers to transition from "macrocell" base stations, which
typically have a five mile radius, to microcells. When the number of subscribers
within the macrocell exceeds the capacity of its equipment, the cell can be
split into several smaller microcells to avoid a degradation in service. The
geographic range of these microcells is smaller and more microcells are required
in order to increase the capacity of the overall system. Microcells require
equipment that consumes less power and is less expensive at each base station
than macrocells.
Wireless carriers' ability to more effectively manage scarce spectrum
resources and accommodate a larger number of subscribers is dependent on their
ability to broadcast signals with high "linearity." Linearity is the degree to
which amplified signals remain within their prescribed band of the spectrum with
low distortion or interference from adjacent channels. In the base station,
network RF power amplification is generally the source of the greatest amount of
signal distortion. Consequently, obtaining RF power amplifiers with high
linearity is critical to a service provider's ability to reduce interference
levels and thereby increase system capacity. For example, higher network
linearity is required as the industry transitions from analog to digital
technologies to prevent scrambling of calls among channels when dynamic channel
allocation is used. Multicarrier power amplifiers, which are critical to the use
of dynamic channel allocation and microcells, require leading edge linearity
technology to function properly. Substantial investment and technical expertise
are required to design and manufacture single and multicarrier RF power
amplifiers with high linearity, low cost, high efficiency and high reliability;
all of which are critical to the network and the service.
Wireless service providers compete in dynamic markets characterized by
evolving and competing industry standards, technologies and applications. Those
wireless service providers that are able to increase the efficiency and lower
the cost of new and existing systems will compete most effectively. Wireless
service providers must anticipate evolving industry standards and invest in
infrastructure equipment that both maximizes efficiency in the management of the
limited spectrum licensed to them and is available in volume for rapid
deployment.
Service providers obtain their equipment from a concentrated group of
large wireless infrastructure OEMs. The Company believes that Lucent
Technologies, Inc. ("Lucent"), Ericsson Telephone Company ("Ericsson"), Motorola
Corporation ("Motorola"), Nortel Networks ("Nortel"), and Nokia OY
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("Nokia") supplied over 80% of the wireless infrastructure equipment installed
worldwide in 1998. Historically, most of these OEMs manufacture base station
components internally. However, in response to competition and as the
performance requirements of certain components increase, many of these OEMs have
begun to rely on independent sources for certain system components that must
meet unique technical requirement, such as power amplifiers. To succeed in
capturing orders from these OEMs, independent power amplifier suppliers must
rapidly bring to market products that are highly linear, can be produced in
volume cost-effectively, support multiple standards and are reliable in the
field.
The Spectrian Solution
Spectrian Corporation designs, manufactures and markets highly linear
RF power amplifiers that address the needs of wireless infrastructure OEMs and
their service provider customers. The Company's amplifiers provide significant
advantages to its customers, including:
High Linearity. Spectrian has developed the multiple technological
competencies and disciplines required to achieve high linearity in its
amplifiers. These competencies and disciplines include RF semiconductor
technology, solid state device physics, thermal and mechanical packaging design,
advanced circuit design, amplifier linear correction technologies, advanced
signal processing techniques, control systems and computer aided design and
modeling. The Company believes that its combined strengths in these areas
provide it with an important competitive advantage in maintaining technological
leadership. The high degree of linearity of the Company's amplifiers enables
Spectrian's OEM customers to furnish wireless service providers with high
capacity base station equipment at low capital cost per subscriber.
Rapid Time to Market and Volume Manufacturing. Spectrian's design and
semiconductor production processes are key elements of the Company's ability to
address wireless infrastructure equipment suppliers' quantity and time to market
requirements for power amplification products. The Company's ability to design
and manufacture its RF semiconductors in-house is important in rapidly and
cost-effectively introducing new products that meet OEMs' evolving needs.
Spectrian also designs its amplifiers to be manufactured in high volumes at low
cost, which the Company believes has been a competitive advantage in securing
orders from its OEM customers because power amplifiers have historically been
difficult to manufacture in high volumes based upon the labor intensive nature
of the manufacturing process and the complexities of RF power technology.
Finally, the Company's use of automated testing reduces overall manufacturing
cycle times and enables the Company to deliver products in volume more rapidly.
Standards Independence. Spectrian's technologies support every major
wireless modulation standard, and its multicarrier power amplifiers support
several standards simultaneously. Certain of the Company's single carrier
products support both analog and digital standards in a dual mode format. The
Company believes that this breadth of product functionality is important to
wireless service providers as they upgrade their cellular infrastructure
equipment and implement digital systems in an environment characterized by
evolving industry standards and the proliferation of spectrum allocation.
High Quality and Reliability. Spectrian strives to design its power
amplifiers to be highly reliable in the field. Spectrian's integrated design and
manufacturing processes are important factors contributing to its ability to
develop and produce highly reliable power amplifiers. In order to further
address customer requirements for amplifier quality and reliability and to
ensure process quality control, Spectrian has implemented a continuous process
improvement program throughout the Company and is ISO 9001 certified.
Multicarrier Functionality. Spectrian develops and supplies
multicarrier amplifiers that integrate the functions of multiple single carrier
power amplifiers into a single smaller unit while simultaneously eliminating the
need for cavity filters. The Company believes that the distortion reduction
performance of its multicarrier amplifiers will provide it with an important
competitive advantage. The ability of the Company's multicarrier products to
combine multiple digital and analog channel schemes enables carriers to maintain
backward compatibility as they add digital transmission and implement dynamic
channel allocation solutions. In addition, multicarrier units can potentially
reduce service providers' equipment and maintenance costs and space
requirements, thereby facilitating the implementation of microcells.
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Spectrian Strategy
Spectrian's objective is to achieve and maintain a leadership position
as a merchant supplier of highly linear power amplifiers to wireless
infrastructure OEMs and service providers worldwide. Spectrian strives to
achieve product leadership through the following:
Leadership Position in Amplification Technology. The Company intends to
maintain and expand a technological leadership position by continuing to invest
significant resources in research and development of amplification technology.
The Company believes that its RF amplifier research and development team is
among the largest and most skilled in the merchant high power RF industry. To
maintain a technological leadership position, the Company believes that numerous
integrated technical capabilities are required, including semiconductor design
and fabrication, unique packaging concepts and components, customized
linearization and correction technologies and expert RF circuit design. The
Company's strategy is to continue to invest significant resources to support the
Company's technology leadership in amplifier linearity, power and efficiency.
Vertical Integration of Semiconductor and Amplifier Design. The Company
has historically pursued a strategy of vertical integration of its semiconductor
and amplifier design process. The design process begins with the design and
development of the semiconductor die and culminates with the design and
development of the power amplifier. Control of both the semiconductor and
amplifier design process allow for the optimum trade off of semiconductor device
performance and amplifier linearity enhancement circuitry that minimizes the
overall product cost while achieving the required product specifications.
Internal Semiconductor Manufacturing. The performance of a
semiconductor device is closely tied to the wafer fabrication facility in which
the devices are built. Spectrian has chosen to operate its own wafer fabrication
facility to control these critical device-manufacturing processes including gold
metallization, which is largely unavailable in outside foundries. In addition to
tightly controlled device performance, the wafer fabrication facility improves
the Company's access to a supply of RF semiconductors even in periods of high
industry demand for semiconductors and intense competition for wafer fabrication
capacity.
Rapid Time to Market. The Company provides customized or "application
specific" amplification products to address the particular technical and time to
market requirements of each of its customers. The Company leverages its modular
product architecture, configurable core technologies and product platforms, as
well as its ability to design products for all RF modulation schemes, to rapidly
and cost effectively develop and deliver application specific solutions to its
customers.
Strategic Relationships with Manufacturing Partners. Since fiscal 1998,
Spectrian has pursued a manufacturing strategy of outsourcing portions of its
product manufacturing to contract manufacturers to decrease the manufacturing
overhead and costs of its products. Use of contract manufacturers also results
in increase flexibility to respond to fluctuations in product demand without
incurring significant fixed costs from an in-house manufacturing staff. During
this period, the Company has moved from outsourcing only a portion of its
printed circuit boards to outsourcing all of its circuit board assemblies and
its higher volume amplifiers on a turnkey basis to contractors solely focused on
manufacturing excellence. As the manufacture of a high power RF amplifier is a
complicated process, Spectrian maintains an extremely close working relationship
with its contract manufacturing partners and continues to monitor and control
all critical manufacturing steps.
Relationships with Leading Worldwide Manufacturers of Wireless
Infrastructure Equipment. The Company has developed relationships with certain
large wireless OEMs, including Nortel Networks ("Nortel"), LG Information and
Communications Limited ("LGIC") and QUALCOMM Incorporated ("QUALCOMM"), as well
as certain emerging manufacturers such as Harris Corporation ("Harris"). The
Company's strategy is to form lasting customer relationships by working closely
with OEM customers to develop insight into their amplifier requirements and to
design specific products that meet their needs, by rapidly delivering product
designs and volume production, and by maintaining the confidentiality of
customer technology. In addition to its current customers, the Company continues
to pursue opportunities to establish relationships and provide products to other
large wireless OEMs both domestically and internationally. The Company markets
its products worldwide, and as of March 31, 1999, its power amplifiers had been
installed in over 35 countries.
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Long Term Relationships with Wireless Service Providers Worldwide. The
Company has also pursued a strategy of establishing direct relationships with
certain wireless service providers offering them product solutions that were not
readily available through the OEM manufacturers. The primary product solutions
offered to service providers have been multicarrier products that enable the
service providers to address some of the challenges of deploying high power
digital base stations. In some cases, these multicarrier product solutions are
required to address the complexities involved with adding digital signals to an
existing analog network without decreasing the analog cell site coverage. Focus
on direct sales to wireless service providers continues to be a critical
component of Spectrian's diversification strategy.
Standards and Systems Independence. The Company's products are
compatible with wireless communications systems provided by various
infrastructure suppliers and operate under every major domestic and
international standard. By pursuing both standards and systems independence, the
Company believes that Spectrian will benefit from the continuing growth of both
existing and emerging wireless communications systems while reducing the risks
associated with reliance on the success of one or a limited number of systems or
existing or emerging industry standards. In addition to supporting every major
cellular standard, the Company has developed, and is continuing to develop,
products that address the needs of the PCS, WLL and emerging third generation
markets.
Markets
Wireless systems have historically employed analog transmission
formats, certain of which have been adopted as industry standards. The need to
accommodate a growing wireless customer base within a finite amount of spectrum
has, however, encouraged a worldwide transition from analog standards to various
digital technologies which are significantly more efficient. Current analog
standards include Advanced Mobile Phone Services ("AMPS") in the Americas and
Total Access Communications System ("TACS") and Nordic Mobile Telephone ("NMT")
in Europe. Current digital standards include TDMA, CDMA, Personal Digital
Cellular ("PDC") in Japan and GSM.
The Company offers amplifiers that support the AMPS and TACS analog
standards and the TDMA, CDMA and GSM digital standards for cellular systems. The
Company has elected not to support the NMT analog standard in Europe, because it
believes that NMT has a lower potential for growth than the GSM digital
standard. To date, the Company has not invested significant development
resources to incorporate the PDC standard into its product offerings, because
such standard has not developed to any great degree outside of Japan.
In addition to the analog and digital cellular systems discussed above,
the market for PCS systems is expanding rapidly. The FCC has reallocated
spectrum in the 1.85 to 1.99 gigahertz range for the provision of PCS and has
conducted several rounds of auctions for the PCS spectrum. The success of PCS as
a wireless service will depend in part on whether infrastructure manufacturers
and service providers can reduce system manufacturing and service costs and
prices sufficiently to increase significantly the rate of market penetration of
potential subscribers.
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<TABLE>
The following chart illustrates these existing and developing standards
for wireless communications, and the shaded areas represent markets and/or
regions served and standards supported by the Company's current product
offerings.
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Major Wireless Standards by Region (frequencies in MHZ)
- ----------------------------------------------------------------------------------------------------
Americas Europe Asia Pacific Japan
(MHZ) (MHZ) (MHZ) (MHZ)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Analog AMPS (800) NMT (450, 900) NMT (450, 900) NTT (800)
Cellular TACS (900) AMPS (800) JTACS (800)
AMPS (800) TACS (900)
- ----------------------------------------------------------------------------------------------------
Digital CDMA (800) GSM (900) CDMA (800, 900) PDC (1500)
Cellular TDMA (800) GSM (900) JDC (800)
TDMA (450, 800) CDMA (800)
- ----------------------------------------------------------------------------------------------------
PCS CDMA (1900) GSM (1800) CDMA (1900) PHS (1900)
TDMA (1900) GSM (1800)
GSM (1900) CDMA (1800)
- ----------------------------------------------------------------------------------------------------
Broadband IMT-2000 (2.1 GHz) IMT-2000 (2.1 GHz) IMT-2000 (2.1 GHz) IMT-2000 (2.1 GHz)
WCS (2.3 GHz) Korean WLL (2.4 GHz)
- ----------------------------------------------------------------------------------------------------
</TABLE>
The Company believes that the potential for wireless communications in
countries without reliable or extensive wireline systems may be even greater
than in countries with developed telecommunications systems. The cost of
building and maintaining a wireless network is generally less than the cost of
building and maintaining a comparable wireline network. Thus, in many less
developed countries, wireless service may provide the primary service platform
for both mobile and fixed telecommunications. In addition, if technological
advances and price decreases continue to occur, a market in the United States
and other developed countries for wireless service to be used in conjunction
with, or in place of, traditional wireline ("local loop") service may emerge for
a variety of applications. For example, WLL networks could provide local loop
service and direct access to the long distance carriers.
Products
The Company designs highly linear amplifiers that address the specific
requirements of each of its OEM customers. The Company's product strategy is to
support multiple wireless systems and standards. Most existing wireless systems
use single carrier power amplifiers. The following table provides a list of
standards for which the Company provides single carrier amplifiers:
- ----------------------------------------------------------------------
Spectrian Single Carrier Amplifier Configurations
- ----------------------------------------------------------------------
Standard Frequency (MHZ) Power (Watts)
- ----------------------------------------------------------------------
Analog Cellular:
AMPS, CDPD ............... 869-894 45,65
TACS ..................... 917-950 65
- ----------------------------------------------------------------------
Digital Cellular:
TDMA ..................... 485-495 50
TDMA ..................... 869-894 25,50
CDMA ..................... 869-894 25
GSM ...................... 925-960 30
- ----------------------------------------------------------------------
PCS:
GSM 1800 ................. 1805-1880 30
CDMA ..................... 1930-1990 20,25
GSM 1900 ................. 1930-1990 30
CDMA ..................... 1805-1870 25
- ----------------------------------------------------------------------
WLL:
Wideband CDMA ............ 2370-2400 10,20,40
- ----------------------------------------------------------------------
IMT 2000:
W-CDMA ................... 2110-2170 25
- ----------------------------------------------------------------------
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The Company also offers multicarrier amplification products.
Multicarrier power amplifiers require significantly higher linearity than single
carrier designs. The following table provides a list of the standards for which
the Company provides multicarrier amplifiers:
- --------------------------------------------------------------------------------
Spectrian Multicarrier Amplifier Configurations
- --------------------------------------------------------------------------------
Frequency Power Typical
Standard (MHZ) (Watts) Linearity (dBc)*
- --------------------------- ------- ------- -----------------
AMPS, TDMA, CDMA, CDPD 869-894 60-350 -65
CDMA, TDMA 1805-1990 25-100 -55
- --------------------------------------------------------------------------------
- ----------------
* Carrier to Intermodulation Distortion Ratio.
The Company's amplifiers can be configured as either modules or
pallets, separate plug-in amplifier units or integrated subsystems and range in
price from approximately $500 to $30,000. A pallet represents the lowest level
of amplifier complexity and consists of RF semiconductors mounted on a printed
circuit board without a housing. A plug-in amplifier unit consists of a cast
housing, which provides thermal management, and contains a RF amplifier pallet
combined with a digital control interface module. A power amplifier subsystem
consists of multiple cast housings and adds signal processing to enhance
linearity. The Company's products are integrated into base station systems
designed and/or manufactured by its OEM customers, and therefore must be
engineered to be compatible with industry standards, as well as customer
specifications including frequency, power and linearity.
OEM Customers, Sales and Marketing
The Company sells power amplifiers to a limited number of OEMs in North
America, Europe and Asia principally through its direct sales organization. The
Company's customers include many of the world's largest manufacturers of
wireless infrastructure equipment, including Nortel, LGIC and QUALCOMM. During
fiscal 1999, Nortel and LGIC accounted for approximately 76% and 11% of
revenues, respectively. During fiscal 1998, Nortel and LGIC accounted for
approximately 79% and 14% of revenues, respectively. During fiscal 1997, Nortel
accounted for approximately 75% of revenues. While Nortel continues to be the
Company's dominant customer, the products the Company supplies to Nortel and the
regions in which they are deployed have become more diverse. The Company expects
that sales of its products will continue to be concentrated among a limited
number of customers. Wireless infrastructure 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. Therefore, the Company
expects to incur increasing price pressures from Nortel and its other major OEM
customers in future periods which could result in declining average sales prices
for the Company's products. The Company's business, financial condition and
results of operations have been materially adversely affected in the past by the
failure of anticipated orders to materialize and by deferrals or cancellations
of orders by its customers. If the Company were to lose Nortel or any other
major customer as a customer, or if orders by Nortel or any other major OEM
customer were to otherwise decrease, the Company's business, financial condition
and results of operations would be materially adversely affected.
The Company employs a customer focused, team based direct sales
approach to satisfy the power amplification needs of its customers. Sales to
large OEM customers require close account management by Company personnel and
relationships at multiple levels of its customers' organizations, including
management, engineering and purchasing personnel. In addition, the Company's
application specific amplification products require experienced sales personnel
to match the customer's amplification requirements to the Company's product
capabilities. The Company believes that close technical collaboration with the
customer during the design phase of new wireless infrastructure equipment is
critical to the integration of its amplification products into the new
equipment. The Company's integrated sales approach involves a team consisting of
a business unit general manager, a senior account manager, a program manager and
members of the Company's engineering department. This sales approach allows the
Company's engineering personnel to work closely with their counterparts at the
OEM customer to assure compliance of the
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Spectrian product to the customer's specification. The Company's executive
officers are also involved in all aspects of the Company's relationships with
its major customers and work closely with their senior management. As of March
31, 1999, the Company had a direct sales staff of six people. The Company
warrants its new products against defects in design, materials and workmanship,
typically for periods from 12 to 30 months.
As part of the effort to diversify its product base, the Company began
to sell multicarrier amplifier systems (including filters and combiners)
directly to service providers in fiscal 1997. The Company recognizes that these
sales may be in conflict with potential or current OEM sales and is willing to
work with its OEM equipment suppliers so that the service provider receives a
Spectrian power amplifier system directly or through the OEM. There can be no
assurance that the Company's direct sales to service providers will not cause
its OEM equipment suppliers to reduce orders or terminate their relationship
with the Company. Any such reduction or termination could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company also markets its products with the assistance of
independent sales representatives in various parts of the world. The Company has
one independent sales representative in the United States, three sales
representatives in Europe covering Austria, Finland, France, Germany, Italy,
Sweden and Switzerland, one sales representative dedicated to each of Japan and
Israel and a sales supports organization in South Korea. The Company
continuously evaluates whether to establish direct sales forces or to utilize
independent representatives in a particular region or for a given potential
customer depending upon the scope of potential sales opportunities. The
Company's direct sales staff provides sales direction and support to its
international sales representatives. Sales outside of the United States
represented 84%, 95% and 73% of revenues in fiscal 1999, fiscal 1998 and fiscal
1997, respectively. Sales outside of the United States are denominated in U.S.
dollars in order to reduce the risks associated with the fluctuations of foreign
currency exchange rates. The Company expects that international sales will
continue to account for a significant portion of its revenues.
Manufacturing
The Company's internal manufacturing facilities consist of a 4 inch
wafer fabrication and semiconductor assembly and test facility and a low volume
amplifier assembly and test facility in Sunnyvale, California. The Company also
utilizes a contract manufacturer to produce its high volume amplifier products
on a turnkey basis.
The Company's strategy of frequently introducing and rapidly expanding
the manufacture of new products to meet evolving OEM customer and 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 and overtime expenses, inefficient
material procurement and an inability to realize economies of scale. These high
manufacturing costs and production interruptions have had an adverse effect on
the Company's results of operations. In addition, the Company has made and
expects to continue to make pricing commitments to OEM customers in anticipation
of achieving manufacturing cost reductions.
The Company's operation of its manufacturing 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. Fixed costs consist primarily of occupancy costs,
investment in manufacturing equipment, repair, maintenance and depreciation
costs related to equipment and fixed labor costs related to manufacturing and
process engineering. During periods of low demand such as evidenced in fiscal
1999, high fixed wafer fabrication costs are likely to have a material adverse
effect on the Company's results of operations.
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 because of their greater
complexity.
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Wafer Fabrication. The Company operates its own wafer fabrication
facility for the production of RF semiconductors, the most important component
utilized in the Company's amplifiers. As of March 31, 1999, the Company has an
eight person semiconductor process engineering group responsible for continuous
improvement of semiconductor processes. The Company believes that control of the
semiconductor manufacturing process allows it to reduce unit costs, control
quality, improve time to market delivery and most importantly increase the
linearity of the RF semiconductors used in its amplifiers.
The Company's operation of its wafer fabrication facility subjects the
Company 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.
Semiconductor Assembly and Test. Once a wafer is processed, it is
tested and diced into chips that are attached to a special ceramic package, wire
bonded and encapsulated. The packages are designed for optimal thermal and
electrical performance that are critical during high power RF operation. These
processes require precision for performance of the semiconductor to meet the
Company's strict standards but must also be suited to manufacturing in large
volumes. The Company utilizes patented packaging techniques to improve the
performance of its semiconductors and amplifiers as well as the automated
assembly techniques for semiconductors. In addition, the Company utilizes a
specialized surface mount packaging process to improve transistor assembly
volume that also enhances thermal performance, lowers costs and improves
reliability.
Amplifier Assembly and Test. The Company's amplifier manufacturing
activities consist of purchasing components, assembling and testing components
and subassemblies, and integrating subassemblies into finished products for its
lower volume amplifier products. The Company's amplifiers are comprised of a
variety of subassemblies and components designed or specified by the Company,
including housings, harnesses, cables, packaged RF semiconductors, semiconductor
integrated circuits and printed circuit boards. Except for the RF
semiconductors, these components and subassemblies are manufactured by third
parties. During fiscal 1999, the Company began utilizing the services of a
turnkey contractor to assemble its high volume amplifier products. Regardless of
whether the Company assembles an amplifier in house or relies on a turnkey
contractor, each of the Company's products receives extensive in process and
final quality inspections and tests.
The Company attempts to utilize standard parts and components that are
available from multiple vendors. However, certain components used in the
Company's products are currently available only from single sources, and other
components are available from only a limited number of sources. Despite the
risks associated with purchasing components from single sources or from a
limited number of sources, the Company has made the strategic decision to select
single source or limited source suppliers in order to obtain lower pricing,
receive more timely delivery and maintain quality control. If the Company were
unable to obtain sufficient quantities of components, delays or reductions in
product shipments could occur which would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company continues to initiate actions to reduce its manufacturing
costs. The Company outsources assembly of its higher volume amplifiers on a
turnkey basis. There can be no assurance that these activities will reduce costs
as quickly as anticipated reductions in average selling prices of the Company's
products. Any failure to achieve continued manufacturing cost reductions could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Research and Development
The mission of the Company's research and development organization is
to rapidly design low cost, highly manufacturable RF power amplifiers with
industry leading performance. The Company's research and development staff is
organized into a semiconductor group and an amplifier group. The semiconductor
group focuses on the rapid design of RF semiconductors that are low cost and
highly efficient to provide improved RF performance. The semiconductor group
also performs advanced research in device
9
<PAGE>
modeling and semiconductor process development to support the amplifier
engineering group's efforts. The amplifier engineering group focuses on rapid
development of new RF power amplifiers that are manufacturable in high volumes
at low cost and achieve industry leading performance. This group creates new
product platforms and leverages existing ones, reuses existing circuit
topologies and introduces into production new correction, control and
amplification concepts created by the group. The Company uses an automated
design environment to model RF semiconductors and amplifiers. This design
environment, together with the Company's modular product architecture and
configurable core technologies, allow it to rapidly define, develop and deliver
on a timely basis the new and enhanced products demanded by its OEM customers.
The Company has historically devoted a significant portion of its
resources to research and development programs and expects to continue to do so.
As of March 31, 1999, the Company had 131 people engaged in research and
development. The Company's research and development expenses in fiscal 1999,
fiscal 1998 and fiscal 1997 were $26.7 million, $18.6 million and $17.2 million,
respectively, and represented 27%, 11% and 19%, respectively, of total revenues
in those periods.
The markets in which the Company and its customers compete are
characterized by rapidly changing technology, evolving industry standards and
continuous improvements in products and services. The Company's future success
depends upon, among other things, its ability to develop new products in a
timely manner that compete effectively on the basis of price and performance and
that adequately address the needs of its OEM customers. No assurance can be
given that the Company's product development efforts will be successful, that
its new products will achieve customer acceptance or that such OEMs' products
will achieve customer acceptance. In addition, as is characteristic of the
wireless communications equipment industry, the average sales prices of the
Company's products have historically decreased over the products' lives and are
expected to continue to do so. To offset declining average sales prices, the
Company believes that in the near term it must develop new products that
incorporate advanced features and can be sold at higher average sales prices. To
the extent that new products are not developed in a timely manner, do not
achieve customer acceptance or do not generate higher sales prices and margins,
the Company's business, financial condition and results of operations would be
materially adversely affected.
Patents and Proprietary Technology
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 five
that have been allowed but not yet formally issued. The Company also has been
awarded four foreign patents and has fifteen 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.
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
10
<PAGE>
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.
Competition
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 such as the Company. 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
into the merchant market and compete directly with the Company, and at least one
OEM, NEC Corporation ("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. Certain of these competitors have, and potential future
competitors could have, substantially greater technical, financial, marketing,
distribution and other resources than the Company and have, or could have,
greater name recognition and market acceptance of their products and
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. To the extent that OEMs increase their reliance on external
sources for their power amplification needs, more competitors could be attracted
to the market. The Company expects its competitors to offer new and existing
products at prices necessary to gain or retain market share. The Company has
experienced significant price competition, which has in the past affected gross
margins. Certain of the Company's competitors have substantial financial
resources which may enable them to withstand sustained price competition or
downturns in the power amplification market. There can be no assurance that the
Company will not be subject to increased price competition or that the Company
will be able to compete successfully in the future.
Backlog
The Company does not believe that its backlog as of any particular date
is representative of actual sales for any succeeding period. As part of the
Company's close working relationships with its major customers, such customers
expect the Company to respond quickly to changes in the volume and delivery
schedule of their amplifiers, and if necessary, to inventory products at the
Company's facilities for just in time delivery. Therefore, although contracts
with such customers typically specify aggregate dollar volumes of products to be
purchased over an extended time period, such contracts also provide that
scheduled shipment dates of particular volumes are generally released to the
Company only a few days or weeks prior to the actual required delivery dates. In
addition, the Company's customers may cancel or defer orders without significant
penalty.
Employees
As of March 31, 1999, the Company had a total of 515 regular, temporary
and contract employees, including 313 in manufacturing operations, 131 in
research and development, 22 in sales and 49 in administration. The Company's
future success will depend, in part, on its ability to continue to attract,
retain and motivate highly qualified technical and management personnel. None of
the Company's employees is represented by a collective bargaining agreement, nor
has the Company experienced any work stoppage. The Company considers its
relations with its employees to be good.
11
<PAGE>
Management
The executive officers of the Company are and certain information about
them as of June 1, 1999 is as follows:
Name Age Position
---- --- --------
Garrett A. Garrettson ......... 55 President, Chief Executive Officer
and Director
Henry C. Montgomery ........... 63 Acting Chief Financial Officer Executive
Joseph M. Veni ................ 47 Vice President, and General Manager,
Single Carrier Products
Timothy Heyboer ............... 49 Vice President, Advanced Technology
Christopher Menicou ........... 40 Vice President, Quality
John Pelose ................... 44 Vice President and General Manager,
Multicarrier Products
David Piazza .................. 35 Vice President and General Manager,
Semiconductor
William Zucker ................ 41 Vice President, Single Carrier Products
Garrett A. Garrettson joined the Company in April 1996 as President,
Chief Executive Officer and a Director. Between March 1993 and March 1996, he
served as President and Chief Executive Officer of Censtor Corporation
("Censtor"), which designs and sells technology related to magnetic recording
heads for the disk drive industry. From 1986 to March 1993, he served as a Vice
President of Imprimis Technology Incorporated ("Imprimis"), a wholly owned
subsidiary of Control Data Corporation, and subsequently as a Vice President of
Seagate Technology, Inc. ("Seagate") following its acquisition of Imprimis in
1989. Prior to 1986, Mr. Garrettson held a variety of positions with
Hewlett-Packard Company and served in the United States Navy. Mr. Garrettson
also serves on the Boards of Directors of RedLake Imaging and Benton Oil and Gas
Company. He received his B.S. and M.S. in Engineering Physics and his Ph.D. in
Mechanical Engineering from Stanford University.
Henry C. Montgomery joined the Company in May 1999 as Interim Executive
Vice President, Finance and Administration, Chief Financial Officer and
Secretary. He served as Executive Vice President of SyQuest Technology, Inc., a
public company engaged in the development, manufacture and sale of computer hard
drives from November 1996 through July 1997. He served as president and Chief
Executive Officer of New Media Corporation, a privately held company engaged in
developing, manufacturing and selling PCMCIA cards for the computer industry,
from March 1995 through November 1996. From March 1994 to March 1995, Mr.
Montgomery served as President and Chief Executive Officer of Industrial
Electric Manufacturing, Inc. Since 1980, Mr. Montgomery has been the Chairman of
the Board of Montgomery Financial Services Corporation, a management consulting
and financial services firm. Mr. Montgomery has served as a director of Swift
Energy Company, an oil and gas company, since 1987. Mr. Montgomery received his
B.A. in Economics from Miami University, Oxford, Ohio.
Joseph M. Veni joined the Company in April 1992 as Vice President of
Sales and in June 1996 was named Senior Vice President, Sales and Marketing and
in December 1998 became Executive Vice President and General Manager of Single
Carrier Products. From 1987 to April 1992, he was Vice President of Sales and
Marketing at TTI-General Signal. Prior to that time, Mr. Veni was employed by
Cushman Electronics, Inc., Halcyon Communications, Inc., ICS Group, Inc. and
Western Union Telegraph Co. in various marketing and sales positions. Mr. Veni
received his Associates Degree in Electronics Technology from Mt. San Antonio
College.
Timothy Heyboer joined the Company in 1986 as Director of Engineering
and served in a variety of functions and divisions including product line
management and the now discontinued military division. In August 1996, Mr.
Heyboer was named Vice President of Amplifier Engineering of the Company. In
December 1998, Mr. Heyboer was named Vice President of Advanced Technology.
Prior to joining Spectrian, Mr. Heyboer was employed at Narda Western
Operations, a passive microwave components company. Mr. Heyboer received his
B.S.E.E. degree and his M.S.E.E. degree from University of Michigan, Ann Arbor.
Christopher Menicou joined the Company in January 1998 as Vice
President of Quality. Prior to joining Spectrian, Mr. Menicou held the position
of Vice President of Quality at Credence Systems from
12
<PAGE>
February 1997 until January 1998. From 1984 until 1996, Mr. Menicou held a
variety of positions at LTX Corporation including Director of Quality. Mr.
Menicou earned his B.S. in Business Administration from San Jose State
University.
John Pelose joined the Company in 1986 and has held senior management
positions in Design Engineering, Operations and Technical Corporate Development.
In December 1998, Mr. Pelose was appointed Vice President & General Manager of
Multicarrier Products. Prior to joining Spectrian, Mr. Pelose held engineering
management and design positions at Narda Microwave and Ford Aerospace. Mr.
Pelose earned his B.S.E.E. degree from the University of California at Davis and
his M.S.E.E. from Santa Clara University.
David Piazza joined the Company in 1990. He has served in various
management positions at the Company, including Director of Engineering, PCS
Amplifier Products, Engineering Manager, Amplifier Products and Project
Engineer. In September 1996, Mr. Piazza was named Vice President, Semiconductor
R&D for the Company. Mr. Piazza received his B.S.E.E. degree from the University
of California at Davis.
William Zucker joined the Company in October 1995 as Vice President of
Engineering. In August 1996, Mr. Zucker became Vice President of Product Line
Management. In April 1997, he was named Vice President of Marketing and in June
1998, became Vice President of Single Carrier Products. Prior to joining the
Company, Mr. Zucker held several positions at AT&T/AT&T Bell Labs, including
Director of Product Management from July 1994 to October 1995 and Director of
Development from November 1991 to July 1994. Mr. Zucker received his B.S.E.E.
degree from Manhattan College and his S.M. in Electrical Engineering from MIT.
ITEM 2. PROPERTIES
The Company's principal administrative, engineering and manufacturing
facilities are located in two buildings of approximately 141,000 square feet in
Sunnyvale, California. In November 1996, the Company entered into several
agreements in connection with a transaction with respect to these properties.
Pursuant to these agreements, the Company sold these properties to SPEC (CA) QRS
12-20, Inc. ("SPEC"), and pursuant to the terms of a lease agreement, SPEC
agreed to lease these properties to the Company for a term of 15 years (with two
options to extend the lease for up to an additional ten years). This lease
agreement also provides that the Company shall have the right of first refusal
to purchase the properties from SPEC upon the occurrence of certain conditions.
During the first quarter of fiscal 1999, the Company entered into operating
leases for an ancillary 40,000 square foot manufacturing facility in Rocklin,
California and a 2,750 square foot engineering design center in Quincy,
Illinois. The Rocklin facility has a sixty-two month term and expires in July
2003, and the Quincy facility has been renewed for a twelve month term that will
expire in March 2000. In March 1997, through means of a limited liability
company of which the Company owns 91.5%, the Company purchased a building of
approximately 39,000 square feet in Sunnyvale, California located between the
Company's two occupied buildings.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF SPECTRIAN COMMON STOCK
The Company's Common Stock has been traded on the Nasdaq National
Market under the symbol "SPCT" since August 4, 1994. The following table sets
forth for the period indicated the high and low sale prices for the Common
Stock, as reported by the Nasdaq National Market.
Fiscal Year Ended March 31, 1998 High Low
-------------------------------- ---- ---
First Quarter .......................... $ 37 3/4 $ 10 3/4
Second Quarter ......................... 64 1/4 36 1/4
Third Quarter .......................... 66 3/8 16 3/4
Fourth Quarter ......................... 20 1/2 14 5/8
Fiscal Year Ended March 31, 1999
--------------------------------
First Quarter .......................... 19 13 1/2
Second Quarter ......................... 18 1/2 12
Third Quarter .......................... 15 1/4 8
Fourth Quarter ......................... 20 5/8 8 3/4
On June 1, 1999, the last reported sale price of the Company's Common
Stock on the Nasdaq National Market was $12 7/8 per share. As of June 1, 1999
there were approximately 286 holders of record of the Company's Common Stock.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock and
does not anticipate paying cash dividends in the foreseeable future. The Company
has entered into a bank line of credit and the Company's agreement with such
lender prohibits the payment of cash dividends without the prior written consent
of the lender.
14
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
The selected consolidated financial data set forth below under the
captions "Statement of Operations Data" and "Balance Sheet Data" for, and as of
the end of, each of the years in the five-year period ended March 31, 1999, are
derived from the consolidated financial statements of Spectrian Corporation and
its subsidiaries, which financial statements have been audited by KPMG LLP,
independent auditors. The results for the fiscal year ended March 31, 1999 are
not necessarily indicative of the results for any future period. The selected
consolidated financial data set forth below should be read in conjunction with
the consolidated financial statements as of March 31, 1999 and March 31, 1998
and for each of the years in the three year period ended March 31, 1999 and
notes thereto set forth on pages F-1 to F-15 and "Management's Discussion and
Analysis of Financial Condition and Results of Operation."
<CAPTION>
Fiscal Year Ended March 31
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues .............................................. $ 99,331 $ 168,798 $ 88,252 $ 72,113 $ 62,478
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of product sales ................................ 96,880 132,684 65,322 45,355 39,068
Research and development ............................. 26,735 18,644 17,230 14,548 11,374
Selling, general and administrative .................. 16,315 13,014 9,299 7,450 6,784
--------- --------- --------- --------- ---------
Total costs and expenses ........................... 139,930 164,342 91,851 67,353 57,226
--------- --------- --------- --------- ---------
Operating income (loss) ............................ (40,599) 4,456 (3,599) 4,760 5,252
Interest income (expense), net ........................ 3,687 3,335 (392) 889 391
Other income, net ..................................... -- 1,530 -- -- --
--------- --------- --------- --------- ---------
Income (loss) before income taxes .................. (36,912) 9,321 (3,991) 5,649 5,643
Income tax expense .................................... 59 399 -- 169 170
--------- --------- --------- --------- ---------
Net income (loss) .................................. $ (36,971) $ 8,922 $ (3,991) $ 5,480 $ 5,473
========= ========= ========= ========= =========
Net income (loss) per share:(1)
Basic .............................................. $ (3.50) $ 0.90 (0.49) $ 0.71 $ 0.87
Diluted ............................................ $ (3.50) 0.83 (0.49) 0.66 0.70
Shares used in computing per share amounts:(1)
Basic .............................................. 10,568 9,881 8,150 7,684 6,300
Diluted ............................................ 10,568 10,701 8,150 8,363 7,764
</TABLE>
<TABLE>
<CAPTION>
March 31
--------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital ......................................... $ 72,399 $117,478 $ 24,062 $ 12,710 $ 28,317
Total assets ............................................ 128,412 175,051 66,633 55,922 45,070
Debt and capital lease obligations, net of
current portion(2) ..................................... 4,899 5,912 7,057 -- --
Total stockholders' equity .............................. 95,968 144,342 42,466 44,838 37,056
<FN>
- ------------------
(1) See Note 1 of Notes to Consolidated Financial Statements contained on pages
F-1 to F-15 of this Annual Report on Form 10-K for the fiscal year ended
March 31, 1999 for information concerning the per share computations.
(2) See Note 4 of Notes to Consolidated Financial Statements herein for a
description of the Company's debt and lease obligations.
</FN>
</TABLE>
15
<PAGE>
ITEM 7. 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 the impact on the Company of a
loss of a major OEM customer; the statements in the analysis of "--Years ended
March 31, 1999 and 1998" under "--Revenues" regarding anticipated future revenue
levels; the statements in the second paragraph of "--Liquidity and Capital
Resources" concerning renewal of the revolving line of credit; the statements in
the last paragraph under "--Liquidity and Capital Resources" regarding the
anticipated spending for capital additions in 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 these 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 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 in infrastructure, the
Company has a high 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 and
will account for a portion of the Company's revenue stream.
During fiscal 1999, Nortel and LGIC accounted for approximately 76% and
11% of revenues, respectively. During fiscal 1998, Nortel and LGIC accounted for
approximately 79% and 14% of revenues, respectively. During fiscal 1997, Nortel
accounted for approximately 75% of revenues. 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 financial market turmoil and economic downturn in Korea
16
<PAGE>
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.
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 the gross margin on sales.
Fiscal Year Ended March 31
----------------------------
1999 1998 1997
----- ----- -----
Revenues .................................... 100.0% 100.0% 100.0%
----- ----- -----
Costs and expenses:
Cost of sales ............................. 97.6 78.6 74.0
Research and development .................. 26.9 11.0 19.6
Selling, general and administrative ....... 16.4 7.8 10.5
----- ----- -----
Total costs and expenses ................ 140.9 97.4 104.1
----- ----- -----
Operating income (loss) ................. (40.9) 2.6 (4.1)
Interest income (expense), net ............. 3.7 2.0 (0.4)
Other income, net .......................... -- 0.9 --
----- ----- -----
Income (loss) before income taxes ......... (37.2) 5.5 (4.5)
Income tax expense ......................... -- 0.2 --
----- ----- -----
Net income (loss) ......................... (37.2)% 5.3% (4.5)%
===== ===== =====
Gross margin on sales ...................... 2.5% 21.4% 26.0%
Years Ended March 31, 1999 and 1998
Revenues. The Company's revenues decreased by 41% to $99.3 million for
the fiscal year ending March 31, 1999 ("fiscal 1999") from $168.8 million for
the fiscal year ending March 31, 1998 ("fiscal 1998"). The decrease in revenues
for fiscal 1999 reflects a significant decrease in demand, primarily by Nortel,
for the Company's TDMA, GSM and PCS CDMA 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
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products, raw materials, RF semiconductor fabrication costs, overhead and
warranty costs. The Company's cost of sales decreased by 27% to $96.9 million
for fiscal 1999 from $132.7 million for fiscal 1998. Gross margin on sales was
3% for fiscal 1999 as compared to 21% for fiscal 1998. The decline in gross
margin for fiscal 1999 reflects reduced average selling prices on some of the
Company's amplifier products, transition costs associated with transferring the
Company's higher volume amplifier products to a contract manufacturer, costs
associated with the underutilization of the Company's wafer fabrication facility
due to reduced shipment volume levels in fiscal 1999, warranty costs associated
with some of the Company's older products and costs associated with higher
excess and obsolete inventory levels due to reduced shipment demand. In the
fourth quarter of fiscal 1999, the Company had a negative gross margin of 29.6%
as compared to a negative gross margin of 3.1% in the third quarter of fiscal
1999 and positive gross margins of 23.2% and 9.9%, in the second and first
quarters of fiscal 1999, respectively. The significant decline in the gross
margin for the fourth quarter of fiscal 1999 was attributable to costs
associated with eliminating manufacturing activities locally for the Company's
high volume amplifier products, increased warranty costs and higher excess and
obsolete inventory levels due to lower demand.
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 43.5%
to $26.7 million in fiscal 1999 from $18.6 million in fiscal 1998. The increase
in R&D spending in fiscal 1999 reflects increased spending in both amplifier and
semiconductor R&D for personnel expenses and project development expenses. R&D
expenses as a percentage of revenues increased to 26.9% in fiscal 1999 from
11.0% in fiscal 1998.
Selling, General and Administrative. Selling, general and
administrative ("SG&A") expenses include compensation and benefits for sales,
marketing, senior management and administrative personnel, commissions paid to
independent sales representatives, professional fees and other expenses. The
Company's SG&A expenses increased by 25.4% to $16.3 million for fiscal 1999 from
$13.0 million for fiscal 1998. SG&A expenses as a percentage of revenues
increased to 16.4% for fiscal 1999 from 7.8% for fiscal 1998. The increase in
SG&A expenses was primarily due to costs associated with the implementation of a
new enterprise resource planning system and a new product data management system
and additional ongoing infrastructure support and depreciation costs associated
with these new systems. These costs were offset slightly by reduced outside
sales commissions due to the decline in revenue in fiscal 1999.
Interest Income (Expense), net. Interest income, net for fiscal 1999
was $3.7 million compared to net interest income of $3.3 million for fiscal
1998, reflecting slightly higher average cash and short-term investment balances
in fiscal 1999 versus fiscal 1998.
Other Income, net. In fiscal 1999, no other expense or other income was
recorded. Other income of $1.5 million was recorded in the first quarter of
fiscal 1998 representing the net gain realized from the cash sale of the
Company's wholly owned subsidiary, American Microwave Technology, Inc. ("AMT"),
to the management group and employees of AMT.
Income Taxes. The Company recorded minimal income tax expense of
$59,000 for fiscal 1999 due to the net loss incurred during the period. An
income tax expense of $399,000 was recorded in fiscal 1998, reflecting the use
of net operating loss carryforwards ("NOLs"). The Company's ability to use its
NOLs against taxable income may be subject to restrictions and limitations under
Section 382 of the Internal Revenue Code of 1986, as amended, in the event of a
change in ownership of the Company as defined therein.
Years Ended March 31, 1998 and 1997
Revenues. The Company's revenues increased by 91% to $168.8 million for
fiscal 1998 from $88.3 million for the fiscal year ending March 31, 1997
("fiscal 1997"). The sizable increase in revenues for fiscal 1998 reflected a
significant increase in demand in the first three fiscal quarters of 1998,
primarily by Nortel, for the Company's second generation GSM and multicarrier
products, single carrier TDMA products and Korean PCS CDMA products. In the
fourth quarter of fiscal 1998, the Company's revenues decreased substantially to
$27.6 million from $47.2 million in the immediately preceding quarter due to
reduced orders from OEM customers stemming in part from the impact of the
financial market and economic turmoil in parts of Asia, particularly Korea.
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Cost of Sales. The Company's cost of sales increased by 103% to $132.7
million for fiscal 1998 from $65.3 million for fiscal 1997. Included in the cost
of sales were costs associated with the rapid increase in manufacturing volume
for new products and costs associated with discontinuing older products. Gross
margin on sales was 21% for fiscal 1998 as compared to 26% for fiscal 1997. The
decline in gross margin for fiscal 1998 primarily reflects costs associated with
steep new product volume manufacturing growth including investment in overhead
infrastructure and automated test equipment, premium costs associated with
materials procurement and logistics, excess and obsolete inventories and product
warranty costs. In the fourth quarter of fiscal 1998, the Company had negative
gross margin of 17.4% as compared to positive gross margins of 28.5% and 27.2%
in the third quarter of fiscal 1998 and the fourth quarter of fiscal 1997,
respectively. The decline in the gross margin for the fourth quarter of fiscal
1998 was attributable to increased material, warranty, excess and obsolete
inventory costs that were not reduced proportionately to revenues.
Research and Development. The Company's R&D expenses increased by 8% to
$18.6 million in fiscal 1998 from $17.2 million in fiscal 1997. R&D spending in
fiscal 1997 included development costs for the Company's 4 inch wafer
fabrication facility. The increase in R&D spending in fiscal 1998 reflects
increased spending in both amplifier and semiconductor R&D for personnel
expenses and project development expenses. R&D expenses as a percentage of
revenues decreased to 11.0% in fiscal 1998 from 19.6% in fiscal 1997, reflecting
the substantially higher revenue levels in fiscal 1998.
Selling, General and Administrative. The Company's SG&A expenses
increased by 39.9% to $13.0 million for fiscal 1998 from $9.3 million for fiscal
1997. SG&A expenses as a percentage of revenues decreased to 7.8% for fiscal
1998 from 10.5% for fiscal 1997. The increase in SG&A expenses was primarily due
to outside commissions paid for South Korean sales, MIS investment in new
infrastructure, increases in sales and administrative headcount, and to a lesser
extent the maintenance of a South Korean sales support office. The decrease of
SG&A expenses as a percentage of sales was a result of the substantially higher
revenue level in that period.
Interest Income (Expense), net. Interest income, net for fiscal 1998
was $3.3 million compared to net interest expense of $392,000 for fiscal 1997.
The increase in net interest income was the result of interest income earned on
substantially higher cash balances and short-term investments reflecting
primarily the investment of the proceeds of the Company's August 1997 public
offering.
Other Income, net. Other income of $1.5 million was recorded in the
first quarter of fiscal 1998 representing the net gain realized from the cash
sale of the Company's wholly owned subsidiary, AMT, to the management group and
employees of AMT. No other expense or other income was recorded during fiscal
1997.
Income Taxes. The Company recorded income tax expense for fiscal 1998
of $399,000.
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 $12.3 million in fiscal 1999 while cash
provided by operations was $16.6 million in fiscal 1998. The cash used by
operations in fiscal 1999 is primarily attributable to the net losses incurred
in fiscal 1999. The cash provided by operations for fiscal 1998 was principally
generated by the Company's profits over the first three quarters of the fiscal
year. The cash used by operations in fiscal 1997 was principally for purchasing
inventory to support production growth for increasing product shipment volumes.
As of March 31, 1999, the Company had working capital of $72.4 million
including $62.7 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 March 31, 1999, the Company was in compliance
with all of these financial covenants with the exception of the profitability
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covenant. The lender granted a waiver to the Company with respect to such
profitability covenant. There were no borrowings outstanding against this line
of credit as of March 31, 1999.
In April 1998, the Company announced a repurchase program pursuant to
which it could acquire up to one million shares of Common Stock in open market
purchases. The Company repurchased a total of one million shares during the
third and fourth quarters of fiscal 1999 on the open market for a total purchase
price of $14.8 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 March 31, 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
future facilities expansion.
Additions to property and equipment were $11.3 million for fiscal 1999
and $18.0 million in fiscal 1998. Capital additions for fiscal 1999 included the
purchase of new corporate management information systems software, manufacturing
test and production equipment required to support new products and test
equipment to support various research and development projects.
The Company anticipates spending approximately $10 million over the
next 12 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 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
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 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 fiscal 1999, Nortel and LGIC accounted for
approximately 76% and 11% of revenues, respectively. During fiscal 1998 Nortel
and LGIC accounted for approximately 79% and 14% of revenues, respectively.
During fiscal 1997, Nortel accounted for approximately 75% of revenues.
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
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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; and 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 TOMA, 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 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
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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
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.
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Furthermore, the Company began outsourcing assembly of some of its higher volume
power amplifiers to a contract manufacturer during the third quarterly of fiscal
1999. The Company's reliance units sole sources 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
represented 84%, 95% and 73% of revenues in fiscal 1999, fiscal 1998 and fiscal
1997, 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, 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
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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.
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 five that have been allowed but not yet formally
issued. The Company also has been awarded four foreign patents and has fifteen
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
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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.
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.
25
<PAGE>
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.
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. For example, the
Company's Executive Vice President of Operations and Chief Operating Officer
resigned in late fiscal 1999. The Company does not maintain key person life
insurance on any of its key technical personnel. 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 June 1, 1999, the last reported sale price of the Common Stock as
reported on the Nasdaq National Market was $12.875.
Pending Litigation. Since December 23, 1997, a number of complaints
have been filed against the Company and certain of its officers in the Federal
Court for the Northern District of California that allege violations of the
federal securities laws. Similar complaints have been filed in California state
court that allege violations of California state securities laws and California
common law. The complaints have been consolidated in the federal and state
courts, respectively. The plaintiffs in both the federal and state lawsuits
purport to represent a class of persons who purchased the Company's securities
during the period of July 17, 1997 through October 23, 1997. The complaints
allege that the Company and certain of its officers misled the investing public
regarding the financial prospects of the Company. The Company believes that the
allegations are completely without merit and will vigorously defend itself.
Certain provisions of the Company's Certificate of Incorporation and
indemnification agreements between the 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
26
<PAGE>
"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.
27
<PAGE>
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 short-fall 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and market our products in
North America, Europe and the Asia-Pacific region. As a result, our 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 our
products less competitive in foreign markets.
<TABLE>
Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. We do not hold derivative financial
instruments in our investment portfolio. We place our investments with high
quality institutions and limit the amount of credit exposure to any one issuer.
We are averse to principal loss and ensure the safety and preservation of our
invested funds by limiting default, market and reinvestment risk. We classify
our 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 40 years. The table below presents
the amounts and related weighted interest rates of our short-term investments at
March 31, 1999:
<CAPTION>
Average Amortized Fair
interest rate cost value
--------------- ----------- ---------
<S> <C> <C> <C>
Fixed rate 6.60% $36,280 $36,417
========
Contractual maturity dates 1 to 5 years $28,117
Contractual maturity dates 5 to 10 years --
Contractual maturity dates over 10 years 8,300
--------
$36,417
========
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and the independent
auditors' report appear on pages F-1 through F-15 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's
directors is incorporated by reference to the sections captioned "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance"
contained in the Company's Proxy Statement related to the 1999 Annual Meeting of
Stockholders, to be filed by the Company with the Securities and Exchange
Commission within 120 days of the end of the Company's fiscal year pursuant to
General Instruction G(3) of Form 10-K (the "Proxy Statement"). Certain
information required by this item concerning executive officers is set forth in
Part I of this Report in "Business--Management" and certain other information
required by this item is incorporated by reference from the section captioned
"Section 16(a) Beneficial Ownership Reporting Compliance" contained in the Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the section captioned "Executive Compensation and Other Matters" contained in
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the sections captioned "Security Ownership of Certain Beneficial Owners and
Management" and "Record Date; Outstanding Shares" contained in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the sections captioned "Compensation Committee Interlocks and Insider
Participation" and "Certain Transactions" contained in the Proxy Statement.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The following consolidated financial statements are incorporated by
reference in Item 8 of this Report:
Independent Auditors' Report
Consolidated Balance Sheets, March 31, 1999 and 1998
Consolidated Statements of Operations for the years ended
March 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years
ended March 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
March 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts and Reserves
(see page S-1) Independent Auditors' Report (see page F-2)
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
(a)(3) Exhibits
3.5(14) Certificate of Incorporation of Registrant.
3.6(15) Bylaws of Registrant.
4.1(11) Amended and Restated Preferred Shares Rights Agreement of January
15, 1997, between the Registrant and ChaseMellon Shareholder
Services, L.L.C., as amended, including the form of Rights
Certificate and the Certificate of Determination, the Summary of
Rights attached thereto as Exhibits A, B and C, respectively.
4.1.1(11) Letter Agreement to amend Preferred Shares Rights Agreement dated
as of January 15, 1997 between the Registrant and Kopp Investment
Advisors, Inc.
10.2(8) 1992 Stock Plan, as amended.
10.4(8) 1994 Director Option Plan and form of agreement thereunder.
10.7(14) Amended and Restated Business Loan Agreement between Registrant
and Silicon Valley Bank dated February 11, 1997 and ancillary
documents thereto.
10.13+(4) Hardware Supply Agreement dated April 6, 1995 between Northern
Telecom Limited and Registrant
10.16(5) Purchase and Sale Agreement between Metropolitan Life Insurance
Company and Registrant.
10.17+(6) Development and Supply Agreement between QUALCOMM Incorporated
and Registrant.
10.18+(7) Purchasing Agreement between Airnet Communications Corporation
and Registrant.
10.19(8) Employment Agreement between Garrett A. Garrettson and
Registrant.
10.21(9) Term Loan Agreement between Silicon Valley Bank and Registrant
10.22(10) Lease Agreement dated November 19, 1996 between the Registrant
and SPEC (CA) QRS 12-20, Inc.
10.23(10) Bill of Sale dated November 19, 1996 by the Registrant to SPEC
(CA) QRS 12-20, Inc.
10.26(13) Stock Option Agreement dated November 26, 1997 between Registrant
and Garrett A. Garrettson.
10.27(13) Stock Option Agreement dated November 26, 1997 between Registrant
and Garrett A. Garrettson.
30
<PAGE>
10.28(13) Stock Option Agreement dated November 26, 1997 between Registrant
and Garrett A. Garrettson.
10.30(13) Stock Option Agreement dated March 20, 1997 between Registrant
and Michael Morrione.
10.32(15) Form of Indemnification Agreement with directors and officers.
10.33(16) 1998 Nonstatutory Stock Option Plan.
10.34(17) 1998 Employee Stock Purchase Plan.
10.35(18) Lease Agreement between Registrant and Ellington Development Inc.
dated April 13, 1998.
10.36 Separation Agreement dated March 23, 1999 between the Registrant
and Stephen B. Greenspan.
10.37 Separation Agreement dated May 7, 1999 between the Registrant and
Bruce R. Wright. Henry C. Montgomery.
23.1 Consent of KPMG LLP.
24.1 Power of Attorney (included on page 32).
27.1 Financial Data Schedule.
- ------------
+ Confidential treatment has been requested or granted with respect to
certain portions of this exhibit. Omitted portions have been filed
separately with the Securities and Exchange Commission.
4 Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 1995.
5 Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended July 1, 1995.
6 Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995.
7 Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended December 30, 1995.
8 Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (File No. 333--38561) as filed with the
Securities and Exchange Commission on October 23, 1997.
9 Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 29, 1996.
10 Incorporated by reference to the Registrant's Form 8-K dated November 19,
1996.
11 Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form 8-A (File No. 000-24360) as filed with the Securities
and Exchange Commission on January 17, 1997.
13 Incorporated by reference to exhibits filed with Registrant's
Post-Effective Amendment No. 1 to the Registration Statement on Form S-8
(File No. 333-25435) as filed with the Securities and Exchange Commission
on October 21, 1997.
14 Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 28, 1997.
15 Incorporated by reference to exhibits filed with Registrant's Current
Report on Form 8-K dated October 10, 1997.
16 Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-8 (File No. 333-49081) as filed with the Securities
and Exchange Commission on April 1, 1998.
17 Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the year ended March 31, 1998 as filed with the
Securities and Exchange Commission on May 27, 1998.
18 Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 28, 1998.
(b) Reports on Form 8-K. The Company did not file any reports on Form
8-K during the three months ended March 31, 1999.
(c) Exhibits. See Item 14(a)(3) above.
(d) Financial Statement Schedules. See Item 14(a)(2) above.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SPECTRIAN CORPORATION
By: /s/ Garrett A. Garrettson
--------------------------------
Garrett A. Garrettson
President, Chief Executive
Officer and Director
Date: June 11, 1999
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Garrett A. Garrettson and Henry C.
Montgomery, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, to sign any and all amendments (including
post-effective amendments) to this Annual Report on Form 10-K and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, or any of them, shall do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Garrett A. Garrettson President, Chief Executive June 11, 1999
- ------------------------------ Officer and Director
Garrett A. Garrettson (Principal Executive Officer)
/s/ Henry C. Montgomery Executive Vice President, June 11, 1999
- ------------------------------ Finance and Administration,
Henry C. Montgomery Chief Financial Officer and
Secretary (Principal
Accounting Officer)
/s/ James A. Cole
- ------------------------------ Director June 11, 1999
James A. Cole
/s/ Martin Cooper
- ------------------------------ Director June 11, 1999
Martin Cooper
/s/ Charles D. Kissner
- ------------------------------ Director June 11, 1999
Charles D. Kissner
/s/ Robert A. Shaner
- ------------------------------ Director June 11, 1999
Robert W. Shaner
/s/ Robert C. Wilson
- ------------------------------ Director June 11, 1999
Robert C. Wilson
/s/ Eric A. Young
- ------------------------------ Director June 11, 1999
Eric A Young
32
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report ............................................. F-2
Consolidated Balance Sheets .............................................. F-3
Consolidated Statements of Operations and Other
Comprehensive Income (Loss) ............................................ F-4
Consolidated Statements of Stockholders' Equity .......................... F-5
Consolidated Statements of Cash Flows .................................... F-6
Notes to Consolidated Financial Statements ............................... F-7
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Spectrian Corporation:
We have audited the accompanying consolidated balance sheets of
Spectrian Corporation and subsidiaries as of March 31, 1999 and 1998, and the
related consolidated statements of operations and other comprehensive income
(loss), stockholders' equity and cash flows for each of the years in the
three-year period ended March 31, 1999. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedule as listed in Item 14(a)(2). These consolidated financial statements and
the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Spectrian
Corporation and subsidiaries as of March 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1999, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects, the information set forth
therein.
KPMG LLP
Mountain View, California
April 29, 1999
F-2
<PAGE>
<TABLE>
SPECTRIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<CAPTION>
March 31,
-------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ........................................................... $ 26,254 $ 31,460
Short-term investments .............................................................. 36,417 68,128
Accounts receivable, less allowance for doubtful accounts of
$388 and $376, respectively ........................................................ 12,983 21,123
Inventories ......................................................................... 20,826 15,362
Prepaid expenses and other current assets ........................................... 3,464 6,202
--------- ---------
Total current assets ............................................................. 99,944 142,275
Property and equipment, net ............................................................ 28,468 32,776
--------- ---------
$ 128,412 $ 175,051
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable .................................................................... $ 8,058 $ 10,456
Accrued liabilities ................................................................. 17,884 12,981
Current portion of debt obligations ................................................. 1,603 1,360
--------- ---------
Total current liabilities ........................................................ 27,545 24,797
Debt obligations, net of current portion ............................................... 4,899 5,912
--------- ---------
Total liabilities ................................................................ 32,444 30,709
--------- ---------
Stockholders' equity:
Common stock, $0.001 par value, 20,000,000 shares authorized;
11,102,333 and 10,904,077 shares issued, respectively;
10,102,333 and 10,904,077 shares outstanding, respectively ......................... 10 10
Additional paid-in capital .......................................................... 149,588 146,827
Treasury stock, 1,000,000 shares of common stock held ............................... (14,789) --
Deferred stock-based compensation ................................................... -- (609)
Accumulated other comprehensive income .............................................. 137 121
Accumulated deficit ................................................................. (38,978) (2,007)
--------- ---------
Total stockholders' equity ....................................................... 95,968 144,342
--------- ---------
$ 128,412 $ 175,051
========= =========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
SPECTRIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
<CAPTION>
Year ended March 31,
----------------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues .......................................................... $ 99,331 $ 168,798 $ 88,252
--------- --------- ---------
Costs and expenses:
Cost of product sales .......................................... 96,880 132,684 65,322
Research and development ....................................... 26,735 18,644 17,230
Selling, general and administrative ............................ 16,315 13,014 9,299
--------- --------- ---------
139,930 164,342 91,851
--------- --------- ---------
Operating income (loss) ..................................... (40,599) 4,456 (3,599)
Interest income (expense), net .................................... 3,687 3,335 (392)
Other income, net ................................................. -- 1,530 --
--------- --------- ---------
Income (loss) before income taxes ........................... (36,912) 9,321 (3,991)
Income tax expense ................................................ 59 399 --
--------- --------- ---------
Net income (loss) ........................................... (36,971) 8,922 (3,991)
--------- --------- ---------
Other comprehensive income (loss):
Unrealized gain (loss) on
short-term investments ..................................... 16 121 (2)
--------- --------- ---------
Comprehensive income (loss) ....................................... $ (36,955) $ 9,043 $ (3,993)
========= ========= =========
Net income (loss) per share:
Basic .......................................................... $ (3.50) $ 0.90 $ (0.49)
Diluted ........................................................ $ (3.50) $ 0.83 $ (0.49)
Shares used in computing per share amounts:
Basic .......................................................... 10,568 9,881 8,150
Diluted ........................................................ 10,568 10,701 8,150
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
SPECTRIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<CAPTION>
Common Stock Deferred
---------------------------- Paid-In Treasury Compensation
Shares Amount Capital Stock Expense
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances as of March 31, 1996 ............... 8,014,525 $ 8 $ 51,948 $ -- $ (182)
Exercise of stock options ................... 114,671 -- 276 -- --
Employee stock purchase plan ................ 136,034 -- 1,163 -- --
Stock-based compensation .................... -- -- -- -- 182
Unrealized losses on investments ............ -- -- -- -- --
Net loss .................................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balances as of March 31, 1997 ............... 8,265,230 8 53,387 -- --
Exercise of stock options ................... 431,470 -- 5,589 -- --
Employee stock purchase plan ................ 207,377 -- 1,604 -- --
Public offering, net of
$4,969 expenses ........................... 2,000,000 2 85,029 -- --
Deferred stock-based compensation ........... -- -- 1,218 -- (1,218)
Stock-based compensation expense ............ -- -- -- -- 609
Unrealized gains on investments ............. -- -- -- -- --
Net income .................................. -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balances as of March 31, 1998 ............... 10,904,077 10 146,827 -- (609)
Exercise of stock options ................... 136,981 -- 1,223 -- --
Employee stock purchase plan ................ 61,275 -- 541 -- --
Purchase of treasury stock .................. -- -- -- (14,789) --
Deferred stock-based compensation ........... -- -- 997 -- (997)
Stock-based compensation expense ............ -- -- -- -- 1,606
Unrealized gains on investments ............. -- -- -- -- --
Net loss .................................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balances as of March 31, 1999 ............... 11,102,333 $ 10 $ 149,588 $ (14,789) $ --
Accumulated
Other Total
Comprehensive Accumulated Stockholders'
Income Deficit Equity
----------- ----------- -----------
Balances as of March 31, 1996 ............... $ 2 $ (6,938) $ 44,838
Exercise of stock options ................... -- -- 276
Employee stock purchase plan ................ -- -- 1,163
Stock-based compensation .................... -- -- 182
Unrealized losses on investments ............ (2) -- (2)
Net loss .................................... -- (3,991) (3,991)
----------- ----------- -----------
Balances as of March 31, 1997 ............... -- (10,929) 42,466
Exercise of stock options ................... -- -- 5,589
Employee stock purchase plan ................ -- -- 1,604
Public offering, net of
$4,969 expenses ........................... -- -- 85,031
Deferred stock-based compensation ........... -- -- --
Stock-based compensation expense ............ -- -- 609
Unrealized gains on investments ............. 121 -- 121
Net income .................................. -- 8,922 8,922
----------- ----------- -----------
Balances as of March 31, 1998 ............... 121 (2,007) 144,342
Exercise of stock options ................... -- -- 1,223
Employee stock purchase plan ................ -- -- 541
Purchase of treasury stock .................. -- -- (14,789)
Deferred stock-based compensation ........... -- -- --
Stock-based compensation expense ............ -- -- 1,606
Unrealized gains on investments ............. 16 -- 16
Net loss .................................... -- (36,971) (36,971)
----------- ----------- -----------
Balances as of March 31, 1999 ............... $ 137 $ (38,978) $ 95,968
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
F-5
<PAGE>
<TABLE>
SPECTRIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Year ended March 31,
----------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................................ $(36,971) $ 8,922 $ (3,991)
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 .......................................... 13,715 9,761 6,574
Equipment retirements, net ............................................. 1,409 -- --
Stock compensation expense ............................................. 1,606 609 182
Changes in operating assets and liabilities:
Accounts receivable ................................................... 8,140 (10,051) (3,845)
Inventories ........................................................... (5,464) 362 (10,072)
Prepaid expenses and other assets ..................................... 2,738 (412) (1,386)
Accounts payable ...................................................... (2,398) 3,141 1,137
Accrued liabilities ................................................... 4,903 5,811 3,301
-------- -------- --------
Net cash provided by (used for)
operating activities ............................................... (12,322) 16,613 (8,100)
-------- -------- --------
Cash flows from investing activities:
Proceeds (purchases) of short-term investments, net ...................... 31,727 (68,008) 3,000
Proceeds from sale of subsidiary ......................................... -- 4,016 --
Proceeds from sale of property and equipment ............................. 468 -- 16,414
Purchase of property and equipment ....................................... (11,284) (17,953) (16,321)
-------- -------- --------
Net cash provided by (used for)
investing activities ............................................... 20,911 (81,945) 3,093
-------- -------- --------
Cash flows from financing activities:
Proceeds from real estate loan ........................................... -- -- 2,917
Proceeds from bank debt and equipment financing .......................... -- -- 18,000
Repayments of debt and capital lease obligations ......................... (770) (1,672) (12,272)
Purchase of treasury stock ............................................... (14,789) -- --
Proceeds from sales of common stock, net ................................. 1,764 92,224 1,439
-------- -------- --------
Net cash provided by (used for)
financing activities ............................................... (13,795) 90,552 10,084
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents ................................................... (5,206) 25,220 5,077
Cash and cash equivalents, beginning of year ........................ 31,460 6,240 1,163
-------- -------- --------
Cash and cash equivalents, end of year .............................. $ 26,254 $ 31,460 $ 6,240
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ................................... $ 853 $ 457 $ 660
Taxes paid during the year ............................................... $ 59 $ 952 $ --
Noncash investing and financing activities:
Equipment recorded under capital lease obligations ..................... $ -- $ 307 $ --
Deferred stock option compensation ..................................... $ 997 $ 1,218 $ --
Unrealized gains on investments ........................................ $ 16 $ 121 $ --
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
F-6
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly and majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenue upon shipment and concurrently accrues
for expected warranty expenses. Repair and service revenues are recognized when
the service is performed.
Concentration of Credit Risk and Fair Value of Financial Instruments
The carrying value of the Company's financial instruments, including
cash and cash equivalents, short-term investments, accounts receivable and
long-term debt approximates fair market value. Financial instruments that
subject the Company to concentrations of credit risk consist primarily of cash
and cash equivalents, short-term investments and trade accounts receivable.
Management believes the financial risks associated with these financial
instruments are minimal. The Company maintains its cash and cash equivalents and
short-term investments with high quality financial institutions.
The Company performs ongoing credit evaluations of its customers'
financial condition and generally does not require collateral on accounts
receivable. When required, the Company maintains allowances for credit losses
and such losses have been within management's expectations.
Cash Equivalents and 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 March 31, 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. At
March 31, 1999 and 1998, the fair value of the Company's investments
approximated cost.
Inventories
Inventories are stated at the lower of first-in, first-out cost or
market. The company periodically reviews inventory for potential slow moving and
obsolete items and writes down specific items to net realizable value as
appropriate.
Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the respective assets, generally three to five years. Assets
recorded under capital leases and leasehold improvements are amortized on a
straight-line basis over the shorter of the lease terms or the estimated useful
lives of the respective assets.
Income Taxes
Income taxes are recorded using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered
F-7
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance is recorded to reduce deferred tax assets to an amount whose
realization is more likely than not.
Per Share Computations
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 years ended March 31, 1999 and March 31, 1997, 2,317,642
and 1,737,789 common equivalent shares with weighted average exercise prices of
$16.75 and $13.18, respectively were not included in the calculation of diluted
net income per share as they were considered antidilutive.
<TABLE>
A reconciliation of the basic and diluted per share calculations
follows:
<CAPTION>
Year ended Year ended
March 31, 1999 March 31, 1998
------------------------------------ -------------------------------------
Per Per
Net Share Net Share
Loss Shares Amount Income Shares Amount
-------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic ....................................... $(36,971) 10,568 $ (3.50) $ 8,922 9,881 $ 0.90
Effect of dilutive securities ............... -- -- -- -- 820 (0.07)
-------- -------- ------- -------- -------- --------
Diluted ..................................... $(36,971) 10,568 $ (3.50) $ 8,922 10,701 $ 0.83
Year ended
March 31, 1997
------------------------------------
Per
Net Share
Loss Shares Amount
-------- -------- -------
Basic ................................... $(3,991) 8,150 $ (0.49)
Effect of dilutive securities ........... -- -- --
-------- -------- -------
Diluted ................................. $(3,991) 8,150 $ (0.49)
</TABLE>
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, revenues and expenses during
the reporting period. The most significant of these relate to the extent of
inventory obsolescence, the allowance for doubtful accounts and the warranty
accrual. Actual results could differ from those estimates.
Accounting for Stock-Based Compensation
The Company accounts for its stock option plans using the intrinsic
value method.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds its fair value.
Recent Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes standards of reporting and display of comprehensive income and its
components of net income and "Other Comprehensive Income" in a full set of
general purpose financial statements. "Other Comprehensive Income" refers to
revenues, expenses, gains and losses that are not included in net income but
rather are recorded directly in stockholders' equity. SFAS 130 was adopted
during the year ended March 31, 1999.
The Financial Accounting Standards Boards issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". SFAS 131
requires the Company to report segment financial information consistent with the
presentation made to the Company's management for decision-making purposes. The
Company adopted SFAS 131 in fiscal 1999.
F-8
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
<TABLE>
Available-for-sale securities at March 31, 1999 and 1998 were as
follows (in thousands):
<CAPTION>
Amortized Unrealized Fair
As of March 31, 1999 Cost Gain (Loss) Value
-------------------- ------- ---------- -------
<S> <C> <C> <C>
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
------- ------- -------
Securities available for sale ............................................. $36,280 137 $36,417
======= ======= =======
Contractual maturity dates, 1 to 5 years ............................... $28,117
Contractual maturity dates, 5 to 10 years .............................. --
Contractual maturity dates, 10 years and over .......................... 8,300
-------
$36,417
=======
Amortized Unrealized Fair
As of March 31, 1998 Cost Gain (Loss) Value
-------------------- ------- ---------- -------
Government bonds & notes .................................................. $23,149 48 $23,197
Corporate bonds & notes ................................................... 68,229 73 68,302
------- ------- -------
91,378 121 91,499
Less amounts classified as cash equivalents ............................... 23,371 -- 23,371
------- ------- -------
Securities available for sale ............................................. $68,007 121 $68,128
</TABLE>
F-9
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. BALANCE SHEET COMPONENTS
Balance sheet components at March 31, 1999 and 1998 are as follows (in
thousands):
March 31,
----------------------
1999 1998
------- -------
Inventories:
Raw materials .................................. $ 9,100 $ 7,395
Work in progress ............................... 5,701 5,538
Finished goods ................................. 6,025 2,429
------- -------
$20,826 $15,362
======= =======
Property and equipment:
Machinery and equipment ........................ $58,322 $52,473
Land, building and improvements ................ 2,736 2,829
Leasehold improvements ......................... 1,957 1,633
------- -------
63,015 56,935
Less accumulated depreciation
and amortization ............................. 34,547 24,159
------- -------
$28,468 $32,776
======= =======
Accrued liabilities:
Employee compensation and benefits ............. $ 4,672 $ 2,958
Warranty ....................................... 9,473 7,326
Other accrued liabilities ...................... 3,739 2,697
------- -------
$17,884 $12,981
======= =======
4. DEBT AND LEASE COMMITMENTS
Lines of Credit
The Company maintains a revolving line of credit under a master credit
agreement with a bank. The master credit agreement contains certain financial
covenants and certain restrictions on other indebtedness and payment of
dividends. The line of credit, secured by a majority of the Company's assets,
expires on December 1, 1999, bears interest at the bank's prime rate, and
provides for borrowings and letters of credit aggregating up to $10,000,000
based on a specified percentage of eligible accounts receivable. As of March 31,
1999, the Company was in compliance with all but its quarterly profitability
financial covenant for which the Company has received a waiver from its bank. As
of March 31, 1999, the Company had $10,000,000 available under this line of
credit with no borrowings outstanding.
Equipment and Real Estate Loans
In January 1997, the Company borrowed $6,000,000 secured by certain
capital equipment. Under the terms of the agreement, the Company is required to
make a series of uneven monthly principal payments through January 2002 ranging
from $42,000 to $136,000, plus interest at a rate equal to the Treasury Rate
plus 2.75%, and must maintain certain minimum working capital, net worth and
other specific ratios for which the Company was in compliance as of March 31,
1999.
In March 1997, through means of a limited liability company in which
the Company is a majority owner, the Company purchased a 39,000 square foot
building and secured a real estate loan with an institutional lender in the
amount of $3,200,000 of which $2,917,000 was received by the Company in fiscal
1997. The loan has an initial maturity date of April 2002 with an option to be
extended to April 2007. The
F-10
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company makes monthly payments of principal and interest in equal amounts which
are amortized over two hundred forty months with the remaining principal balance
due on the maturity date. The interest rate is a variable interest rate set at
the LIBOR rate plus 3.25%.
Future minimum debt principal payments under these loans as of March
31, 1999 aggregated $6,502,000 including $1,603,000, $876,000, $1,466,000,
$177,000, and $146,000 for the fiscal years 2000, 2001, 2002, 2003 and 2004,
respectively, and $2,234,000, thereafter.
Lease Commitments
During fiscal 1997, the Company sold its principal facilities in
Sunnyvale for $16,414,000, and leased the facilities back under a lease that has
been classified as an operating lease. The lease expires in November 2011 and
the quarterly rent payments are subject to Consumer Price Index adjustments on a
tri-annual basis beginning in November 1999.
In 1998, the Company entered into operating leases for an ancillary
40,000 square foot manufacturing facility in Rocklin, California and a 2,750
square foot engineering design center in Quincy, Illinois. The Rocklin facility
has a sixty-two month lease term that commenced in June 1998 and expires in July
2003. The Quincy lease has been renewed for another twelve-month lease term that
expires in March 2000.
The Company leases these facilities and certain equipment under
noncancelable operating leases. Future minimum lease payments under these
noncancelable operating leases as of March 31, 1999 aggregated $24,600,000
including $2,404,000, $2,400,000, $2,406,000, $2,414,000 and $2,046,000 for the
fiscal years 2000, 2001, 2002, 2003 and 2004, respectively and $12,930,000,
thereafter. Rent expense was approximately $3,323,000, $2,530,000 and $819,000
for the years ended March 31, 1999, 1998 and 1997, respectively.
5. STOCKHOLDERS' EQUITY
Preferred 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. The
Board of Directors has designated 20,000 shares of preferred stock as Series A
Participating Preferred Stock, although none of such shares have been issued.
Stock Option Plans
The Company has adopted stock option plans, (the "Plans"), pursuant to
which the Company's Board of Directors may grant stock options to selected
employees, directors, officers and consultants of the Company. Stock options are
generally granted with an exercise price equal to the fair market value of the
Company's stock at the date of grant. The options generally have 10-year terms
and vest 25% after one year from the grant date with the remaining options
vesting pro rata over the following 36 months.
A total of 184,695 shares of Common Stock have been reserved for
issuance under the 1992 Stock Plan as of March 31, 1999. Under the 1994 Director
Option Plan, 25,000 shares were granted during fiscal 1999, and 10,000 shares of
Common Stock were reserved for issuance as of March 31, 1999.
Outside of the 1992 Stock Plan and the 1994 Director Option Plan, two
officers and one employee of the Company were granted a combined total of
390,000 options during fiscal 1997, at exercise prices ranging from $9.50 to
$14.50, which are subject to the same vesting schedule as that of the Company's
1992 Stock Plan. In fiscal 1998, one officer and two employees were granted a
combined total of 90,000 options outside of the Plans at exercise prices ranging
from $16.88 to $56.38, which are subject to the same vesting schedule as that of
the 1992 Stock Plan.
F-11
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In January 1998 the Company adopted the 1998 Nonstatutory Stock Option
Plan under which 400,000 shares were reserved. Under this plan, certain
employees were granted stock options with exercise prices ranging from $6.59 to
$16.36 that were below the $17.25 fair market value of the stock on the day of
grant and were subject to a six-month vesting schedule. Stock compensation of
$609,000 and $1,606,000 was recorded for these options in the fourth quarter of
fiscal 1998 and the first half of fiscal 1999, respectively. In the second
quarter of fiscal 1999, an additional 500,000 shares were reserved under the
1998 Nonstatutory Stock Option Plan. A total of 230,712 shares were reserved for
issuance as of March 31, 1999.
The following table summarizes option activity under the Company's
various plans:
Weighted
Average
Available Exercise
for Grant Options Price
--------- ---------- --------
Outstanding as of March 31, 1996 .......... 1,191,291 936,588 $16.03
Additional shares reserved ............. 390,000 -- --
Granted at fair market value ........... (1,790,746) 1,790,746 14.91
Granted in excess of fair market value . (250,000) 250,000 14.50
Exercised .............................. -- (114,671) 2.50
Canceled ............................... 1,124,874 (1,124,874) 19.69
--------- ----------
Outstanding as of March 31, 1997 .......... 665,419 1,737,789 13.18
Additional shares reserved ............. 500,000 -- --
Granted ................................ (855,755) 855,755 25.91
Exercised .............................. -- (431,511) 12.87
Canceled ............................... 138,028 (138,028) 17.45
--------- ----------
Outstanding as of March 31, 1998 .......... 447,692 2,024,005 18.34
Additional shares reserved ............. 500,000 -- --
Granted ................................ (964,921) 964,921 13.38
Exercised .............................. -- (136,981) 8.93
Canceled ............................... 534,303 (534,303) 18.64
--------- ----------
Outstanding as of March 31, 1999 .......... 517,074 2,317,642 $16.75
========= ==========
<TABLE>
The following tables summarize information about stock options
outstanding at March 31, 1999:
<CAPTION>
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices Options Life Price Options Price
- --------------- ------- ---- ----- ------- -----
<S> <C> <C> <C> <C> <C>
$ 0.20- 9.50 399,878 7.85 $ 7.85 292,045 $ 7.28
10.00-12.94 408,615 9.40 12.73 15,615 11.38
13.13-14.38 274,047 8.45 13.96 118,854 14.02
14.50-14.50 508,566 6.86 14.50 345,665 14.50
14.56-21.25 386,365 8.96 18.14 95,696 18.25
21.38-64.13 340,171 7.98 36.10 169,180 33.79
--------- ---------
2,317,642 8.18 $ 16.75 1,037,055 $ 15.86
========= =========
</TABLE>
Using the Black-Scholes Option-Pricing Model, the per share weighted
average fair market value of stock options granted during fiscal 1999, fiscal
1998 and fiscal 1997 were $10.86, $18.34 and $9.41, respectively, on the date of
grant. Assumptions used with the Black-Scholes Option-Pricing Model were as
F-12
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
follows: fiscal 1999, a stock price volatility of 81%, no expected dividends, an
average risk-free interest rate of 5.4% and an average expected option term of
4.4 years; for fiscal 1998, a stock price volatility of 83%, no expected
dividends, an average risk-free interest rate of 5.6% and an average expected
option term of 4.5 years; and for fiscal 1997, a stock price volatility of 80%,
no expected dividends, an average risk-free interest rate of 6.0% and an average
expected option term of 4.3 years.
Employee Stock Purchase Plan
In June 1998, the Company's stockholders approved the 1998 Employee
Stock Purchase Plan (the "Purchase Plan") which permitted eligible employees to
purchase the Company's Common Stock through payroll deductions. The Purchase
Plan consisted of consecutive and overlapping 12-month offering periods, each
divided into two 6-month purchase periods. The purchase price of the shares in
the Purchase Plan is 85% of the lower of the fair market value of the Common
Stock at the beginning of the offering period or the end of each purchase
period. The Company reserved a total of 250,000 shares of common stock for
issuance under this plan. The Purchase Plan has a feature whereby the number of
shares reserved under the Purchase Plan are increased automatically on an annual
basis by the lesser of 300,000 shares or 2% of outstanding shares of Common
Stock. There were 188,725 shares of Common Stock available for issuance as of
March 31, 1999. During the year ended March 31, 1999, shares totaling 61,275
were acquired under the Purchase Plan at a per share price of $9.08.
Under SFAS No. 123, Accounting for Stock-Based Compensation, pro forma
compensation cost is calculated for the fair market value of the employees'
purchase rights. The per share weighted average fair market value of those
purchase rights granted in fiscal 1999, fiscal 1998 and fiscal 1997,
respectively, was $3.87, $4.32 and $5.14, using the Black-Scholes Option-Pricing
Model with the following assumptions: for fiscal 1999, a stock price volatility
of 81%, no expected dividends, risk free interest rate of 5.4% and an expected
term of 0.4 years; for fiscal 1998, a stock price volatility of 83%, no expected
dividends, a risk free interest rate of 5.6% and an expected term of 0.5 years;
and for fiscal 1997, a stock price volatility of 80%, no expected dividends, a
risk free interest rate of 6.0% and an expected term of 0.9 years.
Pro Forma Fair Value Information
<TABLE>
The Company accounts for its stock options using the intrinsic value
method. Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's net
income (loss) and related per share amounts would have been as indicated in the
pro forma amounts indicated below:
<CAPTION>
1999 1998 1997
------------------ ----------------- ------------------
<S> <C> <C> <C>
Net income (loss) As reported $ (36,971,000) $ 8,922,000 $ (3,991,000)
Pro forma $ (40,972,163) $ (1,870,000) $ (8,018,000)
Earnings (loss) per share:
Basic As reported $ (3.50) $ 0.90 $ (0.49)
Pro forma $ (3.88) $ (0.19) $ (0.98)
Diluted As reported $ (3.50) $ 0.83 $ (0.49)
Pro forma $ (3.88) $ (0.19) $ (0.98)
</TABLE>
Pro forma net income (loss) reflects only the options granted since
April 1, 1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net income
(loss) amounts presented above because compensation cost is reflected over the
options' vesting period of four years and compensation cost for options granted
prior to April 1, 1995 is not considered.
F-13
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. INCOME TAXES
Income tax expense for the years ended March 31, 1999, 1998 and 1997
differs from the amount computed by applying the federal income tax rate of 34%
to pretax income (loss) from operations as a result of the following (in
thousands):
Year ended March 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Federal tax (benefit) at statutory rate .... $(12,550) $ 3,189 $ (1,357)
State tax .................................. 59 -- --
Utilization of net operating loss
carryforwards ............................. -- (3,314) --
Alternative minimum tax .................... -- 183 --
FSC tax expense ............................ -- 215 --
Unrealized benefit from LLC loss ........... -- 44 --
Unutilized net operating losses and
temporary differences ..................... 12,093 -- 1,337
Other ...................................... 457 82 20
-------- -------- --------
Income tax expense ......................... $ 59 $ 399 $ --
======== ======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below (in
thousands):
March 31,
---------------------
1999 1998
-------- --------
Deferred tax assets:
Various accruals and reserves ....................... $ 6,349 $ 6,999
Net operating loss carryforwards .................... 21,259 7,986
Credit carryforwards ................................ 6,982 6,604
-------- --------
Total gross deferred tax assets ................... 34,590 21,589
Less valuation allowance .......................... (32,661) (20,642)
-------- --------
Total deferred tax assets ......................... $ 1,929 $ 947
-------- --------
Deferred tax liabilities:
Property and equipment depreciation differences ..... $ (1,929) $ (947)
-------- --------
Total gross deferred tax liabilities .............. (1,929) (947)
-------- --------
Net deferred tax assets ........................... $ -- $ --
======== ========
As of March 31, 1999, the Company has a net operating loss carryforward
of approximately $60 million and $16 million for federal and California income
tax purposes, respectively. If not utilized, these carryforwards will expire in
various amounts beginning in 2008 and 2004, respectively.
The Company has research credit carryforwards of approximately $3.1
million and $2.9 million for federal and California income tax purposes,
respectively. If not utilized, these carryforwards will expire in various
amounts beginning in 1999. The California research credit can be carried forward
indefinitely.
The Company also has California manufacturing investment tax credit
carryforwards of approximately $2.6 million for California income tax purposes
which, if not utilized, will expire in 2005 through 2007.
Included in the deferred tax assets is approximately $10.2 million of
assets relating to the stock option compensation which will be credited to
equity when realized.
F-14
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. MAJOR PRODUCT GROUPS AND RELATED REVENUE DATA
The Company operated and reported its financial information as one
vertical integrated unit in fiscal 1999, 1998 and 1997.
The following table summarizes the annual percentage contribution to
revenues by customers when sales to such customers exceeded 10% of such revenues
in fiscal 1999, 1998 and 1997, and the amounts due from these customers as a
percentage of total accounts receivable as of March 31, 1999 and 1998, follows:
Percentage of Total Accounts
Revenues Receivable as of
-------- ----------------
Year Ended March 31, March 31,
---------------------- -------------
1999 1998 1997 1999 1998
---- ---- ---- ---- ----
Customer A 76% 79% 75% 74% 74%
Customer B 11% 14% -- 11% 8%
Customers A and B are major companies in the wireless infrastructure
equipment industry.
Revenues from major product categories for the three years ended March
31, 1999 were as follows:
Year ended March 31,
---------------------------
1999 1998 1997
------ ------ ---------
TDMA 34% 34% 48%
CDMA 38% 27% 37%
GSM 18% 29% 8%
Other 10% 10% 7%
---- ---- ----
Total Revenue 100% 100% 100%
==== ==== ====
Revenues from unaffiliated customers by geographic region were as
follows:
Year ended March 31,
---------------------------
1999 1998 1997
------ ------ ---------
Canada 57% 49% 57%
United States 16% 5% 27%
Europe 13% 20% 13%
Korea 14% 26% 2%
Other -- -- 1%
---- ---- ----
Total Exports 100% 100% 100%
==== ==== ====
8. 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.
F-15
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Allowance for Balance at Additions Balance at
Doubtful Accounts Beginning Charged to End of
and Sales Returns of Period Income Deductions Period
------------------- ------------ ------------ ------------ ------------
1999 $376 $12 $-- $388
1998 $365 $24 $13 $376
1997 $339 $36 $10 $365
S-1
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibits Numbered Page
- ---------- ---------------
3.5(14) Certificate of Incorporation of Registrant.
3.6(15) Bylaws of Registrant.
4.1(11) Amended and Restated Preferred Shares Rights Agreement
of January 15, 1997, between the Registrant and
ChaseMellon Shareholder Services, L.L.C., as amended,
including the form of Rights Certificate and the
Certificate of Determination, the Summary of Rights
attached thereto as Exhibits A, B and C, respectively.
4.1.1(11) Letter Agreement to amend Preferred Shares Rights
Agreement dated as of January 15, 1997 between the
Registrant and Kopp Investment Advisors, Inc.
10.2(8) 1992 Stock Plan, as amended.
10.4(8) 1994 Director Option Plan and form of agreement
thereunder.
10.7(14) Amended and Restated Business Loan Agreement between
Registrant and Silicon Valley Bank dated February 11,
1997 and ancillary documents thereto.
10.13+(4) Supply Agreement between Registrant and Northern
Telecom Limited dated April 16, 1995.
10.16(5) Purchase and Sale Agreement between Metropolitan Life
Insurance Company and Registrant.
10.17+(6) Development and Supply Agreement between QUALCOMM
Incorporated and Registrant.
10.18+(7) Purchasing Agreement between Airnet Communications
Corporation and Registrant.
10.19(8) Employment Agreement between Garrett A. Garrettson and
Registrant.
10.21(9) Term Loan Agreement between Silicon Valley Bank and
Registrant
10.22(10) Lease Agreement dated November 19, 1996 between the
Registrant and SPEC (CA) QRS 12-20, Inc.
10.23(10) Bill of Sale dated November 19, 1996 by the Registrant
to SPEC (CA) QRS 12-20, Inc.
10.26(13) Stock Option Agreement dated November 26, 1997 between
Registrant and Garrett A. Garrettson.
10.28(13) Stock Option Agreement dated November 26, 1997 between
Registrant and Garrett A. Garrettson.
10.30(13) Stock Option Agreement dated March 20, 1997 between
Registrant and Michael Morrione.
10.32(15) Form of Indemnification Agreement with directors and
officers.
10.33(16) 1998 Nonstatutory Stock Option Plan.
10.34(17) 1998 Employee Stock Purchase Plan.
10.35(18) Lease Agreement between Registrant and Ellington
Development Inc. dated April 13, 1998.
10.36 Separation Agreement dated March 23, 1999 between the
Registrant and Stephen B. Greenspan.
10.37 Separation Agreement dated May 7, 1999 between the
Registrant and Bruce R. Wright.
23.1 Consent of KPMG LLP.
24.1 Power of Attorney (included on page 32).
27.1 Financial Data Schedule.
- -----------------
+ Confidential treatment has been requested or granted with respect to
certain portions of this exhibit. Omitted portions have been filed
separately with the Securities and Exchange Commission.
1
<PAGE>
4 Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 1995.
5 Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended July 1, 1995.
6 Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995.
7 Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 30, 1995.
8 Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (File No. 333--38561) as filed with the
Securities and Exchange Commission on October 23, 1997.
9 Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 29, 1996.
10 Incorporated by reference to the Registrant's Form 8-K dated November 19,
1996.
11 Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form 8-A (File No. 000-24360) as filed with the Securities and
Exchange Commission on January 17, 1997.
13 Incorporated by reference to exhibits filed with Registrant's
Post-Effective Amendment No. 1 to the Registration Statement on Form S-8
(File No. 333-25435) as filed with the Securities and Exchange Commission
on October 21, 1997.
14 Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 28, 1997.
15 Incorporated by reference to exhibits filed with Registrant's Current
Report on Form 8-K dated October 10, 1997.
16 Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-8 (File No. 333-49081) as filed with the Securities and
Exchange Commission on April 1, 1998.
17 Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended March 31, 1998 as filed with the Securities
and Exchange Commission on May 27, 1998.
18 Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 28, 1998.
2
23 March 1999
Stephen B. Greenspan
[ADDRESS]
Dear Steve:
Your status as an employee of Spectrian will terminate effective March 31, 1999.
With this termination you shall cease to have any responsibilities or authority
to bind or commit Spectrian to any arrangement, contract or agreement.
This letter is to confirm the agreement between you and Spectrian regarding your
separation from employment.
1. We have agreed that your employment with Spectrian will terminate effective
March 31, 1999 (the Termination Date). On this date, Spectrian will pay you
for all of your unpaid salary earned through the Termination Date, less all
applicable withholdings and deduction. Spectrian will also provide you with
all employee benefits through, but not after the Termination Date, except
as defined below.
2. A group life insurance conversion option is available upon your request.
3. Except for any earned but unpaid salary and any moneys, i.e., Spectrian's
401(K) Plan, you agree that prior to the execution of this letter you were
not entitled to receive any further payments, including bonuses and
commissions, compensation or benefits from Spectrian. Moreover, the only
payments and benefits that you are entitled to receive from Spectrian in
the future are those specified in this letter.
4. After you have executed this written agreement, assuming that you do not
revoke it, Spectrian agrees to pay you $100,000.00, which represents six
months salary at your annual base wage of $200,000. In return for this
payment, you agree to serve in the capacity of consultant to Spectrian for
the next twelve months (the consulting period) beginning with April 1,
1999. Your duties as Consultant will be mutually agreed upon between
yourself and the Spectrian CEO. During the period you are a consultant, you
will retain remote e-mail and voicemail (ext. 5664) access to Spectrian
Corporation, as well as your mobile phone.
5. Spectrian will pay for your monthly COBRA premiums to continue your group
medical, vision and dental coverage through COBRA until March 31, 2000.
Thereafter, you may be eligible to continue your medical and dental
coverage pursuant to COBRA at your own expense according to the plan.
6. Attached is a summary of your option status. You acknowledge that the only
stock rights or purchase rights that you have with Spectrian are set forth
in this paragraph. Upon approval of the Board of Directors, you will have
until 6/29/00 to exercise your option with respect to your fully vested
shares. As an Officer of Spectrian, the uninvested shares of your option
were subject to immediate vesting
<PAGE>
S. Greenspan
Page 2
23 March 1999
upon a change of control. This feature will continue during the consulting
period. During the consulting period, your options will continue to vest;
all vesting will stop as of March 31, 2000.
7. Your Executive Life Insurance policy is fully portable. Spectrian will
continue to pay the premium of $11,000 (renews on 7/18/99) for the next
year, beginning with April 1, 1999.
8. You will continue to be eligible for all benefits under the Exec-U-Care
executive reimbursement policy for the next twelve months beginning with
April 1, 1999. This program will be administered through COBRA Exec-U-Care.
Spectrian will pay the premium for this coverage during this twelve month
period of time. After this time, you may continue this coverage at your own
expense, according to the plan.
9. In exchange for receiving the additional payments and benefits described
above, you waive and release and promise never to assert any claims or
causes of action, whether or not now known, against Spectrian, or its
predecessors, successors, subsidiaries, officers, directors, agents,
employees, and assigns, with respect to any matter arising out of or
connected with your employment with Spectrian or the termination of that
employment, including without limitation, claims of wrongful discharge,
emotional distress, defamation, breach of contract, breach of the covenant
of good faith and fair dealing, any claims of discrimination based on sex,
age, race, disability, national origin, or on any other basis under title
VII of the Civil Rights Act of 1964, as amended, the California Fair
Employment and Housing Act, the Age Discrimination in Employment Act of
1967, and all other laws and regulations relating to employment.
10. You expressly waive and release any and all rights and benefits under
Section 1542 of the Civil Code of the State of California, which reads as
follows: "A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of executing the
release, which if known by him, must have materially affected his
settlement with the debtor".
11. Spectrian expects you to return to Spectrian any Spectrian property in your
possession on or before March 31, 1999, except the Dell laptop computer and
the Dell Personal Computer at your residence, which you may keep.
12. You will sign and agree to abide by, at all times in the future,
Spectrian's Non-Disclosure Agreement, a copy of which is attached. You
understand and agree that the obligations contained in this Non-Disclosure
agreement are a material inducement to Spectrian for the payments and
benefits provided to you, pursuant to this agreement and for the breach
thereof, the Company will be entitled to pursue its legal and equitable
remedies against you.
13. If any provision of this agreement is found to be unenforceable it shall
not affect the enforceability of the remaining provisions and the remaining
provisions shall be enforced to the extent permitted by law.
14. You agree that except as expressly provided in this letter, this agreement
renders null and void any and all prior agreements between you and the
Company.
<PAGE>
S. Greenspan
Page 3
23 March 1999
15. This agreement shall be deemed to have been entered into in the State of
California and shall be construed and interpreted in accordance with the
laws of the state. Any controversy involving the construction or
application of any terms, covenants or conditions of this agreement, or any
claim arising out of or relating to this agreement or the breach thereof
will be submitted to and settled by final and binding arbitration in Santa
Clara County, California.
16. You may have at least twenty-one days after receipt of this letter within
which to review and consider, discuss with an attorney of your own
choosing, and decide to execute or not execute this Agreement. Furthermore,
you have seven days after you sign this letter within which you may revoke
this agreement. In order to revoke this agreement, you must deliver to
Bruce Wright, Chief Financial Officer on or before seven days after you
sign this letter, a letter stating that you are revoking this agreement.
This agreement shall not become effective or enforceable until after the
expiration of seven days following the date you sign this letter.
Steve, we appreciate your contributions to Spectrian and we wish you success and
great health in the future.
Please indicate your agreement with the above terms by signing below.
____________________________________
Garrett Garrettson
President and Chief Executive Officer
________________________________________________________________________________
My agreement with the above terms is signified by my signature below.
Furthermore, I acknowledge that I have read and understand the foregoing letter
and that I sign this release of all claims voluntarily, with full appreciation
that I am forever foreclosed from pursuing any of the rights I have waived.
Signed: _______________________________ Dated: __________________
07 May 1999
Bruce R. Wright
[ADDRESS]
Dear Bruce:
Your status as an employee of Spectrian will terminate effective May 8, 1999.
With this termination you shall cease to have any responsibilities or authority
to bind or commit Spectrian to any arrangement, contract or agreement.
This letter is to confirm the agreement between you and Spectrian regarding your
separation from employment.
1. We have agreed that your employment with Spectrian will terminate effective
May 8, 1999 (the Termination Date). On this date, Spectrian will pay you
for all of your unpaid salary earned through the Termination Date, less all
applicable withholdings and deductions. Spectrian will also provide you
with all employee benefits through, but not after the Termination Date,
except as defined below.
2. A group life insurance conversion option is available upon your request
3. Except for any earned but unpaid salary and any moneys, i.e., Spectrian's
401(K) Plan, you agree that prior to the execution of this letter you were
not entitled to receive any further payments, including bonuses and
commissions, compensation or benefits from Spectrian. Moreover, the only
payments and benefits that you are entitled to receive from Spectrian in
the future are those specified in this letter.
4. After you have executed this written agreement, assuming that you do not
revoke it, Spectrian agrees to pay you $250.00 per month on the first
business day of each month through May 8, 2000. In return for this stream
of payments and the continued vesting of options, you agree to make
yourself available and serve in the capacity of consultant to Spectrian for
the next twelve months (the Consulting Period) beginning with May 8, 1999.
Your duties as Consultant will be mutually agreed upon between yourself and
the Spectrian CEO. Any duties you perform as a consultant in excess of 2.5
hours per month should be billed to Spectrian in a timely manner and will
be reimbursed at the rate of $100.00 per hour.
<PAGE>
B. Wright
Page 2
7 May 1999
5. Spectrian will pay for your monthly COBRA premiums to continue your group
medical, vision and dental coverage through COBRA until June 1, 2000, or
until you accept full time employment, whichever comes first. Thereafter,
you may be eligible to continue your medical and dental coverage pursuant
to COBRA at your own expense according to the plan.
6. Attached is a summary of your option status. You acknowledge that the only
stock rights or purchase rights that you have with Spectrian are set forth
in this paragraph. As an Officer of Spectrian, the unvested shares of your
option were subject to immediate vesting upon a change of control. This
feature will continue during the Consulting Period. During the Consulting
Period. And at the discretion of the Board of Directors, subject to your
reasonable availability as a consultant to Spectrian when required, your
options will continue to vest. All vesting will stop no later than May 8,
2000 and you will have 180 days from the date vesting stops to exercise
your fully vested shares.
7. You will continue to be eligible for all benefits under the Exec-U-Care
executive reimbursement program until June 1, 2000. This program will be
administered through COBRA Exec-U-Care. Spectrian will pay the premium for
this coverage during this period of time. After this time, you may continue
this coverage at your own expense, according to the plan.
8. In exchange for receiving the additional payments and benefits described
above, you waive and release and promise never to assert any claims or
causes of action, whether or not now known, against Spectrian, or its
predecessors, successors, subsidiaries, officers, directors, agents,
employees, and assigns, with respect to any matter arising out of or
connected with your employment with Spectrian or the termination of that
employment, including without limitation, claims of wrongful discharge,
emotional distress, defamation, breach of contract, breach of the covenant
of good faith and fair dealing, any claims of discrimination based on sex,
age, race, disability, national origin, or on any other basis under title
VII of the Civil Rights Act of 1964, as amended, the California Fair
Employment and Housing Act, the Age Discrimination in Employment Act of
1967, and all other laws and regulations relating to employment. Provided,
however, nothing herein waives your right to indemnification from Spectrian
pursuant to Labor Code 2802.
9. You expressly waive and release any and all rights and benefits under
Section 1542 of the Civil Code of the State of California, which reads as
follows: "A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of executing the
release, which if known by him, must have materially affected his
settlement with the debtor".
<PAGE>
B. Wright
Page 3
7 May 1999
10. Spectrian expects you to return to Spectrian any Spectrian property in your
possession on or before May 8, 1999.
11. You will sign and agree to abide by, at all times in the future,
Spectrian's Non-Disclosure Agreement, a copy of which is attached. You
understand and agree that the obligations contained in this Non-Disclosure
agreement are a material inducement to Spectrian for the payments and
benefits provided to you, pursuant to this agreement and for the breach
thereof, the Company will be entitled to pursue its legal and equitable
remedies against you.
12. If any provision of this agreement is found to be unenforceable, it shall
not affect the enforceability of the remaining provisions and the remaining
provisions shall be enforced to the extent permitted by law.
13. You agree that except as expressly provided in this letter, this agreement
renders null and void any and all prior agreements between you and
Spectrian.
14. This agreement shall be deemed to have been entered into in the State of
California and shall be construed and interpreted in accordance with the
laws of that state. Any controversy involving the construction or
application of any terms, covenants or conditions of this agreement, or any
claim arising out of or relating to this agreement or the breach thereof
will be submitted to and settled by final and binding arbitration in Santa
Clara County, California.
15. You may have at least twenty-one days after receipt of this letter within
which to review and consider, discuss with an attorney of your own
choosing, and decide to execute or not execute this Agreement. Furthermore,
you have seven days after you sign this letter within which you may revoke
this agreement. In order to revoke this agreement, you must deliver to
Garrett Garrettson, Chief Executive Officer on or before seven days after
you sign this letter, a letter stating that you are revoking this
agreement. This agreement shall not become effective or enforceable until
after the expiration of seven days following the date you sign this letter.
<PAGE>
B. Wright
Page 4
7 May 1999
Please indicate your agreement with the above terms by signing below.
____________________________________
Garrett Garrettson
President and Chief Executive Officer
________________________________________________________________________________
My agreement with the above terms is signified by my signature below.
Furthermore, I acknowledge that I have read and understand the foregoing letter
and that I sign this release of all claims voluntarily, with full appreciation
that I am forever foreclosed from pursuing any of the rights I have waived.
Signed: _______________________________ Dated: __________________
Bruce R. Wright
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Spectrian Corporation
The audits referred to in our report dated April 29, 1999, included the related
financial statement schedule as of March 31, 1999, and for each of the years in
the three-year period ended March 31, 1999, as listed in the index in item 14(a)
2 herein. The financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion, the financial
statement schedule based on our audits. In our opinion, the financial statement
schedule, when considered to relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We consent to incorporation by reference in the registration statements (Nos.
33-38561, 33-25435, 33-49081, and 33-53079) on Form S-8 of Spectrian Corporation
of our report dated April 29, 1999, relating to the consolidated balance sheets
of Spectrian Corporation and subsidiaries as of March 31, 1999 and 1998, and the
related consolidated statements of operations and other comprehensive income
(loss), stockholders' equity, and cash flows for each of the years in the
three-year period ended March 31, 1999, and the related schedule, which report
appears in the March 31, 1999 Annual Report on Form 10-K of Spectrian
Corportion.
KPMG LLP
Mountain View, California
June 10, 1999
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<ARTICLE> 5
<CIK> 0000925054
<NAME> Spectrian Corp./DE/
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 26,254
<SECURITIES> 36,417
<RECEIVABLES> 13,371
<ALLOWANCES> 388
<INVENTORY> 20,826
<CURRENT-ASSETS> 3,464
<PP&E> 63,015
<DEPRECIATION> 34,547
<TOTAL-ASSETS> 128,412
<CURRENT-LIABILITIES> 27,545
<BONDS> 4,899
0
0
<COMMON> 134,809
<OTHER-SE> (38,841)
<TOTAL-LIABILITY-AND-EQUITY> 128,412
<SALES> 99,331
<TOTAL-REVENUES> 99,331
<CGS> 96,880
<TOTAL-COSTS> 96,880
<OTHER-EXPENSES> 43,050
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,687)
<INCOME-PRETAX> (36,912)
<INCOME-TAX> 59
<INCOME-CONTINUING> (36,971)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,971)
<EPS-BASIC> (3.50)
<EPS-DILUTED> (3.50)
</TABLE>
