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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q
---------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 2, 2000,
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 Identification Number)
incorporation or organization)
350 West Java Drive
Sunnyvale, California 94089
(Address of principal executive offices) (Zip Code)
Telephone Number (408) 745-5400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of August 7, 2000 there were 10,959,833 shares of the Registrant's Common
Stock outstanding.
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<PAGE>
<TABLE>
SPECTRIAN CORPORATION
FORM 10-Q
INDEX
FOR QUARTER ENDED JULY 2, 2000
<CAPTION>
Page
----
PART I - FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1 Financial Statements
Condensed Consolidated Balance Sheets - July 2, 2000 and March 31, 2000........ 3
Condensed Consolidated Statements Of Operations - Three Months Ended July 2,
2000 and June 27, 1999..................................................... 4
Condensed Consolidated Statements of Cash Flows - Three Months Ended
July 2, 2000 and June 27, 1999 ............................................ 5
Notes to Condensed Consolidated Financial Statements........................... 6
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 12
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk..................... 23
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings.............................................................. 25
ITEM 6 Exhibits and Reports on Form 8-K............................................... 25
Signatures..................................................................... 26
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SPECTRIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
<CAPTION>
July 2, March 31,
2000 2000 (1)
---- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,179 $ 11,553
Short-term investments 31,220 36,027
Accounts receivable, less allowance for doubtful
accounts of $420 and $420, respectively 27,328 23,817
Inventories 34,584 34,542
Prepaid expenses and other current assets 6,162 4,400
------------ ------------
Total current assets 110,473 110,339
Property and equipment, net 18,980 19,668
Other assets 1,268 1,268
------------ ------------
Total assets $ 130,721 $ 131,275
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 19,316 $ 16,416
Accrued liabilities 12,810 13,793
Current portion of debt and capital lease obligations 982 730
------------ ------------
Total current liabilities 33,108 30,939
Debt and capital lease obligations, net of current portion 959 1,351
------------ ------------
Total liabilities 34,067 32,290
------------ ------------
Contingencies (Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 5,000,000 shares authorized; none
issued and outstanding, respectively -- --
Common stock, $0.001 par value, 20,000,000 shares authorized;
11,948,721 and 11,859,507 shares issued, respectively; 10,948,721
and 10,859,507 shares outstanding, respectively 12 12
Additional paid-in capital 160,625 160,117
Treasury stock, 1,000,000 shares of common stock held (14,789) (14,789)
Deferred compensation expense (91) (937)
Accumulated other comprehensive loss (502) (617)
Accumulated deficit (48,601) (44,801)
------------ ------------
Total stockholders' equity 96,654 98,985
------------ ------------
Total liabilities and stockholders' equity $ 130,721 $ 131,275
============ ============
<FN>
(1) Derived from the March 31, 2000 audited balance sheet included in the 2000
Annual Report on Form 10-K of Spectrian Corporation.
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
SPECTRIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended
-----------------------
July 2, June 27,
2000 1999
---- ----
<S> <C> <C>
NET REVENUES $ 42,190 $ 31,484
-------- --------
COSTS AND EXPENSES:
Cost of revenues 35,268 25,892
Research and development 5,601 4,877
Selling, general and administrative 5,660 4,294
-------- --------
Total costs and expenses 46,529 35,063
-------- --------
OPERATING LOSS (4,339) (3,579)
INTEREST INCOME 597 1,147
INTEREST EXPENSE (46) (158)
-------- --------
LOSS BEFORE INCOME TAXES (3,788) (2,590)
INCOME TAXES 12 32
-------- --------
NET LOSS $ (3,800) $ (2,622)
======== ========
NET INCOME (LOSS) PER SHARE:
Basic and diluted $ (0.35) $ (0.26)
======== ========
SHARES USED IN COMPUTING PER SHARE AMOUNTS:
Basic and diluted 10,916 10,176
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
SPECTRIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended
---------------------------
July 2, June 27,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,800) $ (2,622)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,928 3,373
Loss on sale of property and equipment, net 5 65
Provision for excess and obsolete inventories and write-down to 322 454
market
Stock option compensation expense 139 219
Changes in operating assets and liabilities:
Accounts receivable (3,511) (4,385)
Inventories (364) (121)
Prepaid expenses and other current assets (1,762) 161
Accounts payable 2,900 556
Accrued liabilities (983) (3,975)
-------- --------
Net cash used in operating activities (4,126) (6,275)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments -- (4,984)
Proceeds from sale and maturities of short-term investments 4,922 5,056
Purchase of property and equipment (2,245) (884)
Proceeds from sale of property and equipment -- 42
-------- --------
Net cash provided by (used in) investing activities 2,677 (770)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt and capital lease obligations (140) (276)
Proceeds from sales of common stock, net 1,215 1,053
-------- --------
Net cash provided by financing activities 1,075 777
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (374) (6,268)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,553 26,254
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,179 $ 19,986
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 46 $ 158
======== ========
Cash paid for income taxes $ 12 $ 32
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Spectrian Corporation and subsidiaries ("Spectrian" or the "Company") have
been prepared in conformity with generally accepted accounting principles.
However, certain information or footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. In the opinion of the management, the
statements include all adjustments (which are of a normal and recurring nature)
necessary for the fair presentation of the financial information set forth
therein. These financial statements should be read in conjunction with the
Company's audited consolidated financial statements as set forth on pages F-1
through F-22 of the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 2000. The interim results presented herein are not necessarily
indicative of the results of operations that may be expected for the full fiscal
year ending March 31, 2001, or any other future period.
2. BALANCE SHEET COMPONENTS
Balance sheet components are as follows (in thousands):
July 2, March 31,
2000 2000
---- ----
Inventories:
Raw materials $16,609 $16,763
Work in progress 10,652 10,353
Finished goods 7,323 7,426
------- -------
$34,584 $34,542
======= =======
Property and equipment:
Machinery and equipment $60,309 $58,322
Software 4,265 4,248
Leasehold improvements 3,806 3,781
------- -------
68,380 66,351
Less accumulated depreciation and amortization 49,400 46,683
------- -------
$18,980 $19,668
======= =======
Accrued liabilities:
Employee compensation and benefits $ 3,858 $ 4,310
Warranty 7,208 7,123
Restructuring 869 996
Other accrued liabilities 875 1,364
------- -------
$12,810 $13,793
======= =======
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 established a new
model for accounting for derivative and hedging activities. In July, 1999 the
Financial Accounting Standards Board issued SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133" ("SFAS 137"). SFAS 137 deferred the effective date of
SFAS 133 until the first fiscal year beginning after June 15, 2000. SFAS 133 is
not expected to have any material impact on the Company's consolidated financial
statements.
6
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin: No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain of the Staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company has until the fourth quarter of fiscal 2001 to comply with the
guidance in SAB 101. SAB 101 is not expected to have any material impact on the
Company's consolidated financial statements.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions involving
Stock Compensation" an interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a non compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The adoption of certain provisions prior to July 1, 2000 did not have a material
effect. The Company believes that the adoption of the remaining provisions of
FIN 44 will not have a material effect on its financial position or results of
operations.
4. SHORT-TERM INVESTMENTS
The Company considers all liquid investments with an original maturity
of three months or less to be cash equivalents. The cash equivalents consisted
of investment grade, interest-bearing commercial paper and money market funds as
of July 2, 2000.
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.
As of July 2, 2000 and March 31, 2000, short-term investments
classified as available-for-sale securities were as follows (in thousands):
<TABLE>
<CAPTION>
Amortized Unrealized Fair
As of July 2, 2000 Cost Gain (Loss) Value
------------------ ---- ----------- -----
<S> <C> <C> <C>
Government bonds & notes $ 11,101 $ (137) $ 10,964
Corporate bonds & notes 24,775 (365) 24,410
-------- -------- --------
35,876 (502) 35,374
Less amounts classified as cash equivalents 4,154 -- 4,154
-------- -------- --------
Short-term investments $ 31,722 $ (502) $ 31,220
======== ======== ========
Contractual maturity dates:
1 to 5 years $ 31,220
========
</TABLE>
7
<PAGE>
<TABLE>
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
<CAPTION>
Unrealized Fair
As of March 31, 2000 Amortized Cost Gain (Loss) Value
-------------------- -------------- ----------- -----
<S> <C> <C> <C>
Government bonds & notes $ 14,599 $ (166) $ 14,433
Commercial paper 29,545 (451) 29,094
-------- -------- --------
44,144 (617) 43,527
Less amounts classified as cash equivalents 7,500 -- 7,500
-------- -------- --------
Short-term investments $ 36,644 $ (617) $ 36,027
======== ======== ========
Contractual maturity dates, less than 1 year $ 3,500
Contractual maturity dates, 1 to 5 years 32,527
--------
$ 36,027
========
</TABLE>
5. PER SHARE COMPUTATION
Basic net income (loss) per share is computed by dividing net income
(loss) available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted net income (loss) per share is
computed using the weighted average number of common and potentially dilutive
common shares outstanding during the period using the treasury stock method.
Potentially dilutive common shares include the effect of stock options. For the
three months ended July 2, 2000 and June 27, 1999, 3,215,071 and 2,651,352 stock
options were not included for the calculation of diluted net loss per share as
they were considered antidilutive due to the net loss the Company experienced in
these fiscal periods.
6. SEGMENT INFORMATION
Under the management approach, the Company has broken down its business
into two operating segments based upon product type: Amplifier Division and
Semiconductor Division, which operates under the tradename of UltraRF. UltraRF
derives substantially all of its revenues from sales to the Amplifier Division.
The Company allocates operating expenses to these segments but does not allocate
interest income and expense, other income, net, the provision for income taxes
and certain corporate operating expenses. Corporate expenses are allocated to
the operating segments based on predetermined annual allocation methods.
Appropriate intersegment eliminations are made in the consolidation of the
Company's consolidated financial statements. Segment assets, which include
inventories and property and equipment, are reported upon by operation. No other
assets and liabilities are reported separately.
<TABLE>
Consolidated Statement of Operations Data - fiscal 2001:
<CAPTION>
Three Months Ended July 2, 2000
------------------------------------------------
Amplifier UltraRF Other* Total
--------- ------- ------ -----
<S> <C> <C> <C> <C>
Net revenues, external $ 41,937 $ 253 $ -- $ 42,190
Net revenues, intersegment -- 7,186 (7,186) --
Amortization and depreciation 1,440 690 798 2,928
Income (loss) before income taxes $ (4,475) $ 497 $ 190 $ (3,788)
<FN>
*Data in the "Other" column represents the elimination of intersegment revenues,
interest income and expense, other income, net, the provision for income taxes,
certain unallocated corporate expenses and corporate amortization and
depreciation that is subsequently allocated to the operating segments.
</FN>
</TABLE>
8
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
<TABLE>
Consolidated Balance Sheet Data:
<CAPTION>
July 2, 2000
-----------------------------------------------------------
Amplifier UltraRF Other Total
--------- ------- ----- -----
<S> <C> <C> <C> <C>
Segment Assets $ 31,798 $14,747 $ 7,019 $ 53,564
Expenditures for additions to long-lived assets $ 634 $ 1,448 $ 163 $ 2,245
<CAPTION>
Consolidated Statement of Operations Data - fiscal 2000:
Three Months Ended June 27, 1999
----------------------------------------------------------
Amplifier UltraRF Other* Total
--------- ------- ------ -----
<S> <C> <C> <C> <C>
Net revenues, external $ 31,471 $ 13 $ -- $ 31,484
Net revenues, intersegment -- 4,223 (4,223) --
Amortization and depreciation 1,372 628 1,373 3,373
Income (loss) before income taxes $ (4,034) $ (272) $ 1,716 $ (2,590)
<FN>
*Data in the "Other" column represents the elimination of intersegment revenues,
interest income and expense, other income, net, the provision for income taxes,
certain unallocated corporate expenses and corporate amortization and
depreciation that is subsequently allocated to the operating segments.
</FN>
<CAPTION>
Consolidated Balance Sheet Data:
March 31, 2000
-----------------------------------------------------------
Amplifier UltraRF Other Total
--------- ------- ----- -----
<S> <C> <C> <C> <C>
Segment Assets $ 32,142 $ 13,605 $ 8,463 $ 54,210
</TABLE>
Geographic Segment Data:
Revenue from unaffiliated customers by geographic region as a
percentage of revenues were as follows:
Three Months Ended
--------------------------
July 2, June 27,
2000 1999
---- ----
Canada 35% 54%
United States 34% 8%
France 25% 24%
South Korea 5% 14%
Other countries 1% --%
The Company's long-lived assets are located in the following countries
(in thousands):
July 2, March 31,
2000 2000
---- ----
United States $ 17,249 $ 18,226
Thailand 1,315 1,218
South Korea 416 224
-------- --------
$ 18,980 $ 19,668
======== ========
9
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
7. Discontinued manufacturing operations and Related Restructuring Charges
During fiscal 1999, the Company transitioned the assembly and test of
its higher volume single carrier power amplifier products to a contract
manufacturer located in Thailand on a turnkey basis. During the fourth quarter
of fiscal 2000, the Company decided to transfer the remaining power amplifier
production in Sunnyvale, California, to the contract manufacturer. In connection
with the decision, the Company recognized in fiscal 2000 an approximately $1.0
million restructuring charge for estimated severance costs related to
organizational changes and a planned reduction in work force. Approximately 90
employees engaged in manufacturing and production related functions are
anticipated to be terminated as a result of the restructuring. At July 2, 2000,
approximately twenty-one employees had been terminated pursuant to the
restructuring. The Company anticipates that the restructuring will be
substantially completed in the third quarter of fiscal 2001. The following table
represents the restructuring activity that took place up to July 2, 2000 (in
thousands):
Reduction in
Workforce
---------
Balance at March 31, 2000 $ 996
Cash payment of severance costs (127)
--------
Balance at July 2, 2000 $ 869
========
The balance of the restructuring accrual is included in current
liabilities on the condensed consolidated balance sheets.
8. Comprehensive Income
Statement of Financial Accounting Standard No. 130 (SFAS 130)
"Reporting Comprehensive Income" establishes rules for the reporting and display
of comprehensive income and its components. The following are the components of
comprehensive income (loss) (in thousands):
Three Months Ended
----------------------
July 2, June 27,
2000 1999
---- ----
Net loss $(3,800) $(2,622)
Unrealized gain (loss) on marketable
securities 115 (540)
------- -------
Comprehensive loss $(3,685) $(3,162)
======= =======
The components of accumulated other comprehensive loss are as follows
(in thousands):
July 2, March 31
2000 2000
---- ----
Unrealized loss on marketable securities $(502) $(617)
===== =====
10
<PAGE>
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
9. Litigation
On May 19, 2000, the Company announced that it had reached a settlement
in principle of the shareholder class action lawsuits which were filed
in the United States District Court for the Northern District of
California and the Superior Court of the State of California for Santa
Clara County. The terms of the settlement will not have a material
adverse effect on the Company's financial position or results from
operations. The final settlement agreement is subject to Court approval
and class notice provisions.
10. Line of Credit
The Company has a revolving line of credit of $10.0 million with a bank
collateralized by the majority of the Company's assets. The line of
credit expires on June 30, 2001. 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. The master agreement also has certain
restrictions on other indebtedness and the payment of dividends. The
Company was in default of certain of the covenants and the bank has
granted a waiver of the default effective through September 30, 2000.
The amount available to borrow at July 2, 2000 was $10.0 million. The
Company can borrow at either (i) a variable rate equal to the prime
rate or (ii) a fixed rate equal to 200 basis points above the LIBOR
rate, which at July 2, 2000 was 9.5% and 8.79%, respectively. The
Company had no borrowings under the line of credit at July 2, 2000.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Quarterly Report on Form 10-Q that are
not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 (the `'Securities Act") and Section
21E of the Securities Exchange Act of 1934 (the "Exchange Act"), including
statements regarding Spectrian Corporation's ("the Company") expectations,
hopes, intentions or strategies regarding the future. When used herein, the
words `'may," `'will," `'expect," `'anticipate," `'continue," `'estimate,"
`'project," `'intend" and similar expressions are intended to identify
forward-looking statements within the meaning of the Securities Act and the
Exchange Act. Forward-looking statements include: statements regarding events,
conditions and financial trends that may affect the Company's future plans of
operations, business strategy, results of operations and financial position. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. Investors are
cautioned that any forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties and that actual results
may differ materially from those included within the forward-looking statements
as a result of various factors. These forward-looking statements are made in
reliance upon the safe harbor provision of The Private Securities Litigation
Reform Act of 1995. Factors that could cause or contribute to such differences
include, but are not limited to, those described below, under the heading
"Factors Affecting Future Operating Results" and elsewhere in this Quarterly
Report on Form 10-Q.
Overview
Spectrian designs, manufacturers and markets high-power RF amplifiers
and semiconductor devices, for the global wireless communications industry. The
Company's power amplifiers support a broad range of transmission standards,
including AMPS, TDMA, CDMA, PCS, GSM, WLL, and IMT-2000. Spectrian's power
amplifiers are utilized as part of the infrastructure for both wireless voice
and data networks. The Company's power amplifiers boost the power of a signal so
that it can reach a wireless phone or other device within a designated
geography. The Company's semiconductor devices are key components of a power
amplifier.
UltraRF, the tradename for the Company's semiconductor division,
operates its own wafer fabrication facility that utilizes bipolar and LDMOS
technologies. This facility is capable of processing MOS devices with gold
metallization. Using this fabrication facility, UltraRF produces high-power,
high-performance LDMOS RF power semiconductors, which are one critical enabling
component in the design and manufacture of second and third generation wireless
infrastructure equipment. In addition to its own unique designs, UltraRF also
produces functional equivalents to some devices provided by other manufacturers.
For the three months ended July 2, 2000, Nortel Networks Corporation
("Nortel") and Verizon Communications ("Verizon"), formed by the merger of Bell
Atlantic and GTE Corporation, accounted for approximately 61% and 28% of net
revenues, respectively. For the three months ended June 27, 1999, Nortel and LG
Information & Communications, Inc. ("LGIC") accounted for approximately 83% and
12% of net revenues, respectively. The Company's business, financial condition
and results of operations have been materially adversely affected in the past by
anticipated orders failing to materialize and by deferrals or cancellations of
orders as a result of changes in OEM requirements. In the year ended March 31,
1999 ("fiscal 1999") and the first and fourth quarters of the year ended March
31, 2000 ("fiscal 2000"), product orders fell sharply resulting in substantial
losses in those fiscal periods. There can be no assurance that the Company will
not experience such fluctuations in the future. In September 1999, the Company
announced that it expected that it would not be developing new products for
Nortel but would continue to supply Nortel with existing products. If the
Company is unable to find other customers to generate demand for its new
products, the Company's revenues may be materially adversely affected. If the
Company were to lose Nortel, Verizon or any other major OEM customer, or if
orders by Nortel, Verizon 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.
During the three months ended July 2, 2000 and June 27, 1999, sales
outside of the United States were 66% and 92%, respectively. The Company expects
that international sales will continue to account for a significant percentage
of the Company's net revenues for the foreseeable future. Financial market
turmoil, economic downturn, consolidation or merger of customers, and other
changes in business conditions in any of the Company's current or future
markets, such as South Korea and France, may have a material adverse effect on
the Company's sales of its products. Furthermore, because the Company's products
are priced in U.S. dollars, currency fluctuations and
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
instability in the financial markets that are served by the Company may have the
effect of making the Company's products more expensive than those of other
manufacturers whose products are priced in the local currency of the customer
and may result in reduced revenues for the Company.
In Sunnyvale, California, the Company manufactures low-volume single
carrier and multicarrier power amplifier products, and services all of its power
amplifier products. In addition, the Company operates a four-inch semiconductor
wafer fabrication facility and semiconductor assembly and testing operation in
Sunnyvale, California. During fiscal 1999, the Company transitioned the assembly
and test of its higher volume single carrier power amplifier products to a
contract manufacturer located in Thailand on a turnkey basis. In the year ended
March 31, 2001 ("fiscal 2001"), the Company plans to transfer the remaining
power amplifier production in Sunnyvale to the contract manufacturer. The
Company utilizes contract manufacturing to decrease the Company's manufacturing
overhead and costs of its products, to increase flexibility to respond to
fluctuations in product demand and to leverage the strengths of the contract
manufacturer's focus on high volume, high quality manufacturing. The cost of
transitioning 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 anticipates
that its gross margin will be adversely affected in fiscal 2001 during the
transition of the remaining power amplifier production to the contract
manufacturer. As a result of its wafer fabrication facility and other
manufacturing and development infrastructure, the Company has a high level of
fixed costs and is dependent upon substantial revenue to achieve and maintain
profitability.
The Company's semiconductor 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 for certain
components and services, 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 is 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 merchant amplifier manufacturer for business from Nortel. This
competition has resulted in, and will continue to result in reduced average
selling prices for the Company's products, which accordingly will negatively
impact gross margins.
Results of Operations
The following table sets forth for the periods indicated certain
statement of operations data of the Company expressed as a percentage of total
revenues and gross margin on sales.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Three months ended
July 2, June 27,
2000 1999
---- ----
NET REVENUES 100.0% 100.0%
----- -----
COSTS AND EXPENSES:
Cost of revenues 83.6 82.2
Research and development 13.3 15.5
Selling, general and administrative 13.4 13.6
----- -----
Total costs and expenses 110.3 111.3
----- -----
OPERATING LOSS (10.3) (11.3)
INTEREST INCOME 1.4 3.6
INTEREST EXPENSE (0.1) (0.5)
----- -----
LOSS BEFORE INCOME TAXES (9.0) (8.2)
INCOME TAXES -- 0.1
----- -----
NET LOSS (9.0)% (8.3)%
===== =====
GROSS MARGIN ON SALES 16.4% 17.8%
===== =====
Net Revenues. The Company's revenues increased 34% to $42.2 million for
the three months ended July 2, 2000 from $31.5 million for the three months
ended June 27, 2000. The growth in revenue was primarily due to higher demand in
the single carrier power amplifier ("SCPA") products, primarily new Broadband
products, and achieving volume shipments of the new multi-channel power
amplifier ("MCPA") products. SCPA revenues, including the new single carrier
Broadband products, increased 8% to $33.2 million for the three months ended
July 2, 2000 from $30.7 million for the three months ended June 27, 1999. MCPA
revenues increased 1,018% to $8.7 million for the three months ended July 2,
2000 from $0.8 million for the three months ended June 27, 1999. UltraRF
revenues from external customers increased to $0.3 million from none for the
three months ended July 2, 2000 and June 27, 1999, respectively.
Cost of Revenues. Cost of revenues consists primarily of turnkey
amplifier costs for the Company's higher volume products, internal amplifier
assembly and test costs for its lower volume and new products, radio frequency
("RF") semiconductor fabrication, assembly and test costs, raw materials,
manufacturing overhead and warranty costs. The Company's cost of revenues
increased by 36% to $35.3 million for the three months ended July 2, 2000 from
$25.9 million for the three months ended June 27, 2000. The increase on a dollar
basis for the three months ended July 2, 2000 was due to higher production
volumes associated with the increased revenues.
Gross margin on sales was 16% for the three months ended July 2, 2000
as compared to 18% for the three months ended June 27, 1999. The decrease in
gross margin reflects a change in product mix and declining average sales prices
in certain volume products which were partially offset by cost improvements
resulting from lower per unit manufacturing costs driven by higher production
volumes, product cost reduction initiatives, and the increased use of contract
manufacturing.
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 15% to
$5.6 million in the three months ended July 2, 2000 from $4.9 million in the
three months ended June 27, 1999. As a percentage of revenues, R&D expenses
declined to 13% of revenues for the three months ended July 2, 2000 as compared
to 16% of revenues for the three months ended June 27, 1999. The increase in R&D
expenses on a dollar basis reflects new product development initiatives required
to meet current and future market and customer requirements. The decrease in R&D
expenses on percentage of revenues basis reflects substantially higher revenue
levels.
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
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
independent sales representatives, professional fees and other expenses. The
Company's SG&A expenses increased by 32% to $5.7 million in the three months
ended July 2, 2000 from $4.3 million in the three months ended June 27, 1999. As
a percentage of revenues, SG&A expenses declined to 13% of revenues for the
three months ended July 2, 2000 as compared to 14% of revenues for the three
months ended June 27, 1999. The increase in SG&A expenses on a dollar basis was
principally due to increased commissions, marketing efforts to diversify the
customer base, creation of the UltraRF sales force and network, and added
maintenance and support for the new enterprise resource planning ("ERP") system.
The decrease in SG&A expenses on percentage of revenues basis reflects
substantially higher revenue levels.
Interest Income. Interest income for the three months ended July 2,
2000 decreased to $0.6 million from $1.1 million for the three months ended June
27, 1999. The decrease in interest income resulted from lower interest-bearing
investment balances associated with reduced average cash and cash equivalent
balances.
Interest Expense. Interest expense for the three months ended July 2,
2000 decreased to $46,000 from $158,000 for the three months ended June 27,
1999. The decrease in interest expense resulted from substantially reduced
average borrowings levels.
Income Taxes. Due to the losses incurred by the Company in prior years
and the related net operating loss carryforwards available to the Company, the
Company did not record an income tax expense except for the minimum state income
tax expense for the three months ended July 2, 2000.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 established a new
model for accounting for derivative and hedging activities. In July, 1999 the
Financial Accounting Standards Board issued SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133" ("SFAS 137"). SFAS 137 deferred the effective date of
SFAS 133 until the first fiscal year beginning after June 15, 2000. SFAS 133 is
not expected to have any material impact on the Company's consolidated financial
statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin: No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain of the Staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company has until the fourth quarter of fiscal 2001 to comply with the
guidance in SAB 101. SAB 101 is not expected to have any material impact on the
Company's consolidated financial statements.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions involving
Stock Compensation" an interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a non compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The adoption of certain provisions prior to July 1, 2000 did not have a material
effect. The Company believes that the adoption of the remaining provisions of
FIN 44 will not have a material effect on its financial position or results of
operations.
Liquidity and Capital Resources
The Company has financed its growth through sales of common stock,
private sales of equity securities, capital equipment leases, bank lines of
credit and cash flows from operations. Principal sources of liquidity at July 2,
2000 consisted of cash, cash equivalents and short-term investments of $42.4
million and bank borrowing arrangements.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company has a revolving line of credit of $10.0 million with a bank
collateralized by the majority of the Company's assets. The line of credit
expires on June 30, 2001. 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. The
master agreement also has certain restrictions on other indebtedness and the
payment of dividends. The Company was in default of certain of the covenants and
the bank has granted a waiver of the default effective through September 30,
2000. The amount available to borrow at July 2, 2000 was $10.0 million. The
Company can borrow at either (i) a variable rate equal to the prime rate or (ii)
a fixed rate equal to 200 basis points above the LIBOR rate, which at July 2,
2000 was 9.5% and 8.79%, respectively. The Company had no borrowings under the
line of credit at July 2, 2000.
In January 1997, the Company borrowed $6.0 million under a term
collaterized by certain capital equipment. Under the terms of the loan
agreement, which expires in January 2002, the Company is required to make a
series of uneven monthly principal payments ranging from $42,000 to $136,000,
plus interest at a rate of 9.1%, and must maintain certain minimum working
capital, net worth and other specific ratios for which the Company was in
compliance as of July 2, 2000.
The Company's working capital decreased by $2.0 million to $77.4
million as of July 2, 2000 from $79.4 million as of March 31, 2000. The decrease
was primarily attributable to a $5.2 million decrease in cash, cash equivalents
and short-term investments, a $2.9 million increase in accounts payable, which
were partially offset by a $3.5 million increase in accounts receivable, a $1.8
million increase in prepaid expenses and other current assets, and a $1.0
million decrease in accrued liabilities. The Company's short-term investments
were principally invested in investment grade, interest-bearing securities.
Cash used by operations was $4.1 million for the three months ended
July 2, 2000 compared to cash used by operations for the three months ended June
27, 1999 of $6.3 million. Cash used by operations for the three months ended
July 2, 2000 was principally the result of a $3.8 million net loss, a $3.5
million increase in accounts receivable, which increased as a result of the
timing of shipments late in the quarter, a $1.8 million increase in prepaid
expenses and other current assets and a $1.0 million reduction in accrued
liabilities which were partially offset by a $2.9 million increase in accounts
payable, which increased proportionately with production levels, and
depreciation and amortization of $2.9 million.
The Company's investing activities during the three months ended July
2, 2000 provided cash of approximately $2.6 million as compared to using $0.8
million of cash during the comparable period in the prior year. Cash provided by
investing activities during the three months ended July 2, 2000 resulted
primarily from $4.9 million in proceeds from sale and maturities of short-term
investments which were partially offset by $2.2 million in additions to property
and equipment. Capital additions for the three months ended July 2, 2000
included manufacturing test and production equipment required to support new
products and test equipment to support various research and development
projects.
The Company's financing activities during the three months ended July
2, 2000 provided cash of approximately $1.1 million as compared to cash provided
of $0.8 million during the comparable period in the prior year. Cash provided by
financing activities during the three months ended July 2, 2000 was the result
of $1.2 million in proceeds from the issuance of common stock, through the
exercise of employee stock options and employee stock purchase plan activity,
which was partially offset by $0.1 million in repayments of debt and capital
lease obligations.
The Company anticipates spending approximately $7.3 million over the
next three months for capital additions primarily to support manufacturing
production and test requirements and development projects. Based on the
Company's current working capital position, the cash flows the Company expects
to generate from the remainder of fiscal 2001 operations, and the available line
of credit, 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.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Factors Affecting Future Operating Results
Customer Concentration; Dependence on Nortel and Verizon. The wireless
infrastructure equipment market is dominated by a small number of large OEMs,
including Ericsson, Lucent, Motorola, Nortel, Verizon and Siemens. The Company's
revenues are derived primarily from sales to a limited number of these OEMs, in
particular, Nortel and Verizon. Furthermore, a substantial portion of revenues
from Nortel in the past has 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 a supply
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. This agreement allows Nortel to change the product mix
requirements, which can significantly affect the Company's gross margins, and to
change requested delivery dates without significant financial consequences to
Nortel, which affect the Company's ability to efficiently manage production
schedules and inventory levels and to accurately forecast product sales. In
September 1999, the Company announced that it expected that it would not be
developing products for Nortel but that it will continue to supply Nortel with
existing products. There can be no assurance that Nortel will purchase existing
products from 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
Verizon, 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. If the Company's current or new customers do not
generate sufficient demand for the Company's new products replacing prior demand
from Nortel, the Company's business financial condition and results of
operations could be materially adversely affected. Further, if the Company were
to lose Nortel or any other major OEM customer, or if orders by Nortel or
Verizon 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, 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,
Verizon and other major OEM customers in future periods, which could result in
declining average sales prices and gross margins 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 related gross
margins which vary significantly based upon product mix; subcontractor
performance; variations in operating expenses; changes in manufacturing capacity
and variations in the utilization of this capacity; shortages of key supplies;
the long sales cycles associated with the Company's customer specific products;
the timing and level of product and process development costs; changes in
inventory levels; and 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 the past has caused significant fluctuations in the
Company's product sales. There can be no assurance that the Company will not
experience such fluctuations in the future. The Company does not believe that it
will have the annual revenue growth it experienced in fiscal 2000, in the
future, 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
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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.
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 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.
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. Power
amplifiers as complex as those offered by the Company often encounter
development delays and may contain undetected defects or failures. The Company
has from time to time in the past experienced product quality, performance and
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 relating
to the Company's product quality, performance and reliability will not occur in
the future that may have a material adverse effect on the Company's business,
financial condition and results of operations.
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. In addition, these manufacturers could decide to sell amplifiers to
other wireless equipment OEMs. If this should occur, the competition for power
amplifiers would significantly increase and could have a material adverse effect
on the Company's business, financial condition and results of operations.
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 power amplifier suppliers, any decision by an OEM to employ a
second source merchant supplier for a product currently purchased from a
merchant supplier may reduce the existing merchant supplier's ability to
maintain a given level of product sales to such OEM or, possibly, to retain the
OEM as a customer due to price competition from the second source merchant
supplier. There can be no assurance that the Company's major OEM customers will
continue to rely, or increase their reliance, on the Company as an external
source of supply for their power amplifiers, or that other wireless equipment
OEMs will become customers of the Company. If the major wireless infrastructure
equipment suppliers do not purchase or continue to purchase their power
amplifiers from merchant suppliers, the Company's business, results of
operations and financial condition will be materially adversely affected.
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 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. A softening of demand in the markets served by the Company or a failure
of 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
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
become obsolete or fail to gain widespread commercial acceptance, the Company's
business may be materially adversely affected.
Sole or Limited Sources of Materials and Services. The Company
currently procures from single sources certain components and services for its
products including, but not limited to, turnkey amplifier assemblies and
specialized components. The Company purchases these products, components and
services on a purchase order basis, does not carry significant inventories of
these components and does not have any long-term supply contracts with its sole
source vendors. Furthermore, the Company began outsourcing assembly of some of
its higher volume power amplifiers during the third fiscal quarter of 1999 and
will transfer the remaining power amplifier production during fiscal 2001 to a
contract manufacturer. The Company issues non-cancelable purchase orders to the
contract manufacturer 60 days in advance of requested delivery which is greater
than the committed delivery schedule of some of its customers, such as Nortel.
The Company's reliance on sole sources for certain components and its migration
to an outsourced, turnkey manufacturing strategy entail certain risks including
reduced control over the price, timely delivery, reliability and quality of the
components. If the Company were to change any of its sole source vendors or
contract manufacturer, 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.
Risks of International Sales. The Company operates in an international
market and 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, representatives and customers, reduced protection of
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 turmoil in financial markets and the
deterioration of the underlying economic conditions in certain countries where
the Company has significant sales 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 funding of wireless infrastructure by domestic governments,
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 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 countries
experiencing financial market turmoil and/or deterioration of economic
conditions. Furthermore, a large portion of the Company's existing customers and
potential new customers are servicing new markets in developing countries that
the Company's customers expect will deploy wireless communication networks as an
alternative to the construction of a wireline infrastructure. If such countries
decline to construct wireless communication systems, or construction of such
systems is delayed for any reason, including business and economic conditions
and changes in economic stability due to factors such as increased inflation and
political turmoil, such delays could have a material adverse effect on the
Company's business, financial condition and results of operations.
Reliance upon Growth of Wireless Services. Sales of power amplifiers to
wireless infrastructure equipment suppliers have in the past accounted, and are
expected in the future to account, for substantially all of the Company's
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 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. There can be no
assurance that the Company's pending patent applications will be allowed or that
the issued or pending patents will not be challenged or circumvented by
competitors. Notwithstanding the Company's active pursuit of patent protection,
the Company believes that the success of its business depends more on the
collective value of its patents, specifications, computer aided design and
modeling tools, technical processes and employee expertise. The Company
generally enters into confidentiality and nondisclosure agreements with its
employees, suppliers, OEM customers, and potential customers and limits access
to and distribution of its proprietary technology. However, there can be no
assurance that such measures will provide adequate protection for the Company's
trade secrets or other proprietary information, or that the Company's trade
secrets or proprietary technology will not otherwise become known or be
independently developed by competitors. The failure of the Company to protect
its proprietary technology could have a material adverse effect on its business,
financial condition and results of operations.
Risk of Third Party Claims of Infringement. The communications
equipment industry is characterized by vigorous protection and pursuit of
intellectual property rights or positions, which have resulted in significant
and often protracted and expensive litigation. Although there is currently no
pending intellectual property litigation against the Company, the Company or its
suppliers may from time to time be notified of claims that the Company may be
infringing patents or other intellectual property rights owned by third parties.
If it is necessary or desirable, the Company may seek licenses under such
patents or other intellectual property rights. However, there can be no
assurance that licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain a license from
a third party for technology used by the Company or otherwise secure rights to
use such technology could cause the Company to incur substantial liabilities, to
suspend the manufacture of products or expend significant resources to develop
noninfringing technology. There can be no assurance that the Company would be
successful in such development or that such licenses would be available on
reasonable terms, if at all. In the event that any third party makes a
successful claim against the Company or its customers and either a license is
not made available to the Company on commercially reasonable terms or a "design
around" is not practicable, the Company's business, financial condition and
results of operations would be materially adversely affected.
Furthermore, the Company may initiate claims or litigation against
third parties for infringement of the Company's proprietary rights or to
establish the validity of the Company's proprietary rights. Litigation by or
against
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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. Compliance with such regulations could
require the Company to acquire expensive remediation equipment or to incur
substantial expenses. Any failure by the Company to control the use, disposal,
removal or storage of, or to adequately restrict the discharge of, or assist in
the cleanup of, hazardous or toxic substances, could subject the Company to
significant liabilities, including joint and several liabilities under certain
statutes. The imposition of such liabilities could materially adversely affect
the Company's business, financial condition and results of operations.
Management of Growth; Dependence on Key Personnel. The Company's
business and growth 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, motivate, manage and retain new employees successfully, especially in
the highly competitive northern California job market, to integrate new
employees into its overall operations and to retain the continued service of its
key technical, marketing and management personnel, and to continue to improve
its operational, financial and management information systems. Although the
Company has employment contracts with several of its executive officers, these
agreements do not obligate such individuals to remain in the employment of the
Company. The Company does not maintain key person life insurance on any of its
key technical personnel. The competition for such personnel is intense. The
Company has experienced loss of key employees in the past and could in the
future. Such losses could have a material adverse effect on the Company. On
March 31, 2000, the Company employed Mr. Thomas H. Waechter as its President and
Chief Executive Officer. There can be no assurance that Mr. Waechter will
operate effectively with existing management nor that he will be able to retain
or attract additional executive officers as needed. As a result of the plan to
discontinue manufacturing operations in Sunnyvale, California, and the other
restructuring activities, several key executives will cease to be employees of
the Company.
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company's ability to manage its growth will require it to continue
to invest in its operational, financial and management information systems,
procedures and controls. The Company can give no assurance that it will be able
to manage its growth effectively. Failure to manage growth effectively would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company may, from time to time, pursue the
acquisition of other companies, assets or product lines that complement or
expand its existing business. The Company may also, from time to time, pursue
divestitures of existing operations. Acquisitions and divestitures involve a
number of risks that could adversely affect the Company's operating results.
These risks include the diversion of management's attention from day-to-day
business, the difficulty of combining and assimilating the operations and
personnel of the acquired companies, charges to the Company's earnings as a
result of the purchase of intangible assets, and the potential loss of key
employees as a result of an acquisition. Should any acquisition take place, we
can give no assurance that this acquisition will not materially and adversely
affect the Company or that any such acquisition will enhance the Company's
business.
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 quarterly and
annual operating results, customer concentration, the timing difference between
Nortel's requested delivery dates and its vendor purchase commitments to support
the customer's delivery requirements, reliance on international markets, the
absence of the economies of scale achieved by some of its competitors,
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, estimates and recommendations, news reports regarding the Company,
its competitors and its markets, governmental regulatory action, developments
with respect to patents or proprietary rights, announcements of significant
acquisitions or strategic partnerships by the Company or its competitors,
announcements of significant divestitures of existing businesses or product
lines, general market conditions and other factors. In addition, the stock
market in general, and the market prices for power amplifier manufacturers in
particular, have experienced extreme volatility that is often unrelated to the
operating performance of these companies. These broad market and industry
fluctuations may adversely affect the price of the Company's common stock,
regardless of actual operating performance. The market price of the Company's
Common Stock has fluctuated significantly in the past.
Legal Proceedings. On May 19, 2000, the Company announced that it had
reached a settlement in principle of the shareholder class action lawsuits which
were filed in the United States District Court for the Northern District of
California and the Superior Court of the State of California for Santa Clara
County. The terms of the settlement will not have a material adverse effect on
the Company's financial position or results from operations. The final
settlement agreement is subject to Court approval and class notice provisions.
Shareholder Rights Plan; Issuance of Preferred Stock. The Board of
Directors of the Company adopted a Shareholder Rights Plan in October 1996 (the
"Rights Plan"). Pursuant to the Rights Plan, the Board declared a dividend of
one Preferred Stock Purchase Right per share of Common Stock (the "Rights") and
each such Right has an exercise price of $126.00. The Rights become exercisable
upon the occurrence of certain events, including the announcement of a tender
offer or exchange offer for the Company's Common Stock or the acquisition of a
specified percentage of the Company's Common Stock by a third party. The
exercise of the Rights could have the effect of delaying, deferring or
preventing a change in control of the Company, including, without limitation,
discouraging a proxy contest or making more difficult the acquisition of a
substantial block of the Company's Common Stock. These provisions could also
limit the price that investors might be willing to pay in the future for shares
of the Company's Common Stock. The Board of Directors has the authority to issue
up to 5,000,000 shares of undesignated Preferred Stock and to determine the
powers, preferences and rights and the qualifications, limitations or
restrictions granted to or imposed upon any wholly unissued shares of
undesignated Preferred Stock and to fix the number of shares constituting any
series and the designation of such series, without any further vote or action by
the Company's stockholders. For example, in connection with the Company's
Shareholder Rights Plan, the Board of Directors designated 20,000 shares of
Preferred Stock as Series A Participating Preferred Stock although none of such
shares have been issued. The Preferred Stock could be issued with voting,
liquidation, dividend and other rights superior to those of the holders of
Common Stock. The issuance of Preferred Stock under certain circumstances could
have the effect of delaying, deferring or preventing a change in control of the
Company.
Additional Factors Affecting Future Operating Results of UltraRF
22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Capacity Constraints. UltraRF's facilities have a level of capacity
beyond which it cannot cost effectively produce its products. Although UltraRF
is not currently approaching those constraints, it may be unable to further
expand its business if it fails to plan and build sufficient capacity. UltraRF
may attempt to increase its capacity by converting its existing facility to
accommodate equipment that uses six-inch wafers. UltraRF does not have any
experience processing six-inch wafers in UltraRF's fabrication facilities.
UltraRF may be required to redesign its processes and procedures substantially
to accommodate the larger wafers. As a result, implementing additional capacity
for six-inch wafers may take longer than planned, which could harm UltraRF's
results of operations. The process of converting to six-inch wafers must begin
substantially prior to receiving actual customer demand for products. If the
customer demand for products is not realized or implementation takes longer than
planned, the results will have a material adverse effect on the Company's
business, financial condition and results of operations.
Risks Associated with UltraRF's Wafer and Device Fabrication. UltraRF'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 for certain
components and services, and a strict regulatory environment. During periods of
low demand, high fixed wafer fabrication costs are likely to have a material
adverse effect on UltraRF'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 UltraRF will be able
to achieve acceptable production yields in the future. In addition, UltraRF'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, the loss of key employees dedicated to the wafer and device
fabrication facilities, or any failure to maintain acceptable wafer and device
production levels could have a material adverse effect on UltraRF's business,
financial condition and results of operations.
Risks Associated with Development of LDMOS RF. UltraRF's business could
be adversely affected by its failure to develop and market its LDMOS RF power
transistors competitively UltraRF sells its products in an industry
characterized by rapid technological changes, frequent new product and service
introductions and evolving industry standards. UltraRF can provide no assurance
that its development efforts will result in commercially successful LDMOS
products in a timely or cost-effective manner, if at all. UltraRF's competitors
are also expected to develop and sell devices suitable for these markets and may
produce devices with superior performance to UltraRF's planned developments.
Failure by UltraRF to develop competitive devices could adversely affect its
business.
Risks Associated with Relationship with the Company. UltraRF's close
relationship with the Company could limit UltraRF's potential to do business
with the Company's competitors. The Company currently is UltraRF's largest
customer, and UltraRF expects to have a variety of ongoing contractual
relationships with the Company. UltraRF cannot predict whether existing or
potential customers who are competitors of the Company will be deterred by the
existence of such a relationship between the Company and UltraRF. If they are
deterred, UltraRF's future growth could be hindered.
Risks Associated with the Cyclical Nature of the Semiconductor
Industry. From time to time, the semiconductor industry has experienced
significant downturns and wide fluctuations in product supply and demand. This
cyclicality has led to significant imbalances in demand and production capacity.
It has also accelerated the decrease of average selling prices per unit. UltraRF
may experience periodic fluctuations in its future financial results because of
these or other industry-wide conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company develops products in the United States and markets its
products in North America, Europe and the Asia-Pacific region. Thus, the
financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. As all
sales are currently made in U.S. dollars, a strengthening of the dollar could
make the Company's products less competitive in foreign markets.
The Company's exposure to market rate risk for changes in interest
rates relate primarily to its investment portfolio. The Company does not hold
derivative financial instruments in its investment portfolio. The Company
23
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
places its investments with high quality institutions and limits the amount of
credit exposure to any one issuer. The Company is averse to principal loss and
ensures the safety and preservation of its invested funds by limiting default,
market and reinvestment risk. The Company classifies its short-term investments
as "fixed-rate" if the rate of return on such instruments remains fixed over
their term. These "fixed-rate" investments include fixed-rate U.S. government
securities and corporate obligations with contractual maturity dates ranging
from less than one year to greater than 10 years. The table below presents the
amounts and related weighted interest rates of the Company's short-term
investments at July 2, 2000 and March 31, 2000 (dollars in thousands).
July 2, March 31,
2000 2000
---- ----
Average fixed interest rate 5.9% 6.0%
======= =======
Amortized cost $31,722 $36,644
======= =======
Fair value $31,220 $36,027
======= =======
Contractual maturity dates:
Less than 1 year $ -- $ 3,500
1 to 5 years 31,220 32,527
------- -------
$31,220 $36,027
======= =======
24
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 19, 2000, the Company announced that it had reached a settlement
in principle of the shareholder class action lawsuits which were filed in the
United States District Court for the Northern District of California and the
Superior Court of the State of California for Santa Clara County. The terms of
the settlement will not have a material adverse effect on the Company's
financial position or results from operations. The final settlement agreement is
subject to Court approval and class notice provisions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------------------------------------------------
3.6 Amended and Restated Bylaws of Spectrian Corporation
(a Delaware Corporation) dated June 9, 2000
10.46 Sublease Agreement by and between American Microwave
Technology and the Registrant dated May 31, 2000.
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule.
(b) Reports on Form 8-K. The Company did not file any Reports on
Form 8-K during the quarter ended July 2, 2000.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPECTRIAN CORPORATION
---------------------
(Registrant)
Dated: August 11, 2000 By: /s/ MICHAEL D. ANGEL
-------------------------
Michael D. Angel
Executive Vice President,
Finance and Administration,
Chief Financial Officer and Secretary
(Authorized Officer and Principal
Financial and Accounting Officer)
26
<PAGE>
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
Exhibits Description
-------- -------------------------------------------------------------------------------
<S> <C>
3.6 Amended and Restated Bylaws of Spectrian Corporation (a Delaware Corporation)
dated June 9, 2000
10.46 Sublease Agreement by and between American Microwave Technology and the
Registrant dated May 31, 2000.
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule
</TABLE>
27
