UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended March 31, 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 (I.R.S. Employer
of incorporation or organization) Identification Number)
350 West Java Drive, 94089
Sunnyvale, California (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code: (408) 745-5400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
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 contained 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. [ ]
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
23, 2000 as reported on the Nasdaq National Market, was approximately
$112,000,000. 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 23, 2000, registrant had outstanding 10,943,103 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 2000 Annual Meeting of
Stockholders.
<PAGE>
SPECTRIAN CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED MARCH 31, 2000
Page
----
PART I
Item 1. Business............................................................ 3
Item 2. Properties.......................................................... 17
Item 3. Legal Proceedings................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders................. 17
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................... 18
Item 6. Selected Consolidated Financial Data................................ 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......... 38
Item 8. Financial Statements and Supplementary Data......................... 38
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................... 38
PART III
Item 10. Directors and Executive Officers of the Registrant.................. 40
Item 11. Executive Compensation.............................................. 40
Item 12. Security Ownership of Certain Beneficial Owners and Management...... 40
Item 13. Certain Relationships and Related Transactions...................... 40
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.... 41
Signatures.......................................................... 45
2
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PART I
ITEM 1. BUSINESS
The statements contained in this Annual Report on Form 10-K 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 in "Management's Discussion and
Analysis of Financial Condition and Results of Operations", under the heading
"Factors Affecting Future Operating Results" and elsewhere in this Annual Report
on Form 10-K.
General
Spectrian Corporation ("Spectrian" or "the Company") designs,
manufacturers and markets high-power radio frequency ("RF") amplifiers and
semiconductor devices, through its division that operates under the trade name
UltraRF, for the global wireless communications industry. The Company's power
amplifiers support a broad range of transmission standards, including Advanced
Mobile Phone Services ("AMPS"), Time Division Multiple Access ("TDMA"), Code
Division Multiple Access ("CDMA"), Personal Communications System ("PCS"),
Global System for Mobil Communications ("GSM"), Wireless Local Loop ("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 operates its own wafer fabrication facility that utilizes
bipolar and laterally diffused metal oxide semiconductor ("LDMOS") technologies.
This facility is capable of processing metal oxide semiconductor ("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.
Industry Background
The market for cellular, PCS and WLL communications services
(collectively known as "wireless" services) has grown significantly during the
past decade, due to decreasing prices for wireless handsets, increasing
competition among service providers and a greater availability of high quality
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 bi-directional
wireless data applications have the potential to further expand the market for
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wireless communications by allowing service providers to increase
revenue-generating traffic on their networks.
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 sends telephone calls to/from the
switching office of the local wireline telephone company and transmits and
receives 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, feeding an antenna to transmit the outgoing signal to the
wireless telephone user. The power amplifier receives a low-level 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 based on analog technology operate in the
frequency range of 800 MHz to 1000 MHz and are capable of carrying only one call
per "channel" in the allocated spectrum. Analog cellular systems are being
supplanted by digital systems, which convert voice transmissions into bits of
electronic information and thereby more efficiently use the finite RF spectrum
allocated to wireless transmissions to serve growing demand. The three dominant
digital transmission modulation formats for cellular and PCS networks (GSM, TDMA
and CDMA) allow a digital network to have a call capacity of three to eight
times that of an analog network. In addition to the growth in digital cellular
networks, the new digital PCS networks continue to grow. PCS networks operate in
the 1800 MHz to 2000 MHz frequency range and 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 led
many 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; hence more microcells are
required in order to increase the capacity of the overall system. Microcells
also require equipment that consumes less power and is less expensive per
channel at each base station than macrocells.
Wireless carriers' ability to more effectively manage the 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 greatest source 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. Not surprisingly, higher network
linearity is required as the industry transitions from analog to digital
technologies to prevent interference between adjacent frequency channels.
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.
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An emerging trend in the wireless communications industry is the
convergence of Internet high speed access with mobile and fixed wireless
systems. Cellular and PCS systems are currently adopting limited Internet
capability, and many traditional mobile communications systems providers are
attempting to provide high Internet access speeds which, Spectrian anticipates,
will create opportunities for new systems to gain market acceptance. However,
few wireless systems which allow greater than 14 kbps data transmission have
been deployed for commercial systems.
The growth of infrastructure equipment purchases is, however, impacted
by the industry's focus on price reductions. J.D. Power and Associates notes
that even though minutes of use have nearly doubled from 1998 to 1999, the
average household wireless charges have been flat or declined. Competition
between network operators for subscribers is significant and influenced by
subscriber plans that include a single rate, free long-distance, no roaming
charges and free minutes of use. This pricing pressure extends to the equipment
manufacturers, including suppliers of amplifiers and components
Amplifier Division
The Spectrian Solution - Amplifier Division
Spectrian's Amplifier Division ("Amplifier Division") designs,
manufactures and markets highly linear RF power amplifiers that seek to address
the needs of wireless infrastructure original equipment manufacturers ("OEMs")
and their service provider customers. The Amplifier Division's amplifiers
provide significant advantages to its customers, including:
High Linearity. The Amplifier Division has developed the multiple
technological competencies and disciplines required to achieve high linearity in
its amplifiers. These competencies and disciplines include thermal and
mechanical packaging design, advanced circuit design, linear correction
technologies, advanced signal processing techniques, control systems and
computer aided design and modeling. Spectrian believes that the high degree of
linearity of the Amplifier Division's power amplifiers enables its customers to
furnish wireless services with high capacity base station equipment at low
capital cost per subscriber.
Time to Market and Volume Manufacturing. The Amplifier Division's
design processes aid it in addressing wireless infrastructure equipment
suppliers' quantity and time to market requirements for power amplification
products. The Amplifier Division designs its amplifiers to be manufactured in
high volumes at low cost. Power amplifiers have historically been difficult to
manufacture in high volumes due to the labor intensive nature of the
manufacturing process and the complexities of RF power technology. The Amplifier
Division's experience with automated testing, which is faster than manual
testing with replicable results, enables the Amplifier Division to transfer
manufacturing to outsource partners in lower cost areas of the world and to
achieve high volume at low cost with a variable cost model.
Standards Independence. The Amplifier Division's technologies support
every major wireless modulation standard, and its multicarrier power amplifiers
support several standards simultaneously. Certain of the Amplifier Division's
single carrier products support both analog and digital standards in a dual mode
format. The Amplifier Division 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 new spectrum
allocation.
Quality and Reliability. The Amplifier Division strives to design its
power amplifiers to be reliable in the field. The Amplifier Division's
integrated design and manufacturing processes are important factors contributing
to its ability to develop and produce reliable power amplifiers. In order to
further address customer requirements for power amplifier quality and
reliability and to ensure process quality control, the Amplifier Division has
implemented a continuous process improvement program throughout its operations
and the Company is ISO 9001 certified.
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Multicarrier Functionality. The Amplifier Division 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 certain filters. The Amplifier Division believes the
ability of its 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.
Spectrian Strategy - Amplifier Division
The Amplifier Division's objective in fiscal 2000 was to focus on the
multicarrier power amplifier market, to diversify its customer base, and to
maintain the Amplifier Division's position in single-carrier power amplifier
markets.
Focus on the multicarrier power amplifier market. With a new suite of
multicarrier power amplifiers, the Amplifier Division has enabled network
operators to address some of the challenges of deploying high power digital base
stations, including those operators which are adding digital signals to an
existing analog network, without decreasing the analog cell site coverage. In
addition during fiscal 2000, the Amplifier Division shipped a full-bandwidth
multicarrier amplifier for high-volume PCS applications using a new
architecture.
Diversify the customer base. In fiscal 2000, the Amplifier Division
diversified its customer base by adding multicarrier and wideband CDMA customers
such as Metricom.
Maintain its market position in single carrier power amplifiers. In
fiscal 2000, the Amplifier Division maintained its market position in single
carrier power amplifiers through volume manufacturing with outsource partners
and with periodic redesigns for cost reductions. From time to time, the
Amplifier Division will pursue new opportunities with single carrier designs if
the return on investment is competitive with multicarrier or wideband
opportunities.
Outsource power amplifier manufacturing. During fiscal 1999 and fiscal
2000, the Amplifier Division transferred the manufacturing of its high-volume
single carrier power amplifiers to a contract manufacturer in Thailand. This
transition allowed the Amplifier Division to lower overhead spending through a
reduction in fixed costs and labor rates while maintaining its manufacturing
standards.
Markets - Amplifier Division
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 AMPS, Total Access Communications System ("TACS") and Nordic
Mobile Telephone ("NMT"). Current digital standards include TDMA, GSM and EDGE,
CDMA (1595ARB), CDMA 2000 (1595C) and Personal Digital Cellular ("PDC").
<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 Amplifier Division's current
product offerings.
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<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) TACS (900) JTACS (800)
AMPS (800) AMPS (800)
------------------------ ---------------------- ---------------------- ----------------------- ---------------------
Digital CDMA (800) GSM (900) CDMA (800, 900) PDC (1500)
Cellular TDMA (800) CDMA (2000) JDC (800)
GSM (800) GSM (900) CDMA (800)
EDGE EDGE EDGE HDR
TDMA (450, 800)
------------------------ ---------------------- ---------------------- ----------------------- ---------------------
PCS CDMA (1900) GSM (1800) CDMA(1900)&(1800) PHS (1900)
CDMA (2000) EDGE CDMA (2000)
TDMA (1900) GSM (1800)
GSM (1900) EDGE
EDGE
------------------------ ---------------------- ---------------------- ----------------------- ---------------------
Wideband IMT-2000 (2.1 GHz) IMT-2000 (2.1 GHz) IMT-2000 (2.1 GHz) IMT-2000 (2.1 GHz)
3G & WCDMA WCS (2.3 GHz) Korean WLL (2.4 GHz)
------------------------ ---------------------- ---------------------- ----------------------- ---------------------
</TABLE>
The Amplifier Division believes that the potential for wireless
communications in countries without reliable or extensive wireline systems may
be significant. 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 be
providing 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 data service may emerge.
Products - Amplifier Division
The Amplifier Division designs highly linear power amplifiers that
address the specific requirements of its OEM customers and the market in
general. The Amplifier Division's product strategy is to support multiple
wireless systems and standards.
Most existing wireless systems use lower cost single carrier power
amplifiers. The following table provides a list of standards for which The
Amplifier Division currently provides in its single carrier amplifiers:
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-----------------------------------------------------------------------------
Spectrian Single Carrier Amplifier Configurations
-----------------------------------------------------------------------------
Standard Frequency Power
(MHZ) (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
--------------------------------------------------------- -------------------
WCS:
32-QAM 2305-2360 63
--------------------------------------------------------- -------------------
WLL:
Wideband CDMA 2370-2400 10,20,40
--------------------------------------------------------- -------------------
IMT 2000:
W-CDMA 2110-2170 25
--------------------------------------------------------- -------------------
While many existing wireless systems use single carrier power
amplifiers, the Amplifier Division believes that more wireless systems will use
multicarrier power amplifiers in the future. To meet this market trend, the
Amplifier Division also offers multicarrier amplification products. The
following table provides a list of the standards for multicarrier amplifiers
offered by the Amplifier Division:
--------------------------------------------------------------------------------
Spectrian Multicarrier Amplifier Configurations
--------------------------------------------------------------------------------
Standard Frequency Power Typical
(MHZ) (Watts) Linearity
(dBc)*
------------------------------------------------ ------------- -----------------
AMPS
TDMA
CDMA 869-894 60-350 -65
CDPD
CDMA 2000
------------------------------------------------ ------------- -----------------
CDMA
TDMA 1805-1990 25-100 -55
CDMA 2000
------------------------------------------------ ------------- -----------------
IMT-2000 2110-2170 30-60 -60
------------------------------------------------ ------------- -----------------
*Carrier to Intermodulation Distortion Ratio.
The Amplifier Division's amplifiers can be configured as either
separate plug-in amplifier units or integrated subsystems and range in price
from approximately $500 to $30,000. 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 Amplifier Division'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.
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OEM Customers, Sales and Marketing - Amplifier Division
Network operators obtain their equipment from a concentrated group of
large wireless infrastructure OEMs. The Amplifier Division believes that Lucent
Technologies, Inc. ("Lucent"), Ericsson, Motorola Corporation ("Motorola"), LG
Information and Communications Limited ("LGIC"), Siemens AG ("Siemens"), Nortel,
and Nokia OY ("Nokia") supplied over 80% of the wireless infrastructure
equipment installed worldwide in 1999. Many of these OEMs manufacture most of
their base station components, including the power amplifier, internally. In
response to competition and as the performance requirements of certain
components increase, many of these OEMs have begun to outsource power amplifier
manufacturing to companies like Spectrian. 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.
Other current customers include worldwide operators of wireless
networks such as AT&T Wireless Services ("AT&T Wireless"), BellSouth Cellular
Corp. ("Bellsouth") and GTE Wireless Services Corporation ("GTE Wireless"). As
these operators upgrade their networks, they often work directly with
independent power amplifier manufacturers to ensure new products are compatible
with their existing network, support increased coverage areas, and provide high
linearity.
The Amplifier Division sells power amplifiers to a limited number of
OEMs in North America, Europe and Asia principally through its direct sales
organization. During the year ended March 31, 2000 ("fiscal 2000"), Nortel
accounted for approximately 72% of net revenues. During the year ended March 31,
1999 ("fiscal 1999"), Nortel and LGIC accounted for approximately 76% and 11% of
net revenues, respectively. During the year ended March 31, 1998 ("fiscal
1998"), Nortel and LGIC accounted for approximately 79% and 14% of net revenues,
respectively.
Furthermore, a substantial portion of revenues from Nortel in the past
has resulted from sales of a limited number of the Amplifier Division's
products. The Amplifier Division'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 Amplifier Division and Nortel have a
demand-pull 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 Amplifier Division. This agreement allows Nortel
to change the product mix requirements, which can significantly affect the
Amplifier Division's gross margins, and to change requested delivery dates
without significant financial consequences to Nortel, which adversely affect the
Amplifier Division's ability to efficiently manage production schedules and
inventory levels and to accurately forecast product sales.
In September 1999, the Amplifier Division announced that it was not
developing products for new Nortel platforms but that it will continue to supply
Nortel with existing products. There can be no assurance that the Company will
be able to design additional new products for Nortel in the future or that
Nortel will purchase existing products from the Amplifier Division in the future
or otherwise agree to purchase the same or similar levels of its power amplifier
requirements from the Amplifier Division or purchase its power amplifier
requirements at the same or similar pricing. Any reduction in the level of
purchases of the Amplifier Division's amplifiers by Nortel, or any material
reduction in pricing without significant offsets, would have a material adverse
effect on the Amplifier Division's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") - Factors Affecting Future Operating Results -
Customer Concentration, Dependence on Nortel."
If the Amplifier Division's current or new customers do not generate
sufficient demand for the Amplifier Division's new products replacing prior
demand from Nortel, the Amplifier Division's business financial condition and
results of operations could be materially adversely affected. Further, if the
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Amplifier Division 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 Amplifier Division'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 Amplifier Division's products. The Amplifier Division expects to
incur increasing pricing pressures from Nortel and other major OEM customers in
future periods, which could result in declining average sales prices and gross
margins for the Amplifier Division's products. See "MD&A - Factors Affecting
Future Operating Results - Customer Concentration, Dependence on Nortel."
Sales and Marketing - Amplifier Division
The Amplifier Division 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 Amplifier
Division's application specific amplification products require experienced sales
personnel to match the customer's amplification requirements to the Amplifier
Division's product capabilities. The Amplifier Division 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. This allows the Amplifier
Division's engineering personnel to work closely with their counterparts at the
OEM customer to assure compliance of the Spectrian product to the customer's
specification.
As part of the effort to diversify its product base, the Amplifier
Division began to sell multicarrier amplifier systems (including filters and
combiners) directly to service providers in fiscal 1997. The Amplifier Division
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 Amplifier Division's direct sales to
service providers will not cause its OEM equipment suppliers to reduce orders or
terminate their relationship with the Amplifier Division. Any such reduction or
termination could have a material adverse effect on the Amplifier Division's
business, financial condition and results of operations.
The Amplifier Division also markets its products with the assistance of
independent sales representatives in various parts of the world. The Amplifier
Division 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 Amplifier
Division 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 Amplifier Division's direct sales staff provides sales direction and support
to its international sales representatives. Sales outside of the United States
represented 87%, 84% and 95% of net revenues in fiscal 2000, fiscal 1999 and
fiscal 1998, 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 Amplifier Division expects that
international sales will continue to account for a significant portion of its
revenues.
Manufacturing - Amplifier Division
In Sunnyvale, California, the Amplifier Division currently manufactures
low-volume single carrier and multicarrier power amplifier products, and
services all of its power amplifier products. During fiscal 1999 and fiscal
2000, the Amplifier Division 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 fiscal 2001, the Amplifier Division
intends to transfer the remaining power amplifier production in Sunnyvale to the
contract manufacturer. The Amplifier Division's strategy is to utilize contract
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manufacturing to decrease the Amplifier Division's manufacturing overhead and
the costs of its products, 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.
Demands of its customers drive the Amplifier Division to frequently
introduce and rapidly expand volume of the manufacture of new products. This has
caused the Amplifier Division 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 Amplifier Division's results of operations. In addition, the Amplifier
Division has made and expects to continue to make pricing commitments to OEM
customers in anticipation of achieving manufacturing cost reductions.
The Amplifier Division's operation of its own manufacturing facilities
in Sunnyvale 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 costs are likely to have a material
adverse effect on the Amplifier Division's results of operations. The Company's
outsourcing strategy is designed to address some of these issues. See "MD&A -
Factors Affecting Future Op. Results - Risks Associated with Internal Wafer and
Device Fabrication."
The Amplifier Division expects that its customers will continue to
establish demanding specifications for quality, performance and reliability that
must be met by the Amplifier Division's products. Products as complex as those
offered by the Amplifier Division often encounter development delays and may
contain undetected defects or failures when first introduced or after
commencement of commercial shipments. The Amplifier Division 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. See "MD&A - Factors - Product Quality, Performance and Reliability."
Amplifier Assembly and Test. The Amplifier Division'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 Amplifier
Division's amplifiers are comprised of a variety of subassemblies and components
designed or specified by the Amplifier Division, including housings, harnesses,
cables, packaged RF semiconductors, semiconductor integrated circuits and
printed circuit boards. Except for most RF semiconductors, these components and
subassemblies are manufactured by third parties. Beginning in fiscal 1999, the
Amplifier Division began utilizing the services of a turnkey contractor to
assemble its high volume amplifier products. Regardless of whether the Amplifier
Division assembles an amplifier in house or relies on a turnkey contractor, each
of the Amplifier Division's products receives extensive in process and final
quality inspections and tests.
The Amplifier Division attempts to utilize standard parts and
components that are available from multiple vendors. However, certain components
used in the Amplifier Division'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 Amplifier Division 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 Amplifier Division 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 Amplifier Division's business, financial
condition and results of operations. See "MD&A - Factors Affecting Future
Operations - Sole or Limited Sources of Materials and Services."
11
<PAGE>
Research and Development - Amplifier Division
The Amplifier Division's research and development organization designs
high performance low cost, highly manufacturable power amplifiers. The Amplifier
Division and UltraRF maintain separate research and development ("R&D") groups.
The Amplifier Division's R&D group focuses on rapid development of new power
amplifiers that are manufacturable in large volumes at low cost. 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 Amplifier Division uses an
automated design environment to model amplifiers. This design environment,
together with the Amplifier Division'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 Amplifier Division historically has devoted a significant portion
of its resources to research and development programs and expects to continue to
do so.
Competition - Amplifier Division
The Amplifier Division's principal competitors in the market for
wireless amplification products provided by merchant suppliers currently include
AML Communications, Inc., Amplidyne, Inc., Microwave Power Devices, Inc., NEC
Corporation, Paradigm 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
Amplifier Division and have, or could have, greater name recognition and market
acceptance of their products and technologies. No assurance can be given that
the Amplifier Division'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 Amplifier Division'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 Amplifier Division expects its competitors to offer new and existing
products at prices necessary to gain or retain market share. The Amplifier
Division has experienced significant price competition, which has in the past
affected gross margins. Certain of the Amplifier Division'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 Amplifier Division will not be subject to increased price
competition or that the Amplifier Division will be able to compete successfully
in the future. See "MD&A - Factors Affecting Future Operations - Internal
Amplifier Design and Production Capabilities of OEMs" and "Market for the
Company's Products is Highly Competitive."
The markets in which the Amplifier Division 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 Amplifier Division'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
Amplifier Division's ability to rapidly design and produce individual products
for which there is significant OEM customer demand will be a critical
determinant of the Amplifier Division's future success. A softening of demand in
the markets served by the Amplifier Division or a failure of a modulation
standard in which the Amplifier Division 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 Amplifier Division'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 Amplifier Division's new
multicarrier products, do not result in substantial volume production or if
technologies or standards supported by the Amplifier Division's or its
customers' products become obsolete or fail to gain
12
<PAGE>
widespread commercial acceptance, the Company's business may be materially
adversely affected. See "MD&A - Factors Affecting Future Operations - Internal
Amplifier Design and Production Capabilities of OEMs" and "Market for the
Company's Products is Highly Competitive."
UltraRF Division
In November 1999, the Company announced that its semiconductor division
would begin to operate as an autonomous business unit within Spectrian named
UltraRF. UltraRF is a developer, manufacturer and supplier of customizable and
cost-effective RF power devices. These devices are a necessary component in the
manufacture of wireless power amplifiers for mobile and fixed wireless
infrastructure. Prior to November 1999, UltraRF sold its products almost
exclusively to the Amplifier Division. Since that time, UltraRF also has focused
on building its sales to other customers.
Spectrian Strategy - UltraRF Division
UltraRF's objective is to expand its product offerings, develop and
enhance key strategic alliances, expand and upgrade its fab capacity and
selectively target key markets.
Expand UltraRF Product Offerings. UltraRF intends to expand its product
offerings in order to take advantage of the rapidly evolving wireless
infrastructure market. In addition to increasing the range of discrete die and
packaged devices that UltraRF offers to some of its customers, it also intends
to offer increasingly integrated module solutions to these customers in order to
satisfy their time-to-market requirements. In addition, UltraRF believes its
module products will allow it to target customers with less RF device
integration expertise.
Expand Fab Capacity. UltraRF intends to expand its semiconductor
manufacturing ("fab") capacity over the next 12 months. The fab's current
capacity is 1000 four-inch wafers per month, which equates to approximately 2.0
million gross die of average size. During the next 12 months, UltraRF intends to
convert its fab to produce six-inch wafers, which UltraRF believes will increase
its gross wafer capacity. The primary motivation for the change to six-inch
processing is to assure the availability of starting silicon wafers from top
tier vendors, thus increasing quality and therefore yield. UltraRF believes
increased fab capacity will better enable it to assure customers a steady supply
of RF power devices and allow UltraRF to continue to fully supply customers
should they demand a higher volume of products.
Selectively Target Key Markets. UltraRF believes a component of its
future success will be targeting individual customers with appropriate
technology solutions at appropriate prices. To target customers with greater RF
device integration experience, UltraRF will primarily market discrete RF power
devices and die. With customers that require more integration technology and
subsystem expertise, UltraRF intends to supply them with integrated module
products. UltraRF believes that by developing a range of RF devices from
discrete die to integrated modules, it can offer target customers appropriate
product solutions, regardless of whether they possess RF device integration
experience.
Products - UltraRF Division
<TABLE>
RF products are available in a wide variety of frequencies and
wattages, allowing customers to determine the most appropriate product for
varying applications. UltraRF currently offers the following discrete
semiconductors for sale:
13
<PAGE>
<CAPTION>
Device Frequency (MHz) Pout (watts) Gain (dB)
------ --------------- ------------ ---------
<S> <C> <C> <C>
LDMOS - FET to 1GHz 1,000 10-80 13.5 - 10.5
LDMOS - FET to 2GHz 2,000 10-120 11.5 - 7.5
LDMOS - FET to 2.4GHz 2,200-2,400 25-45 8.0-6.0
Pulse Radar 400-450 1000 watts (pulse) 11.0
Bipolar Transistors 450-2,000 1-60 (1000 pulse) 14.5-7.0
</TABLE>
Manufacturing - UltraRF
UltraRF manufactures semiconductor die entirely in its fab located in
Sunnyvale, California. Final device assembly for discrete transistors is also
completed in its Sunnyvale facility. Final functional testing and reliability
engineering is performed in UltraRF's Sunnyvale facility. The semiconductor
manufacturing plant comprises 50,000 square feet, with 8,500 square feet of
class 100 clean room space with class 10 cells under clean hoods and 5,000
square feet of assembly area. The fab is one of the few facilities that
processes silicon for high power RF LDMOS and RF bipolar transistors with gold
interconnect. UltraRF is certified as an ISO 9001 facility.
Sales and Marketing - UltraRF
In November 1999, UltraRF launched a brand recognition campaign,
starting with a national press tour followed by press releases, technical
articles and a customer presentation tour. UltraRF has established a
representative network covering North America, Europe and the Pacific Rim.
Competition - UltraRF
UltraRF competes against several well established manufacturers who
produce semiconductor products for their own internal use, or their captive
manufacturers, in the RF device market. Primary competitors are Motorola,
Philips and Ericsson.
Research and Development - UltraRF
The UltraRF research and development resources have been focused on the
design of RF semiconductors and LDMOS power amplification modules ("PAM").
UltraRF also performs advanced research in device modeling and semiconductor
process development.
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. 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 has been awarded 37 United States patents
and 4 foreign patents, has 6 patents that have been allowed and has 18 United
States patent applications pending and 28 foreign patent applications pending.
See "MD&A - Factors... - Uncertain Protection of Intellectual Property."
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
14
<PAGE>
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. See "MD&A
- Factors... - Uncertain Protection of Intellectual Property."
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 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. See "MD&A - Factors... - Risk of
Third Party Claims of Infringement."
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's business,
financial condition and results of operations would be materially adversely
affected. See "MD&A - Factors... - Uncertain Protection of Intellectual
Property."
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 power 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, these delivery schedules are shorter than the
Company's manufacturing cycle time, which have required the Company to commit
working capital to build and hold inventory and to take significant excess and
obsolete inventory risks. The Company's customers may also cancel or defer
orders without significant penalty.
Employees
As of March 31, 2000, the Company had a total of 479 employees.
However, as a result of the Company's decision to use contract manufacturing for
the remaining power amplifier production in Sunnyvale, California, and other
organizational restructuring, the number of employees is anticipated to be
reduced by approximately 90 employees by the end of the third quarter of fiscal
2001. The Company's future success will depend, in part, on its ability to
continue to attract, retain and motivate
15
<PAGE>
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.
Management
The executive officers of the Company are and certain information about
them as of June 1, 2000 is as follows:
Name Age Position
---- --- --------
Thomas H. Waechter...... 47 President and Chief Executive Officer
Michael D. Angel........ 44 Executive Vice President, Finance and
Administration, Chief Financial Officer
and Secretary
Christopher J. Tubis.... 51 President, UltraRF Division
Richard A. Johanson..... 57 Vice President of Human Resources
Mr. Waechter joined the Company on March 31, 2000 as its President and
Chief Executive Officer. From January 2000 until he joined the Company, Mr.
Waechter was employed by Asyst Technologies, Inc. as its Senior Vice President
of Global Business Operations. From September 1986 until January 2000, Mr.
Waechter was employed by Schlumberger Ltd. in various management positions, most
recently as its Vice President of Global Operations. Mr. Waechter holds a B.B.A.
in Business Management from the College of William and Mary.
Mr. Angel joined the Company in September 1999 as its Executive Vice
President, Finance and Administration, Chief Financial Officer and Secretary.
From April 1994 until he joined Spectrian, Mr. Angel was employed by National
Semiconductor Corporation in various management positions, most recently as its
Director of Finance - Worldwide Manufacturing and Central Technology Operations.
Mr. Angel has also held various positions with Hitachi Data Systems and
PricewaterhouseCoopers LLP. Mr. Angel holds a B.S. degree in Business
Administration with a concentration in Accounting from California State
University, Chico.
Mr. Tubis, joined the Company in July 1999 as its President of the
UltraRF division. From November 1993 until he joined Spectrian, Mr. Tubis was
employed by National Semiconductor Corporation as its Vice President of
Wireless. Mr. Tubis was educated in England and holds a OND/HNC Degree in
Electronics from Lowestoft.
Mr. Johanson joined the Company in June 1999 as its Vice President of
Human Resources. From August 1979 until he joined Spectrian, Mr. Johanson was
employed by Schlumberger Ltd. in various management positions, most recently as
its Director of Human Resources. Mr. Johanson holds a B.A. degree in Education
and an M.A. degree in Administration and Finance from San Jose State University.
16
<PAGE>
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 second quarter of fiscal 2000, the Company subleased its
ancillary 40,000 square foot manufacturing facility in Rocklin, California to
GPS Management Services, Inc. ("GPS"). GPS subsequently assigned the sublease to
The Gap, Inc. for the remainder of the Company's lease term. The Rocklin
facility has a sixty month term and expires in June 2003. In the first quarter
of fiscal 2001, the Company entered into an agreement to lease 12,000 square
feet of development and manufacturing space for its engineering design center in
Quincy, Illinois. Pursuant to the terms of the lease agreement, the Company has
agreed to lease this property for a term of two years (with two options to
extend the lease for up to an additional four years) that expires in April 2002.
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. In December 1999, the Company sold the building for net proceeds of
approximately $3.3 million.
In the fourth quarter of fiscal 2000, the Company leased approximately
21,500 square feet of a facility in Seoul, Korea for a one-year term expiring in
February 2001. Administrative, development, manufacturing and repair functions
for the Asia Pacific region are located in the facility.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
17
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's Common Stock has been traded on the Nasdaq National
Market tier of the Nasdaq Stock Market under the trading 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, 2000 High Low
----------- -----------
Fourth Quarter $ 30.000 $ 16.250
Third Quarter $ 35.250 $ 21.266
Second Quarter $ 25.625 $ 11.188
First Quarter $ 15.500 $ 8.875
Fiscal Year Ended March 31, 1999 High Low
----------- -----------
Fourth Quarter $ 19.750 $ 9.250
Third Quarter $ 14.500 $ 8.375
Second Quarter $ 16.750 $ 12.125
First Quarter $ 18.938 $ 13.813
The reported last sale price of the Company's Common Stock on the Nasdaq
National Market on June 23, 2000 was $17.44. The approximate number of holders
of record of the shares of the Company's Common Stock was 240 as of June 23,
2000. This number does not include stockholders whose shares are held in trust
by other entities. The actual number of stockholders is greater than this number
of holders of record. Based on the number of annual reports requested by
brokers, the Company estimates that it has approximately 5,000 beneficial owners
of its Common Stock.
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.
(b) Report of offering securities and use of proceeds therefrom
Not applicable.
18
<PAGE>
<TABLE>
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
<CAPTION>
Fiscal Year Ended March 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
NET Revenues .......................................... $ 163,567 $ 99,331 $ 168,798 $ 88,252 $ 72,113
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of revenues .................................... 129,998 96,880 132,684 65,322 45,355
Research and development ............................ 22,488 26,735 18,644 17,230 14,548
Selling, general and administrative ................. 19,337 16,315 13,014 9,299 7,450
Restructuring costs ................................. 1,032(3) -- -- -- --
--------- --------- --------- --------- ---------
Total costs and expenses ......................... 172,855 139,930 164,342 91,851 67,353
--------- --------- --------- --------- ---------
Operating income (loss) ............................... (9,288) (40,599) 4,456 (3,599) 4,760
Interest income ....................................... 3,344 4,540 4,045 210 889
Interest expense ...................................... (473) (853) (710) (602) --
Other income, net ..................................... 624 -- 1,530 -- --
--------- --------- --------- --------- ---------
Income (loss) before income taxes ..................... (5,793) (36,912) 9,321 (3,991) 5,649
Income taxes .......................................... 30 59 399 -- 169
--------- --------- --------- --------- ---------
Net income (loss) ..................................... $ (5,823) $ (36,971) $ 8,922 $ (3,991) $ 5,480
========= ========= ========= ========= =========
Net income (loss) per share:(1)
Basic ............................................. $ (0.56) $ (3.50) $ 0.90 $ (0.49) $ 0.71
========= ========= ========= ========= =========
Diluted ........................................... $ (0.56) $ (3.50) $ 0.83 $ (0.49) $ 0.66
========= ========= ========= ========= =========
Shares used in computing per share amounts:(1)
Basic ............................................. 10,426 10,568 9,881 8,150 7,684
========= ========= ========= ========= =========
Diluted ........................................... 10,426 10,568 10,701 8,150 8,363
========= ========= ========= ========= =========
March 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(in thousands, except per share data)
Balance Sheet Data:
Working capital ....................................... $ 80,668 $ 72,399 $ 117,478 $ 24,062 $ 12,710
Total assets .......................................... 131,275 128,412 175,051 66,633 55,922
Debt and capital lease obligations, net of
current portion(2) .................................... 1,351 4,899 5,912 7,057 --
Total stockholders' equity ............................ $ 98,985 $ 95,968 $ 144,342 $ 42,466 $ 44,838
<FN>
------------------
(1) See Note 1 of Notes to Consolidated Financial Statements herein 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.
(3) See Note 11 of Notes to Consolidated Financial Statements herein for
details of the restructuring.
</FN>
</TABLE>
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Annual Report on Form 10-K 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 Annual Report
on Form 10-K.
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 year ended March 31, 2000 ("fiscal 2000"), Nortel accounted for
approximately 72% of net revenues. For the year ended March 31, 1999 ("fiscal
1999"), Nortel and LGIC accounted for approximately 76% and 11% of net revenues,
respectively. During the year ended March 31, 1998 ("fiscal 1998"), Nortel and
LGIC accounted for approximately 79% and 14% 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 fourth quarter of fiscal 1998, the fiscal year ended
March 31, 1999, and the first and fourth quarters of 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
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 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.
During fiscal 2000, 1999 and 1998, sales outside of the United States
were 87%, 84% and 95%, 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 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 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 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 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.
Results of Operations
<TABLE>
The following table sets forth for the periods indicated certain
statement of operations data of the Company expressed as a percentage of total
revenues and gross margin on revenues.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
<CAPTION>
Fiscal Year Ended March 31,
-------------------------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
NET REVENUES......................................... 100.0% 100.0% 100.0%
----- ----- -----
COSTS AND EXPENSES:
Cost of revenues.................................. 79.5 97.6 78.6
Research and development.......................... 13.7 26.9 11.0
Selling, general and administrative............... 11.8 16.4 7.8
Restructuring costs .............................. 0.6 -- --
----- ----- -----
Total costs and expenses........................ 105.6 140.9 97.4
----- ----- -----
Operating income (loss).............................. (5.6) (40.9) 2.6
INTEREST INCOME...................................... 2.0 4.6 2.4
INTEREST EXPENSE..................................... (0.3) (0.9) (0.4)
OTHER INCOME (EXPENSE)............................... 0.4 -- 0.9
----- ----- -----
INCOME (LOSS) BEFORE INCOME TAXES.................... (3.5) (37.2) 5.5
INCOME TAXES......................................... -- -- 0.2
----- ----- -----
NET INCOME (LOSS).................................... (3.5)% (37.2)% 5.3%
===== ===== =====
Gross margin on REVENUES............................. 20.5% 2.4% 21.4%
===== ===== =====
</TABLE>
Years Ended March 31, 2000 and 1999
Net Revenues. The Company's net revenues increased 65% to $163.6
million for fiscal 2000 from $99.3 million for fiscal 1999. The growth in net
revenue was primarily due to higher demand in the single carrier power amplifier
("SCPA") product line from Nortel and achieving volume shipments of the new
multi-channel power amplifier ("MCPA") product line. SCPA revenues increased 41%
to $126.4 million for fiscal 2000 from $89.4 million for fiscal 1999. MCPA
revenues increased 710% to $32.2 million for fiscal 2000 from $4.0 million for
fiscal 1999. UltraRF revenues from external customers increased to $880,000 from
none for fiscal 2000 and fiscal 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, RF semiconductor
fabrication, assembly and test costs, raw materials, manufacturing overhead and
warranty costs. The Company's cost of revenues increased by 34% to $130.0
million for fiscal 2000 from $96.9 million for fiscal 1999. The increase on a
dollar basis for fiscal year 2000 was due primarily to higher production volumes
associated with the increased revenues.
Gross margin on sales was 20% for fiscal 2000 as compared to 2% for
fiscal 1999. The increase in gross margin reflected lower per unit manufacturing
costs driven by higher production volumes, product cost reduction initiatives,
the increased use of contract manufacturing, and product mix. However, these
cost improvements were partially offset by declining average sales prices in
certain volume products.
Research and Development. Research and development ("R&D") expenses
include the cost of designing, developing or reducing the manufacturing cost of
amplifiers and RF semiconductors. The Company's R&D expenses decreased by 16% to
$22.5 million in fiscal 2000 from $26.7 million in fiscal 1999. As a percentage
of net revenues, R&D expenses represented 14% of net revenues for
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
fiscal 2000 as compared to 27% of net revenues for fiscal 1999. The decrease in
R&D expenses on both a dollar and percentage of net revenues basis reflected
substantially higher revenue levels on a year-to-year basis and reduced expenses
associated with completion of the initial products in the new MCPA product line
in early fiscal 2000.
Selling, General and Administrative. Selling, general and
administrative ("SG&A") expenses include compensation and benefits for sales,
marketing, senior management and administrative personnel, commissions paid to
independent sales representatives, professional fees and other expenses. The
Company's SG&A expenses increased by 59% to $19.3 million in fiscal 2000 from
$16.3 million in fiscal 1999. As a percentage of net revenues, SG&A expenses
represented 12% of net revenues for fiscal 2000 as compared to 16% of net
revenues for fiscal 1999. The increase in SG&A expenses on a dollar basis for
fiscal 2000 was in principal due to increased commissions and added maintenance
and support for the new enterprise resource planning ("ERP") system. The
decrease in SG&A expenses as a percentage of revenue was due primarily to the
increased revenue levels.
Restructuring Costs. 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 to utilize lower labor costs than available domestically and to
reduce fixed overheads. 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. The transfer of production to Thailand is expected to be
completed during the third quarter of fiscal 2001.
Interest Income. Interest income decreased to $3.3 million in fiscal
2000 from $4.5 million in fiscal 1999. The decrease in interest income for the
year was a result of lower interest-bearing investment balances associated with
the reduced average cash and cash equivalent balances.
Interest Expense. Interest expense decreased to $0.5 million in fiscal
2000 from $0.9 million in fiscal 1999. The decrease in interest expense for the
year was a result of substantially reduced average borrowings levels due to
repayments made at the time of the sale of property.
Other Income. Other income increased to $0.6 million in fiscal 2000
from none in fiscal 1999. The increase in other income resulted from the sale of
a light industrial building in December 1999 by the Company for $3.3 million,
net of selling expenses. A gain, net of selling expenses, of $0.6 million was
recognized on the sale. The related bank debt of $2.8 million that was secured
by the building was retired upon the closing of the building sale.
Income Taxes. Due to the losses incurred by the Company in the current
and prior years and the related net operating loss carryforwards available to
the Company, the Company did not record income tax expense except for the
minimum state income tax expense for fiscal 2000 and fiscal 1999.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Years Ended March 31, 1999 and 1998
Net Revenues. The Company's net revenues decreased by 41% to $99.3
million for fiscal 1999 from $168.8 million for fiscal 1998. The decrease in net
revenues for fiscal 1999 reflected a significant decrease in demand, primarily
by Nortel, for the Company's TDMA, GSM and PCS CDMA products.
Cost of Sales. 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 2% 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.
Research and Development. The Company's R&D expenses increased by 44%
to $26.7 million in fiscal 1999 from $18.6 million in fiscal 1998. The increase
in R&D spending in fiscal 1999 reflected increased spending in both amplifier
and semiconductor R&D for personnel expenses and project development expenses.
R&D expenses as a percentage of net revenues increased to 27% in fiscal 1999
from 11% in fiscal 1998 due to an increase in costs and a decrease in revenues.
Selling, General and Administrative. The Company's SG&A expenses
increased by 25% to $16.3 million for fiscal 1999 from $13.0 million for fiscal
1998. SG&A expenses as a percentage of net revenues increased to 16% for fiscal
1999 from 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 as compared to 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 income tax expense of $0.1 million
and $0.4 million for fiscal 1999 and 1998, respectively. In fiscal 1999, the
Company did not record income tax expense except for the minimum state income
tax expense. In fiscal 1998, the Company's combined effective tax rate of 4.3%
reflected 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.
Segment Information
Under the management approach, the Company has broken down its business
into two divisions based upon product type: Amplifier Division and Semiconductor
Division, which operates under the tradename of UltraRF. UltraRF derives
virtually all of its net revenues from sales to the Amplifier Division. The
Company allocates operating expenses to these
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
segments but does not allocate interest income and expense. 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.
The Company operated and reported its financial information as one
vertical integrated unit in the fiscal year ending March 31, 1999 and therefore
did not identify or report separate segment information. The Company began
reporting its operations by segment as of the fiscal period beginning April 1,
1999. Segment information for the year ended March 31, 2000 is as follows (in
thousands):
<TABLE>
Consolidated Statement of Operations Data - Fiscal 2000:
<CAPTION>
Year Ended March 31, 2000
--------------------------------------------------------------------
Amplifier UltraRF Other Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues, external .............................. $ 162,687 $ 880 $ -- $ 163,567
Net revenues, intersegment .......................... -- 27,050 (27,050) --
Amortization and depreciation ....................... 5,797 2,546 4,912 13,255
Income (loss) before income taxes ................... (9,906) 4,113 -- (5,793)
</TABLE>
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 quarter 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"
("SAB101"). SAB 101 summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements and is effective for the Company beginning fiscal 2001. 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 Company believes that 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 and divisions, capital equipment leases, bank
lines of credit and cash flows from operations. Principal sources of liquidity
at March 31, 2000 consisted of cash, cash equivalents and short-term investments
of $47.6 million and bank borrowing arrangements.
25
<PAGE>
ITEM 7. 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 June 30, 2000.
The Company expects to be in default of a covenant at the end of the first
quarter of fiscal 2001. The amount available to borrow at March 31, 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 March 31, 2000 was 9% and 8.29%, respectively. The Company had no
borrowings under the line of credit at March 31, 2000.
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, 2000.
In April 1998, the Company entered into an operating lease for an
ancillary 2,750 square foot engineering design center in Quincy, Illinois. The
lease was subsequently renewed for another 2 years lease term that expires in
April 2002.
The Company's working capital increased by $8.3 million to $80.7
million as of March 31, 2000 from $72.4 million as of March 31, 1999. However,
cash, cash equivalents and short-term investments decreased by $15.1 million
during the same period. The Company's short-term investments were principally
invested in investment grade, interest-bearing securities.
Cash used by operations was $14.9 million for fiscal 2000 compared to
$12.3 million for fiscal 1999. Cash used by operations in fiscal 2000 was
principally the result of a $13.7 million increase in inventory, which is
partially a result of the timing difference between Nortel's requested delivery
dates and the Company's vendor purchase commitments to support the customer's
delivery requirements, a $10.8 million increase in accounts receivable, which
increased proportionately with revenue growth and also reflects the longer
standard payment terms in Europe, partially offset by an $8.4 million increase
in accounts payable, which increased proportionately with production levels. In
addition, accrued liabilities decreased by $5.1 million due primarily to the
reduction of warranty reserves based upon repairing defective products
previously accrued for and the timing of the payment of certain expenses,
primarily payroll related.
The Company's investing activities used cash of approximately $4.6
million during fiscal 2000 as compared to providing $20.9 million of cash during
fiscal 1999. Cash used for investing activities during fiscal 2000 resulted
primarily from $7.7 million additions to property and equipment, partially
offset by $3.3 million in proceeds from the sale of a light industrial building
by the Company. Capital expenditures during fiscal 2000 included manufacturing
test and production equipment required to support new products, test equipment
to support various research and development projects, and the ERP system.
The Company's financing activities provided cash of approximately $4.8
million during fiscal 2000 as compared to cash used of $13.8 million during
fiscal 1999. Cash provided by financing activities during fiscal 2000 was the
result of $9.2 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 $4.4 million in repayments of debt and
capital lease obligations.
26
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company anticipates spending approximately $15 million over the next
twelve months for capital additions primarily to support manufacturing
production and test requirements, development projects and facilities expansion.
The Company currently believes that its cash and equivalents, its line of
credit, and funds from current and anticipated operations, will be sufficient to
meet working capital and capital expenditure requirements for the next twelve
months. If the Company acquires one or more businesses or products or divests
existing businesses or product lines, the Company's capital requirements could
increase or decrease substantially. To raise additional capital, the Company may
issue equity securities that could dilute existing investors.
27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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. The Company's revenues
are derived primarily from sales to a limited number of these OEMs, in
particular, Nortel. 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 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 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 and other major OEM customers in future periods,
which could result in declining average sales prices and gross margins for the
Company's products.
28
<PAGE>
ITEM 7. 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.
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
29
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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.
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 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 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.
30
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 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 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 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, 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 the
Company's business, financial condition and results of operations.
UltraRF's business could be adversely affected by its failure to
develop and market its LDMOS RF power transistors competitively. UltraRF is
developing and refining its LDMOS RF power transistor technology to address
current and emerging wireless voice and data air interface standards. 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.
UltraRF's close relationship with Spectrian could limit UltraRF's
potential to do business with Spectrian's competitors. Spectrian currently is
UltraRF's largest customer, and UltraRF expects to have a variety of ongoing
contractual relationships with Spectrian. UltraRF cannot predict whether
existing or potential customers who are competitors of Spectrian will be
deterred by the existence of such a
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
relationship between Spectrian and UltraRF. If they are deterred, UltraRF's
future growth could be hindered.
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 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.
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, such as South Korea, 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
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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
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
33
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
secrets or proprietary technology will not otherwise become known or be
independently developed by competitors. The failure of the Company to protect
its proprietary technology could have a material adverse effect on its business,
financial condition and results of operations.
Risk of Third Party Claims of Infringement. The communications
equipment industry is characterized by vigorous protection and pursuit of
intellectual property rights or positions, which have resulted in significant
and often protracted and expensive litigation. Although there is currently no
pending intellectual property litigation against the Company, the Company or its
suppliers may from time to time be notified of claims that the Company may be
infringing patents or other intellectual property rights owned by third parties.
If it is necessary or desirable, the Company may seek licenses under such
patents or other intellectual property rights. However, there can be no
assurance that licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain a license from
a third party for technology used by the Company or otherwise secure rights to
use such technology could cause the Company to incur substantial liabilities, to
suspend the manufacture of products or expend significant resources to develop
noninfringing technology. There can be no assurance that the Company would be
successful in such development or that such licenses would be available on
reasonable terms, if at all. In the event that any third party makes a
successful claim against the Company or its customers and either a license is
not made available to the Company on commercially reasonable terms or a "design
around" is not practicable, the Company's business, financial condition and
results of operations would be materially adversely affected.
Furthermore, the Company may initiate claims or litigation against
third parties for infringement of the Company's proprietary rights or to
establish the validity of the Company's proprietary rights. Litigation by or
against the Company could result in significant expense to the Company and
divert the efforts of the Company's technical and management personnel, whether
or not such litigation results in a favorable determination for the Company. In
the event of an adverse result in any such litigation, the Company could be
required to pay substantial damages, indemnify its customers, cease the
manufacture, use and sale of infringing products, expend significant resources
to develop noninfringing technology, discontinue the use of certain processes or
obtain licenses to the infringing technology.
Government Regulation of Communications Industry. Radio frequency
transmissions and emissions, and certain equipment used in connection therewith
are regulated in the United States, Canada and throughout the rest of the world.
Regulatory approvals generally must be obtained by the Company in connection
with the manufacture and sale of its products, and by wireless service providers
to operate the Company's products. The United States Federal Communications
Commission (the "FCC") and regulatory authorities abroad constantly review RF
emission issues and promulgate standards based on such reviews. If more
stringent RF emission regulations are adopted, the Company and its OEM customers
may be required to alter the manner in which radio signals are transmitted or
otherwise alter the equipment transmitting such signals, which could materially
adversely affect the Company's products and markets. The enactment by federal,
state, local or international governments of new laws or regulations or a change
in the interpretation of existing regulations could also materially adversely
affect the market for the Company's products. Although deregulation of
international communications industries along with radio frequency spectrum
allocations made by the FCC have increased the potential demand for the
Company's products by providing users of those products with opportunities to
establish new wireless personal communications services, there can be no
assurance that the trend toward deregulation and current regulatory developments
favorable to the promotion of new and expanded personal communications services
will continue or that other future regulatory changes will have a positive
impact on the Company. The increasing demand for wireless communications has
exerted pressure on regulatory bodies worldwide to adopt new standards for such
products, generally following extensive investigation of and deliberation over
competing technologies. The delays inherent in this governmental approval
process have in the past caused, and may in the future cause, the cancellation,
34
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 related
restructuring, several key executives will cease to be employees of the Company.
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. We can give no assurance that the Company 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.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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
36
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 a four-digit field to define the applicable year. Such
computer programs utilizing a two-digit date field may recognize a date using
"00" as the year 1900 rather than the year 2000 (the "Year 2000 Issue").
To date, the Company has not experienced disruptions in its business
related to the Year 2000 Issue. However, the Company cannot provide any
assurance that no Year 2000 Issues will impact its systems, products or other
aspects of its business in the future. 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 of the
Company's networks, desktops, application servers, operating systems and an
enterprise-wide computer software system have been found compliant, have been
replaced or remediation has been completed. Until 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. The Company believes that any future
disruptions to its business from the Year 2000 Issue could have a material
impact on operating expenses, but that the effect on revenues would not be
material. Substantially all necessary remedial work was completed by the end of
December 1999.
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. Key suppliers to the
Company and its contract manufacturer have not experienced disruptions in their
business related to the Year 2000 Issue. However, the Company cannot provide any
assurance that no Year 2000 Issue will effect its suppliers or contract
manufacturer in the future.
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<PAGE>
ITEM 7A. 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 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 March 31, 2000 and 1999 (dollars in thousands).
March 31,
------------------------
2000 1999
------- -------
Average fixed interest rate 6.0% 6.6%
======= =======
Amortized cost $36,644 $36,280
======= =======
Fair value $36,027 $36,417
======= =======
Contractual maturity dates:
Less than 1 year $ 3,500 $ --
1 to 5 years 32,527 28,117
Greater than 10 years -- 8,300
------- -------
$36,027 $36,417
======= =======
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and the independent
accountants' reports appear on pages F-1 through F-22 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 5, 2000, Spectrian dismissed KPMG LLP ("KPMG") as the
Company's independent public accountants, a capacity in which KPMG had served
for several years. The decision to change the Company's independent public
accountants was approved by the Company's full Board of Directors and the
Company's Audit Committee.
During the Company's years ended March 31, 1998 and 1999 and the
subsequent interim period preceding the change in accountants, there were no
disagreements with KPMG on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of KPMG, would have caused
KPMG to make reference
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<PAGE>
to the subject matter of the disagreements in connection with its reports on the
Company's financial statements for the years ended March 31, 1998 and 1999. In
addition, KPMG's reports on the financial statements of the Company for the
years ended March 31, 1998 and 1999 contained unqualified opinions.
KPMG's letter to the Audit Committee related to its audit of the
Company's consolidated financial statements of the fiscal year ended March 31,
1999 included two reportable conditions that (1) the Company was not reconciling
certain balance sheet accounts maintained in the general ledger on a monthly
basis and (2) the reduced production of the Company's products in the fiscal
year ended March 31, 1999 resulted in an under absorption of overhead and the
resulting variances were not adequately allocated between cost of sales and
inventory on hand. The Company believes it has resolved these reportable
conditions noted above. The subject matter of the reportable conditions were
discussed with the Company's Audit Committee as were the subsequent remedial
actions taken and the informal assessments by KPMG of those actions in
subsequent interim periods.
On January 5, 2000, Spectrian also selected PricewaterhouseCoopers LLP
("PricewaterhouseCoopers") to replace KPMG in this role. During the years ended
March 31, 1998 and 1999 years and through the subsequent period ended January
11, 2000, the Company did not consult with PricewaterhouseCoopers on items which
(i) were or should have been subject to SAS 50 or (ii) concerned the subject
matter of a disagreement or reportable event with KPMG as described in Item
304(a)(2) of Regulation S-K. PricewaterhouseCoopers advises the Company on
federal, state and local tax matters.
The Company has authorized KPMG to respond fully to the inquiries of
PricewaterhouseCoopers. The Company also provided KPMG with a copy of the
disclosures it made in Item 4 of the Current Report filed on Form 8-K dated
January 11, 2000 ("Form 8-K"). KPMG furnished the Company with a letter
addressed to the Commission stating that it agrees with the statements made by
the Company in the Form 8-K. The Company filed a copy of KPMG's letter as
Exhibit 99.1 to the Form 8-K which was incorporated by reference therein.
39
<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 Company's 2000 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.
40
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements. The following consolidated financial
statements are incorporated by reference in Item 8 of this Report:
Page
----
Report of Independent Accountants - PricewaterhouseCoopers LLP..F-2
Independent Auditors' Report - KPMG LLP.........................F-3
Consolidated Balance Sheets as of March 31, 2000 and 1999.......F-4
Consolidated Statements of Operations for the Years ended
March 31, 2000, 1999 and 1998.................................F-5
Consolidated Statements of Stockholders' Equity
for the Years ended March 31, 2000, 1999 and 1998.............F-6
Consolidated Statements of Cash Flows for the Years ended
March 31, 2000, 1999, and 1998................................F-7
Notes to Consolidated Financial Statements......................F-8
2. Financial Statement Schedules. Financial statement schedules have
been omitted because they are not applicable or are not required or
the information required to be set forth therein is included in the
consolidated financial statements or notes thereto.
3. Exhibits.
Exhibit
Number Description
------ -----------------------------------------------------
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.
4.1.2 Letter Agreement regarding Stockholder Rights Plan
between Kopp Investment Advisors, Inc. and Registrant
dated February 16, 2000.
10.2(20) 1992 Stock Plan, as amended.
10.4(20) 1994 Director Option Plan and form of agreement
thereunder.
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
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<PAGE>
and Registrant.
10.19(8) Employment Agreement between Garrett A. Garrettson
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.
10.28(13) Stock Option Agreement dated November 26, 1997
between Registrant and Garrett A. Garrettson.
10.32(15) Form of Indemnification Agreement with directors and
officers.
10.33(20) 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(21) Separation Agreement dated March 23, 1999 between the
Registrant and Stephen B. Greenspan.
10.37(21) Separation Agreement dated May 7, 1999 between the
Registrant and Bruce R. Wright.
10.39 Amended and Restated Loan and Security Agreement
between Silicon Valley Bank and Registrant.
10.39.1 Loan Modification Agreement between Silicon Valley
Bank and Registrant dated November 24, 1999.
10.39.2 Loan Modification Agreement between Silicon Valley
Bank and Registrant dated January 31, 2000.
10.39.3 Loan Modification Agreement between Silicon Valley
Bank and Registrant dated May 2, 2000.
10.40 Form of Change of Control Severance Agreement.
10.41 Master Lessor's Consent to Sublease between North
American Resort Properties, Inc and Registrant.
10.41.1 Agreement and Assumption of Sublease between North
American Resort Properties, Inc. and The Gap, Inc.
10.42 Closing documents regarding 165 Gibraltar Court,
Sunnyvale, California.
10.43 Summary of Lease Contract between Ensung Building and
Registrant.
10.44 Contract to Lease between Ellington Development
Incorporated and Registrant.
10.45 Manufacturing Agreement between GSS/Array Technology
and Registrant.
23.1.1 Consent of PricewaterhouseCoopers LLP.
23.1.2 Consent of KPMG LLP.
24.1 Power of Attorney (included on page 45).
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.
42
<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.
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.
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.
19 Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-8 (File No. 333-61085) as filed with the Securities and
Exchange Commission on August 10, 1998.
20 Incorporated by reference to exhibits filed with Registrant's Registration
Statement on form S-8 (File No. 333-84827) as filed with the Securities and
Exchange Commission on August 9, 1999.
21 Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended March 31, 1999 as filed with the Securities
and Exchange Commission on May 27, 1998.
(b) Reports on Form 8-K. On January 11, 2000, the Registrant filed Current
Report on Form 8-K regarding (i) dismissal of KPMG LLP ("KPMG") as the
Registrant's independent public accountants and (ii) the selection of
PricewaterhouseCoopers LLP to replace KPMG in that role, which contained
disclosures under Item 4. Changes in Registrant's Certifying Accountant.
(c) Exhibits Pursuant to Item 601 of Regulation S-K. See Item 14(a)(3) above.
43
<PAGE>
(d) Financial Statement Schedules. See Item 14(a)(2) above.
44
<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/ Thomas H. Waechter
--------------------------------------------
Thomas H. Waechter
President and Chief Executive Officer
Date: June 29, 2000
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas H. Waechter and Michael D. Angel, and each
of them, his true and lawful attorneys-in-fact and agents, 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 each of said
attorneys-in-fact and agents, 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 each of said
attorneys-in-facts and agents, or his substitute or substitutes, or any of them,
shall do or cause to be done by virtue hereof.
<TABLE>
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:
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Thomas H. Waechter President, Chief Executive Officer and Director June 29, 2000
-------------------------------------------- (Principal Executive Officer)
Thomas H. Waechter
/s/ Michael D. Angel Executive Vice President, Finance and June 29, 2000
------------------------------------------ Administration, Chief Financial Officer and
Michael D. Angel Secretary (Principal Financial and Accounting
Officer)
/s/ Garrett A. Garrettson Director and Chairman June 29, 2000
------------------------------------------
Garrett A. Garrettson
/s/ James A. Cole Director June 29, 2000
------------------------------------------
James A. Cole
/s/ Martin Cooper Director June 29, 2000
------------------------------------------
Martin Cooper
/s/ Charles D. Kissner Director June 29, 2000
------------------------------------------
Charles D. Kissner
/s/ Robert W. Shaner Director June 29, 2000
------------------------------------------
Robert W. Shaner
/s/ Robert C. Wilson Director June 29, 2000
------------------------------------------
Robert C. Wilson
</TABLE>
45
<PAGE>
SPECTRIAN CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants - PricewaterhouseCoopers LLP............. F-2
Independent Auditors' Report - KPMG LLP.................................... F-3
Consolidated Balance Sheets................................................ F-4
Consolidated Statements of Operations...................................... F-5
Consolidated Statements of Changes in Stockholders' Equity................. F-6
Consolidated Statements of Cash Flows...................................... F-7
Notes to Consolidated Financial Statements................................. F-8
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Spectrian Corporation and
subsidiaries:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, of stockholders' equity and of cash flows,
present fairly, in all material respects, the financial position of Spectrian
Corporation and its subsidiaries at March 31, 2000, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
April 26, 2000 except for Note 4,
which is as of May 2, 2000 and
Note 10, which is as of May 19, 2000
F-2
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Spectrian Corporation:
We have audited the accompanying consolidated balance sheet of
Spectrian Corporation and subsidiaries as of March 31, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the two-year period ended March 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 the results of their
operations and their cash flows for each of the years in the two-year period
ended March 31, 1999, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Mountain View, California
April 29, 1999
F-3
<PAGE>
<TABLE>
SPECTRIAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<CAPTION>
March 31,
----------------------------
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................................. $ 11,553 $ 26,254
Short-term investments .................................................................... 36,027 36,417
Accounts receivable, less allowance for doubtful accounts of
$420 and $388, respectively ............................................................. 23,817 12,983
Inventories ............................................................................... 34,542 20,826
Prepaid expenses and other current assets ................................................. 5,668 3,464
--------- ---------
Total current assets .................................................................... 111,607 99,944
Property and equipment, net .................................................................. 19,668 28,468
--------- ---------
Total assets ............................................................................ $ 131,275 $ 128,412
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................................................... $ 16,416 $ 8,058
Accrued liabilities ....................................................................... 13,793 17,884
Current portion of debt and capital lease obligations ..................................... 730 1,603
--------- ---------
Total current liabilities ............................................................... 30,939 27,545
Debt and capital lease obligations, net of current portion ................................... 1,351 4,899
--------- ---------
Total liabilities ....................................................................... 32,290 32,444
--------- ---------
Commitments and contingencies (Notes 4 and 10)
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; 11,859,507 and
11,102,333 shares issued, respectively; 10,859,507 and 10,102,333 shares
outstanding, respectively ............................................................... 12 10
Additional paid-in capital ................................................................ 160,117 149,588
Treasury stock, 1,000,000 shares of common stock held ..................................... (14,789) (14,789)
Deferred compensation expense ............................................................. (937) --
Accumulated other comprehensive income (loss) ............................................. (617) 137
Accumulated deficit ....................................................................... (44,801) (38,978)
--------- ---------
Total stockholders' equity .............................................................. 98,985 95,968
--------- ---------
Total liabilities and stockholders' equity .............................................. $ 131,275 $ 128,412
========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
SPECTRIAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<CAPTION>
Year Ended March 31,
-----------------------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
NET REVENUES ..................................................... $ 163,567 $ 99,331 $ 168,798
--------- --------- ---------
COSTS AND EXPENSES:
Cost of revenues .............................................. 129,998 96,880 132,684
Research and development ...................................... 22,488 26,735 18,644
Selling, general and administrative ........................... 19,337 16,315 13,014
Restructuring costs ........................................... 1,032 -- --
--------- --------- ---------
Total costs and expenses .................................... 172,855 139,930 164,342
--------- --------- ---------
Operating income (loss) .......................................... (9,288) (40,599) 4,456
INTEREST INCOME .................................................. 3,344 4,540 4,045
INTEREST EXPENSE ................................................. (473) (853) (710)
OTHER INCOME ..................................................... 624 -- 1,530
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ................................ (5,793) (36,912) 9,321
INCOME TAXES ..................................................... 30 59 399
--------- --------- ---------
30
NET INCOME (LOSS) ................................................ $ (5,823) $ (36,971) $ 8,922
========= ========= =========
NET INCOME (LOSS) PER SHARE:
Basic ......................................................... $ (0.56) $ (3.50) $ 0.90
========= ========= =========
Diluted ....................................................... $ (0.56) $ (3.50) $ 0.83
========= ========= =========
SHARES USED IN COMPUTING PER SHARE AMOUNTS:
Basic ......................................................... 10,426 10,568 9,881
========= ========= =========
Diluted ....................................................... 10,426 10,568 10,701
========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-5
<PAGE>
<TABLE>
SPECTRIAN CORPORATION
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 April 1, 1997 .... 8,265,230 $ 88 $ 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
Net income ...................... -- -- -- -- --
Unrealized gains on investments . -- -- -- -- --
Comprehensive 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
Net loss ........................ -- -- -- -- --
Unrealized gains on investments . -- -- -- -- --
Comprehensive loss .............. -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balances as of March 31, 1999 ... 11,102,333 10 149,588 (14,789) --
Exercise of stock options ....... 565,941 1 7,420 -- --
Employee stock purchase plan .... 191,233 1 1,762 -- --
Deferred stock-based
compensation .................. -- -- 1,347 -- (1,347)
Stock-based compensation expense -- -- -- -- 410
Net loss ........................ -- -- -- -- --
Unrealized losses on
investments ................... -- -- -- -- --
Comprehensive loss .............. -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balances as of March 31, 2000 ... 11,859,507 $ 12 $ 160,117 $ (14,789) $ (937)
========== ========== ========== ========== ==========
Accumulated
Other Total
Comprehensive Accumulated Stockholders'
Income (Loss) Deficit Equity
---------- ---------- ----------
Balances as of April 1, 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
Net income ...................... -- 8,922
Unrealized gains on investments . 121 --
Comprehensive income ............ -- -- 9,043
---------- ---------- ----------
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
Net loss ........................ -- (36,971)
Unrealized gains on investments . 16 --
Comprehensive loss .............. -- -- (36,955)
---------- ---------- ----------
Balances as of March 31, 1999 ... 137 (38,978) 95,968
Exercise of stock options ....... -- -- 7,421
Employee stock purchase plan .... -- -- 1,763
Deferred stock-based
compensation .................. -- -- --
Stock-based compensation expense -- -- 410
Net loss ........................ -- (5,823)
Unrealized losses on
investments ................... (754) --
Comprehensive loss .............. -- -- (6,577)
---------- ---------- ----------
Balances as of March 31, 2000 ... $ (617) $ (44,801) $ 98,985
========== ========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-6
<PAGE>
<TABLE>
SPECTRIAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Year Ended March 31,
----------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................................... $ (5,823) $(36,971) $ 8,922
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Gain on sale of subsidiary .................................................... -- -- (1,530)
(Gain) loss on sale of property and equipment, net ............................ (624) -- --
Depreciation and amortization ................................................. 13,255 13,715 9,761
Equipment retirements, net .................................................... 375 1,409 --
Provision for doubtful accounts receivable .................................... 32 12 24
Provision for excess and obsolete inventories and write-down
to market .................................................................. 1,468 1,360 5,385
Stock compensation expense .................................................... 410 1,606 609
Changes in operating assets and liabilities:
Accounts receivable ......................................................... (10,866) 8,128 (10,075)
Inventories ................................................................. (15,184) (6,824) (5,023)
Prepaid expenses and other assets ........................................... (2,204) 2,738 (412)
Accounts payable ............................................................ 8,358 (2,398) 3,141
Accrued liabilities ......................................................... (4,091) 4,903 5,811
-------- -------- --------
Net cash provided by (used for) operating activities ........................ (14,894) (12,322) 16,613
-------- -------- --------
Cash flows from investing activities:
Proceeds (purchases) of short-term investments, net ............................. (364) 31,727 (68,008)
Proceeds from sale of subsidiary ................................................ -- -- 4,016
Purchase of property and equipment .............................................. (7,731) (11,284) --
Proceeds from sale of property and equipment .................................... 3,525 468 (17,953)
-------- -------- --------
Net cash provided by (used for) investing activities .......................... (4,570) 20,911 (81,945)
-------- -------- --------
Cash flows from financing activities:
Repayments of debt and capital lease obligations ................................ (4,421) (770) (1,672)
Purchase of treasury stock ...................................................... -- (14,789) --
Proceeds from sales of common stock, net ........................................ 9,184 1,764 92,224
-------- -------- --------
Net cash provided by (used for) financing activities ............................ 4,763 (13,795) 90,552
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ............................... (14,701) (5,206) 25,220
Cash and cash equivalents, beginning of year ....................................... 26,254 31,460 6,240
-------- -------- --------
Cash and cash equivalents, end of year ............................................. $ 11,553 $ 26,254 $ 31,460
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest .......................................... $ 473 $ 853 $ 457
======== ======== ========
Taxes paid during the year ...................................................... $ 67 $ 59 $ 952
======== ======== ========
Noncash investing and financing activities:
Equipment recorded under capital lease obligations ............................ $ -- $ -- $ 307
======== ======== ========
Deferred stock option compensation ............................................ $ 1,347 $ 997 $ 1,218
======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-7
<PAGE>
SPECTRIAN CORPORATION
Notes to Consolidated Financial Statements
Years Ended March 31, 2000, 1999 and 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Spectrian Corporation ("the Company") was originally incorporated in
California in 1984 under the name Microwave Modules & Devices, Inc. ("MM&D") and
engaged in the manufacture of power amplifiers for military applications. On
April 2, 1992, MM&D changed its name to Spectrian Corporation. On October 3,
1997, the Company reincorporated in Delaware. The Company is engaged in the
design, manufacturer and marketing of high-power radio frequency ("RF")
amplifiers and semiconductor devices, through its division that operates under
the trade name UltraRF, for the global wireless communications industry.
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.
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. Repair and service
revenues are recognized when the related 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, since the discounted present
value of investments and long-term debt is approximately equal to carrying
value, and receivables are subject to collection in less than three months.
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, 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. At
March 31, 2000, the unrealized losses on the Company's investments aggregated to
$617,000.
F-8
<PAGE>
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 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 (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
years ended March 31, 2000 and 1999, 3,271,536 and 2,317,642 common equivalent
shares with weighted averages exercise prices of $18.46 and $16.75, respectively
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 years.
<TABLE>
A reconciliation of the basic and diluted per share calculations
follows:
<CAPTION>
Year ended March 31,
----------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- ----------------------------- ----------------------------
Per Per Per
Net Share Net Share Net Share
Loss Shares Amount Loss Shares Amount Income Shares Amount
---- ------ ------ ---- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic................. $ (5,823) 10,426 $(0.56) $(36,971) 10,568 $(3.50) $ 8,922 9,881 $ 0.90
Effect of dilutive
securities......... -- -- -- -- -- -- -- 820 (0.07)
-------- ------ ------- --------- ------ ------- ------- ------ --------
Diluted............... $ (5,823) 10,426 $(0.56) $(36,971) 10,568 $(3.50) $ 8,922 10,701 $ 0.83
======== ====== ======= ========= ====== ======= ======= ====== ========
</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. Actual results could differ from those estimates.
F-9
<PAGE>
Accounting for Stock-Based Compensation
The Company accounts for its stock option plans using the intrinsic
value method. The Company calculates the fair value of stock-based compensation
and discloses the proforma impact of the value on net loss and net loss per
share in the notes to the financial statements.
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 based on an
evaluation of the discounted cash flow generated by such assets. Although the
Company currently has no significant impaired assets, if such assets were to be
considered impaired, the impairment to be recognized would be measured by the
amount by which the carrying amount of the asset exceeds its fair value.
Comprehensive Income (Loss)
Comprehensive income, as defined, includes all changes in equity during
a period from non-owner sources. The Company's comprehensive income (loss)
includes unrealized gains or losses on investments and is displayed in the
Consolidated Statement of Stockholders Equity.
Warranty
The Company's products are generally subject to warranty and the
Company provides for the estimate future costs of repair, replacement or
customer accommodation upon shipment of the product.
Reclassifications
Certain items have been reclassified to be consistent with current
presentation. The reclassifications have no effect on previously disclosed net
income or stockholders' equity.
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
and is effective for the Company beginning fiscal 2001. 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
F-10
<PAGE>
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 Company believes that FIN 44 will not have a
material effect on its financial position or results of operations.
2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
<TABLE>
Available-for-sale securities at March 31, 2000 and 1999 were as
follows (in thousands):
<CAPTION>
Amortized Unrealized Fair
As of March 31, 2000 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
-------- -------- --------
Securities available for sale ........................................ $ 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
========
Amortized Unrealized Fair
As of March 31, 1999 Cost Gain (Loss) Value
---------------------------------------------------------------------- ------- ----------- -------
Government bonds & notes .................................................. $ 8,973 $ 81 $ 9,054
Commercial paper .......................................................... 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, 10 years and over ........................ 8,300
-------
$36,417
=======
</TABLE>
3. BALANCE SHEET COMPONENTS
Balance sheet components at March 31, 2000 and 1999 are as follows (in
thousands):
March 31,
-------------------------
2000 1999
------- -------
Inventories:
Raw materials ........................... $16,763 $ 9,100
Work in progress ........................ 10,353 5,701
Finished goods .......................... 7,426 6,025
------- -------
$34,542 $20,826
======= =======
F-11
<PAGE>
Property and equipment:
Machinery and equipment ............................. $58,322 $57,077
Software ............................................ 4,248 1,245
Land, building and improvements ..................... -- 2,736
Leasehold improvements .............................. 3,781 1,957
------- -------
66,351 63,015
Less accumulated depreciation and amortization ...... 46,683 34,547
------- -------
$19,668 $28,468
======= =======
Depreciation expense was $13,154,000, $13,614,000 and $9,710,000 for
fiscal 2000, 1999 and 1998, respectively. Amortization expense was $101,000,
$101,000 and $51,000 for fiscal 2000, 1999 and 1998, respectively.
Accrued liabilities:
Employee compensation and benefits ............... $ 4,310 $ 4,672
Warranty ......................................... 7,123 9,473
Restructuring .................................... 996 --
Other accrued liabilities ........................ 1,364 3,739
------- -------
$13,793 $17,884
======= =======
4. DEBT AND LEASE COMMITMENTS
Lines 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 June 30, 2000.
The Company expects to be in default of a covenant at the end of the first
quarter of fiscal 2001. The amount available to borrow at March 31, 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 March 31, 2000 was 9% and 8.29%, respectively. The Company had no
borrowings under the line of credit at March 31, 2000.
Equipment Loan
In January 1997, the Company borrowed $6.0 million collaterized 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 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 March 31, 2000.
F-12
<PAGE>
Future minimum debt principal payments under this loan as of March 31,
2000 were as follows (in thousands):
2001 .................................................. $ 819
2002 .................................................. 1,301
------
$2,120
======
Lease Commitments
In May 1997, the Company entered into capital lease for production
equipment in Sunnyvale premises for a sixty-month lease term expiring in August
2002. Future minimum lease payments under this capital lease as of March 31,
2000 are as follows (in thousands):
2001 ................................................... $ 76
2002 ................................................... 76
2003 ................................................... 32
----
$184
====
During fiscal 1997, the Company sold its principal facilities in
Sunnyvale for approximately $16.4 million, 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.
Future minimum lease payments under all noncancelable operating leases
as of March 31, 2000 are as follows (in thousands):
2001 .................................................. $ 2,043
2002 .................................................. 2,046
2003 .................................................. 2,018
2004 .................................................. 2,016
2005 .................................................. 2,016
Thereafter ............................................ 15,284
-------
$25,423
=======
In 1998, the Company entered into an operating lease for an ancillary
40,000 square foot manufacturing facility in Rocklin, California for a sixty
month lease term expiring in June 2003. During the second quarter of fiscal
2000, the Company subleased its Rocklin facility to The Gap, Inc. for the
reminder of the Company's lease term. At March 31, 2000, minimum lease payments
required and sublease income under this operating lease are as follows (in
thousands):
F-13
<PAGE>
Lease Payments Sublease Income
-------------- ---------------
2001 ................................. $ 422 $ 423
2002 ................................. 422 434
2003 ................................. 422 447
2004 ................................. 70 75
------ ------
$1,336 $1,379
====== ======
Rent expense was $2,300,000, $3,323,000 and $2,530,000 for the years
ended March 31, 2000, 1999 and 1998, respectively. Sublease rental income was
$310,000 for the year ended March 31, 2000 and none for the years ended March
31, 1999 and 1998.
5. STOCKHOLDERS' EQUITY
Preferred Stock
The Board of Directors has the authority to issue up to 5.0 million
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.
Shareholder Rights Plan
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.
Treasury Stock
In March 1998, the Board of Directors authorized the repurchase of up
to 1 million shares of Spectrian's common stock at a price up to $18.00 per
share. The Company's repurchases of shares of common stock are recorded as
"Treasury Stock" and result in reduction of Stockholders' Equity. During fiscal
1999, 1,000,000 shares of common stock at an average per share cost of $14.79
were repurchased.
Stock Option Plans
The Company has adopted three stock option plans, (the "Plans"): the
1992 Stock Plan (the "1992 Plan"), the 1994 Director Option Plan (the
"Directors' Plan"), and the 1998 Nonstatutory Stock Options Plan (the "1998
Plan"). Pursuant to the terms of the plan, 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.
F-14
<PAGE>
1992 Plan
In 1997, the Company amended the 1992 Plan under which the Company's
Board of Directors could issue options to purchase up to 3,300,886 shares of
common stock to employees and directors of and consultants to the Company. In
July 1999, the Company amended the 1992 Plan to reserve an additional 450,000
shares of common stock for issuance under the 1992 Plan.
Under the 1992 Plan, the Company's Board of Directors has the authority
to determine to whom options will be granted, the number of shares under option,
the option term and the exercise price. 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. The term of any options issued
under the plan may not exceed ten years from the date of grant.
Directors' Plan
The Directors' Plan provides for automatic grants to purchase 5,000 of
the Company's common stock upon new non-employee directors being elected to the
Board of Directors. The Directors' Plan also provides for the grant of options
to purchase up to an additional 5,000 shares annually thereafter. Options under
the Directors' Plan vest over 48 months and the exercise price of options
granted shall be 100% of the fair market value of the Company's common stock on
the date of grant. The options expire ten years after the date of grant. In July
1999, the Company amended the Directors' Plan to increase the aggregate number
of shares authorized by 60,000 shares to 145,000 shares. Under the Director's
Plan, 30,000 shares were granted during fiscal 2000.
1998 Plan
In January 1998, the Company adopted the 1998 Plan under which the
Company's Board of Directors could issue options to purchase up to 400,000
shares of common stock to employees of and consultants to the Company. In the
second quarter of fiscal 1999, an additional 500,000 shares were reserved under
the 1998 Plan. In the first quarter of fiscal 2000, an additional 250,000 shares
were reserved under the 1998 Plan.
Under the 1998 Plan, the Company's Board of Directors has the authority
to determine to whom options will be granted, the number of shares under option,
the option term and the exercise price. 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.
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.
Other Stock Option Grant Activity
Outside of the 1992 Plan, the Director's Plan and the 1998 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 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 Plan. During fiscal 1999, 91,667 options were cancelled. In fiscal 2000,
one officer and one employee were granted a combined total of 160,000 options
outside of the Plans at an exercise price ranging from $11.38 to $22.50, which
are subject to the same vesting schedule as that of the 1992 Plan.
<TABLE>
The following table summarizes option activity under the Company's
various plans:
F-15
<PAGE>
<CAPTION>
Weighted
Average
Available for Options Exercise
Grant Outstanding Price
----- ----------- -----
<S> <C> <C> <C>
Outstanding as of April 1, 1997................................. 685,420 1,737,789 $ 13.18
Additional shares reserved................................... 490,000 -- --
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................................ 457,693 2,024,005 18.34
Additional shares reserved................................... 500,000 -- --
Granted...................................................... (964,921) 964,921 13.38
Exercised.................................................... -- (136,981) 8.93
Canceled(1).................................................. 442,636 (534,303) 18.64
----------- -----------
Outstanding as of March 31, 1999................................ 435,408 2,317,642 16.75
Additional shares reserved................................... 1,170,000 -- --
Granted...................................................... (1,944,794) 1,944,794 18.83
Exercised.................................................... -- (565,941) 13.16
Canceled..................................................... 424,959 (424,959) 17.88
----------- -----------
Outstanding as of March 31, 2000................................ 85,573 3,271,536 $ 18.46
=========== ===========
<FN>
-------------------
(1) 91,667 shares which were outside of the Plans were cancelled and were not
available for re-grant.
</FN>
</TABLE>
<TABLE>
The following tables summarize information about stock options
outstanding at March 31, 2000:
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------- ---------------------------
Number Weighted Weighted Number Weighted
Range of Outstanding at Average Average Exercisable at Average
Exercise March 31, Remaining Exercise March 31, Exercise
Prices 2000 Life (Years) Price 2000 Price
------ ---- ------------ ----- ---- -----
<S> <C> <C> <C> <C> <C>
$ 0.20 - $ 6.59 76,620 6.47 $ 5.31 76,620 $ 5.31
$ 7.00 - $10.25 229,562 7.82 9.79 82,351 9.30
$11.38 - $15.38 1,462,438 8.03 13.95 578,544 14.12
$15.44 - $23.06 1,028,581 9.28 21.38 149,787 18.94
$23.50 - $34.63 291,561 9.88 25.54 21 24.00
$36.00 - $50.06 143,003 7.17 39.01 103,112 38.88
$52.00 - $64.13 39,771 7.48 58.03 25,446 58.17
--------- ---------
$ 0.20 - $64.13 3,271,536 8.49 $ 18.46 1,015,881 $ 17.39
========= =========
</TABLE>
Using the Black-Scholes Option-Pricing Model, the per share weighted
average fair market value of stock options granted during fiscal 2000, fiscal
1999 and fiscal 1998 were $15.32, $10.86 and $18.34, respectively, on the date
of grant. Assumptions used with the Black-Scholes Option-Pricing Model were as
follows:
F-16
<PAGE>
Fiscal Year
--------------------------------------
2000 1999 1998
--------- --------- ---------
Risk-free interest rate.............. 5.8% 5.4% 5.6%
Expected term of options............. 5.3 years 4.4 years 4.5 years
Expected volatility.................. 86.2% 81.0% 83.0%
Expected dividend yield.............. 0.0% 0.0% 0.0%
Stock-Based Compensation
Stock-based compensation expense related to stock options granted to
non-employees is recognized as earned. At each reporting date, the Company
re-values the stock-based compensation related to unvested non-employee options
using the Black-Scholes option pricing model. As a result, the stock-based
compensation expense will fluctuate as the fair market value of the Company's
common stock fluctuates. In connection with the grant of stock options to
consultants, the Company recorded stock-based compensation expense of $410,000
for the year ended March 31, 2000. As of March 31, 2000, the Company expects to
amortize stock-based compensation expense of $409,000 in fiscal 2001, $269,000
in fiscal 2002, $187,000 in fiscal 2003, and $72,000 in fiscal 2004, assuming no
change in the underlying value of the Company's common stock.
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 199,538 shares of Common Stock available for issuance as of
March 31, 2000. During the fiscal years ended March 31, 2000 and 1999, shares
totaling 191,233 and 61,275 were acquired under the Purchase Plan at an average
per share price of $9.22 and $9.08, respectively.
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 fair value of each stock purchase right granted under the
Purchase Plan is estimated using the Black-Scholes Option-Pricing Model with the
following weighted average assumptions by fiscal year:
Fiscal Year
--------------------------------------
2000 1999 1998
--------- --------- ---------
Risk-free interest rate.............. 5.0% 5.4% 5.6%
Expected term of options............. 0.5 years 0.4 years 0.5 years
Expected volatility.................. 86.2% 81.0% 83.0%
Expected dividend yield.............. 0.0% 0.0% 0.0%
The per share weighted average fair market value of those purchase
rights granted in fiscal 2000, fiscal 1999 and fiscal 1998 was $6.08, $3.87 and
$4.32, respectively, per share.
Pro Forma Fair Value Information
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 (in thousands, except per share amounts):
F-17
<PAGE>
Year Ended March 31,
-----------------------------------------
2000 1999 1998
----------- ----------- ---------
Net income (loss):
As reported ................... $ (5,823) $ (36,971) $ 8,922
=========== =========== =========
Pro forma ..................... $ (15,099) $ (40,972) $ (1,870)
=========== =========== =========
Earnings (loss) per share:
Basic:
As reported ................. $ (0.56) $ (3.50) $ 0.90
=========== =========== =========
Pro forma ................... $ (1.45) $ (3.88) $ (0.19)
=========== =========== =========
Diluted:
As reported ................. $ (0.56) $ (3.50) $ 0.83
=========== =========== =========
Pro forma ................... $ (1.45) $ (3.88) $ (0.19)
=========== =========== =========
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.
6. EMPLOYEE BENEFIT PLAN
In January 1997, the Company adopted the Spectrian Corporation 401(k)
Savings Plan (the "Benefit Plan") to provide retirement and incidental benefits
for eligible employees. The Benefit Plan provides for Company contributions as
determined by the Company's Board of Directors that may not exceed 20% of the
annual aggregate salaries of those employees eligible for participation. In
fiscal years 2000, 1999 and 1998, the Company contributed $148,000, $209,000 and
$181,000, respectively, in contributions to the Benefit Plan.
7. INCOME TAXES
The components of the provision for income taxes in the statement of operations
are as follows (in thousands):
March 31,
----------------------------------
2000 1999 1998
---- ---- ----
Current
Federal ...................... -- -- --
State ........................ 10 59 399
Foreign ...................... 20 -- --
---- ---- ----
Total Current 30 59 399
Deferred
Federal ...................... -- -- --
State ........................ -- -- --
Foreign ...................... -- -- --
---- ---- ----
Total Deferred -- -- --
---- ---- ----
Total Provision 30 59 399
==== ==== ====
<TABLE>
Income tax expense for the years ended March 31, 2000, 1999 and 1998
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):
F-18
<PAGE>
<CAPTION>
Year Ended March 31,
--------------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Federal tax (benefit) at statutory rate ...................................... $ (1,970) $(12,550) $ 3,189
State tax, net of Federal benefit ............................................ 10 59 --
Utilization of net operating loss carryforwards .............................. -- -- (3,314)
Alternative minimum tax ...................................................... -- -- 183
FSC tax expense .............................................................. 20 -- 215
Unrealized benefit from LLC loss ............................................. -- -- 44
Unutilized net operating losses and temporary differences .................... 2,299 12,093 --
Other ........................................................................ (329) 457 82
-------- -------- --------
Income tax expense ........................................................... $ 30 $ 59 $ 399
======== ======== ========
</TABLE>
The components of significant portions of the deferred tax assets and
liabilities are presented below (in thousands):
March 31,
---------------------
Deferred tax assets: 2000 1999
-------- --------
Various accruals and reserves ..................... $ 4,893 $ 6,349
Net operating loss carryforwards .................. 22,411 21,259
Credit carryforwards .............................. 7,180 6,982
-------- --------
Total gross deferred tax assets ................. 34,484 34,590
Less valuation allowance .......................... (33,783) (32,661)
-------- --------
Total deferred tax assets ....................... $ 701 $ 1,929
-------- --------
Deferred tax liabilities:
Property and equipment depreciation differences ... $ (701) $ (1,929)
-------- --------
Total gross deferred tax liabilities .............. (701) (1,929)
-------- --------
Net deferred tax assets .............................. $ -- $ --
======== ========
Due to the uncertainties surrounding the realization of the deferred
tax assets resulting from the Company's accumulated deficit and net losses in
fiscal 2000 and 1999, the Company has provided a full valuation allowance and,
therefore no benefit has been recognized for the operating loss and other
deferred tax assets. The Company evaluates positive and negative evidence about
the recoverability of its net deferred tax asset each quarter and will record
the net deferred tax asset when it is more likely than not that it will be
recovered.
As of March 31, 2000, the Company has a net operating loss carryforward
of approximately $62.5 million and $19.6 million for federal and California
income tax purposes, respectively. If not utilized, the federal carryforwards
will expire in various amounts beginning in 2008 through March 2020 and the
California carryforwards will expire in various amounts beginning in 2004
through March 2006.
The Company has research credit carryforwards of approximately $1.9
million and $2.1 million for federal and California income tax purposes,
respectively. If not utilized, the Federal carryforwards will expire in various
amounts beginning in 2003. The California research credit can be carried forward
indefinitely.
The Company also has California manufacturing investment tax credit
carryforward of approximately $2.8 million for California income tax purposes
which, if not utilized, will expire in 2005 through 2008.
F-19
<PAGE>
Included in the deferred tax assets is approximately $11.6 million of
assets relating to the stock option compensation which will be credited to
equity when realized.
Utilization of the net operating losses and credits may be subject to
an annual limitation due to the ownership change limitations provided by the
Internal Revenue Code and similar state provisions. The annual limitation may
result in the expiration of net operating loss carryforwards and credits before
utilization.
8. CUSTOMER CONCENTRATIONS
For the year ended March 31, 2000, one customer accounted for
approximately 72% of net revenues. For the year ended March 31, 1999, two
customers accounted for approximately 76% and 11% of net revenues, respectively.
For the year ended March 31, 1998, two customers accounted for approximately 79%
and 14% of net revenues, respectively. Two customers accounted for an aggregate
of 86% and 85% of accounts receivable at March 31, 2000 and 1999, respectively.
The Company has written off bad debts of none in fiscal years 2000 and 1999,
respectively, and $13,000 in fiscal year 1998.
9. SEGMENT INFORMATION
Under the management approach, the Company has broken down its business
into two divisions based upon product type: Amplifier Division and Semiconductor
Division, which operates under the tradename of UltraRF. UltraRF derives
virtually 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. 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.
The Company operated and reported its financial information as one
vertical integrated unit in the fiscal year ending March 31, 1999, and therefore
did not identify or report separate segment information. The Company began
reporting its operations by segment as of the fiscal period beginning April 1,
1999. Segment information for the year ended March 31, 2000 is as follows (in
thousands):
<TABLE>
Consolidated Statement of Operations Data - Fiscal 2000:
<CAPTION>
Year Ended March 31, 2000
--------------------------------------------------------------------
Amplifier UltraRF Other* Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues, external .............................. $ 162,687 $ 880 $ -- $ 163,567
Net revenues, intersegment .......................... -- 27,050 (27,050) --
Amortization and depreciation ....................... 5,797 2,546 4,912 13,255
Income (loss) before income taxes ................... $ (9,906) $ 4,113 $ -- $ (5,793)
</TABLE>
*Data in the "Other" column represents the elimination of intersegment revenues.
The Company does not allocate interest income or expenses, other
income, net, or the provision for income taxes to these segments for internal
reporting purposes.
<TABLE>
Consolidated Balance Sheet Data:
<CAPTION>
March 31, 2000
----------------------------------------------------------
Amplifier UltraRF Other Total
--------- ------- ----- -----
<S> <C> <C> <C> <C>
Segment Assets ................................................. $32,142 $13,605 $ 8,463 $54,210
Expenditures for additions to long-lived assets ................ $ 3,181 $ 2,362 $ 2,188 $ 7,731
</TABLE>
F-20
<PAGE>
Segment assets represent inventories and property and equipment, which
are allocated to these segments.
Net revenues from major product categories for the three years ended
March 31, 2000 were as follows:
Year ended March 31,
-----------------------------
2000 1999 1998
---- ---- ----
SCPA ...................................... 77% 90% 90%
MCPA ...................................... 20% 4% --%
Other...................................... 3% 6% 10%
--- --- ---
Total Revenue.............................. 100% 100% 100%
=== === ===
Geographic Segment Data:
Revenue from unaffiliated customers by geographic region as a
percentage of net revenues were as follows:
Year Ended March 31,
--------------------------------
2000 1999 1998
---- ---- ----
Canada....................................... 42% 57% 49%
Korea........................................ 16% 14% 26%
United States................................ 13% 16% 5%
France....................................... 26% 13% 20%
Other........................................ 3% --% -- %
The Company's long-lived assets are located in the following countries
(in thousands):
March 31,
---------------------------
2000 1999
------- -------
United States .......................... $18,226 $27,441
Thailand ............................... 1,218 1,011
Korea .................................. 224 16
------- -------
$19,668 $28,468
======= =======
10. 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.
F-21
<PAGE>
11. 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 March 31,
2000, approximately six employees had been terminated pursuant to the
restructuring. 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 March 31, 2000 (in thousands):
Reduction in
Workforce
-------
Reserve for estimated severance costs ....................... $ 1,032
Cash payment of severance costs ............................. (36)
-------
Balance at March 31, 2000 ................................... $ 996
=======
The balance of the restructuring accrual is included in current
liabilities on the consolidated balance sheets.
F-22
